Overview of Split EPC Structures
Split EPC structures involve dividing the traditional full-wrap EPC contract into multiple contracts with separate contractors and suppliers. This approach is becoming more common, especially in renewable energy projects like solar PV and battery energy storage systems (BESS), as it can offer cost savings by removing the “wrapped” risk premium charged by EPC contractors.
Impacts on Financing
- Additional Diligence Required: Lenders need to conduct more thorough due diligence across multiple contracts to ensure that risks are adequately covered. This includes reviewing all contracts for compatibility and ensuring that there are no gaps in responsibilities or liabilities.
- Bankability Challenges: Split EPC structures complicate the bankability of projects because they introduce multiple contracts and counterparties. Lenders may require direct contractual arrangements (e.g., tripartite deeds) with each contractor to ensure risk allocation and manage interface issues between contracts.
- Higher Transaction Costs and Stricter Lending Terms: The complexity and perceived higher risk of split EPC structures can lead to higher transaction costs and more stringent lending conditions. Financiers may demand additional security measures, such as tripartite deeds, performance bonds, or parent company guarantees.
- Risk of Incompatibility and Integration Issues: Split contracts increase the risk that equipment from different suppliers might not integrate seamlessly, affecting project performance and potentially leading to costly modifications.
- Liability Caps and Recourse: With multiple contracts, liability caps are often tied to individual contract values, which can limit the project owner’s recourse in case of supplier or contractor defaults. This forces project owners to assume more risk unless specific exceptions are negotiated.
- Cost and Schedule Risks: Coordinating multiple contractors can lead to timeline and cost overruns if not managed carefully. Delays by one contractor can impact others, multiplying risks across the project.
Despite these challenges, some benefits of split EPC structures include cost savings and the ability to select specialized suppliers for different components, which can enhance project quality and competitiveness. However, managing these structures requires careful planning and legal oversight to mitigate risks and ensure successful project financing.
Original article by NenPower, If reposted, please credit the source: https://nenpower.com/blog/how-do-split-epc-structures-impact-the-financing-of-energy-storage-projects/
