The Upcoming SESI Global Solar O&M Contract Template

October 30, 2017

Talk 1 with Global Solar Energy Standardisation Initiative Leaders

Post Update: Revised SESI Contract Templates Schedule as of November 20, 2017
Q2 2018 – Official Launch of the Final Package. Official launch of the final standardised contract package freely available online for renewable energy stakeholders around the world.

An audacious goal is being pursued by organizations and solar professionals worldwide to standardize contractual language needed to facilitate the levels of solar investment required to meet the Paris Climate Change Agreement carbon reduction targets.

The methodology to reduce market friction and speed solar deployment is a set of streamlined and interlocking contract templates supporting every stage of solar PV project development, finance, construction and operation.

The umbrella program for this massive effort is called The Global Solar Energy Standardisation Initiative or SESI. It was announced in June 2016 as a joint program of IRENA – International Renewable Energy Agency and The Terrawatt Initiative, along with SolarPower Europe and the Global Solar Council.

Making up the initiative organization are seven work groups constructing contract templates which will be vetted with industry stakeholders then fit together so the language supports each template and each stage of a solar project’s lifecycle.

Alectris Solar OM Insider talk 1 SESI leadersTo get an insider’s perspective of the SESI initiative and developments related to the operations and maintenance work group, the Solar O&M Insider talked with leaders of this initiative and those involved with the O&M work stream. Members of the operations and maintenance work group are focused on the development of the Solar O&M contract template, to assist the industry in producing a streamlined innovative document with risk balanced for all executing parties.

This special multipart series of the Solar O&M Insider features, in alpha order:

For the full Solar O&M Insider discussion in episode one of this series, listen to the podcast or reference the transcript here.

Solar Contract Complexity = Higher Project Cost

At the time SESI was announced, Henning Wuester, Director of IRENA’s Knowledge, Policy and Finance Centre said, “High transaction costs for some solar projects are due, in large part, to the complexity of the contractual documents supporting the projects. Simplifying the negotiation of these contractual documents will help reduce transaction costs, and allow investment in solar PV to advance more rapidly in more markets worldwide. That is what this initiative hopes to achieve.”

“The industry works mostly in a craftmanship manner where at each stage of the contractual chain, everyone is re-doing and reinventing the wheel completely each time,” Jean-Pascal Pam-Ba, Secretary General of the Terrawatt Initiative told the Solar O&M Insider. “This fragmented approach generates a lot of cost of transaction, a lot of time of negotiation and makes it really complex.”

He went on to say it would be much more efficient to have a standardized set of documentation which is allocating the risk in a fair manner and has been drafted in coordination with stakeholders to create a simplified set of contracts.

An Integrated Vision of the Solar PV Contract Value Chain

Bruce Douglas of SolarPower Europe and Global Solar Council added the SESI program mirrors what happens in other industries. “If you look at the offshore vessel industry, for example, or the construction industry, they already have a set of standard template contracts they use to facilitate projects at lower transaction cost and simplify the whole process. This is not new in general for industry, it’s just new to solar power. SESI will dramatically simplify the development of projects, and will help lower the costs, especially in emerging markets. Imagine in Africa and Southeast Asia, where entering a new market each time with a new contract adds significant cost and complexity.”

The SESI contract templates will be open source and optional.  The timetable for development aims for their adoption as suggested templates by the world’s governments at the IRENA General Assembly and World Future Energy Summit this coming January, at which point they will be made publicly available.

Core solar project contracts in the process of being standardized through SESI include:

  1. PPA
  2. Supply Agreements
  3. Fit & Commissioning Agreements
  4. O&M Agreement
  5. Finance Facility Agreement
  6. Implementation Agreement Guideline
  7. Project Development Guideline

Jean-Pascal Pham Ba The Terrawatt Initiative SESI talk 1 Solar O&M InsiderJean-Pascal Pham-Ba added further explanation, saying “The idea is to have an integrated vision of the contract value chain. A solar project is the result of a chain of contracts. If you only work on one, you don’t solve the problem. To make a difference requires a new integrated vision of the contractual value chain. This is the reason we decided to standardize, to propose and to offer a complete suite of standardized contracts.”

The SESI O&M Work Group

Photo: Vassilis Papaeconomou, Managing Director of Alectris and Chair of the SolarPower Europe O&M Task Force, presented the main assumptions of the SESI template contract currently being developed. Source: SolarPower Europe

Photo: Vassilis Papaeconomou, Managing Director of Alectris and Chair of the SolarPower Europe O&M Task Force, presented the main assumptions of the SESI template contract currently being developed. Source: SolarPower Europe

As part of its O&M task force, SolarPower Europe and Bird & Bird are leading the O&M work stream of The Global Solar Energy Standardisation Initiative.

The Energy and Utilities Sector Team of international law firm Bird & Bird LLP, led by Sophie Dingenen and Elizabeth Reid, co-heads of the global Renewables Group, has a key role in SESI jointly leading the Operation and Maintenance working group together with Máté Heinz of SolarPower Europe. Bird & Bird is leading the drafting of the template contract.

Alectris managing director, Vassilis Papaeconomou, is contributing to the O&M working group activities through his role as the SolarPower Europe O&M task force leader.  SolarPower Europe is contributing to the technical aspects of the initiative.

Other firms within the SESI O&M work group include ABB, Baker McKenzie, BayWa RE, Clifford Chance, Eversheds Sutherland, Gide Loyrette Nouel, the Global Solar Council. Inter-American Development Bank: IDB, Lark Energy, Lightsource RE, Martifer, Simmons & Simmons, Trilegal, Trina Solar and White & Case.

“The nice thing about the O&M work stream in this initiative is we inherited a lot of work done already in SolarPower Europe through the framework of Best Practices Guidelines Workforce,” said Vassilis Papaeconomou.  “Our contribution from the SolarPower Europe task force was more on the technical and operational perspective, where Bird & Bird has contributed from the legal perspective.”

Sophie Dingenen Bird & Bird SESI talk 1 Solar O&M InsiderSophie Dingenen of Bird & Bird elaborated: “Our efforts are working to bring together market parties’ years of experience and best practices that have been developed on both the technical side but also on the commercial side. At completion we will have a suite of documents which will then need to be adjusted to fit together and interlinked so they also work as a project package in order to come to the point where you limit or reduce the project development cost.”

SESI O&M Contract Template Goals

Throughout this discussion with the SESI participants, goals for the operations and maintenance contract template were outlined including:

  • To have a standard document which serves the needs of the market to realize a fair balance of risk and lower the costs
  • Standardize the O&M contract template to open up the market and make the switch between O&M providers easier for the asset owners so the industry can evolve on a quality basis and not be held up by complex legal structures
  • From the very comprehensive SESI process being used for all seven contract templates, get the best legal and solar industry minds coming to a consensus view on what should or should not be included in these contracts
  • Create open source, market available contract templates
  • Integrate the O&M contract within the suite of integrated SESI templates
  • Lead the way into the future of O&M, not merely to continue to implement the past
  • Provide guidance for emerging solar markets to lessen risk, reduce cost and increase the success of solar growth in these regions
  • Incorporate best practice key performance indicators and O&M activities which have an impact on the asset’s energy yield

At the heart of the SESI O&M agreement is the pursuit of three core objectives inherent throughout the SESI program:

  1. Simplification
  2. Balance risk
  3. Innovation

Simplification includes the standardization of terminology and O&M activities to create transparency and evoke trust among all parties.  Balancing risk is a focus of ensuring all parties are represented in a fair equation with risk identified and mitigated as much as possible. The call for innovation heralds the discovery of what is working in the industry overall, with an eye toward incorporating best practices for new and innovative means to deliver O&M activities.

Current Stage of the SESI Solar Contract Template Work

The SESI O&M work group, like the other six streams, is currently within the review process.

SESI stagesJean-Pascal Pham-Ba added, “We are planning to showcase the suite in the first instance at COP23 in Berlin, Germany.  We will get feedback from the stakeholders on the global side because we also talk to NGOs and governments, especially on the PPA side, which is one of the key issues where the interface with the government is really important. We will then bring that to the IRENA International Assembly in January, where we expect the governments to sign off as acceptable and recommendable suite for standardized contracts, which help the achievement of the goals.”

Feedback on the O&M contract will also be sought out by the SolarPower Europe task force participants at the December 7 event, The O&M Asset Management Conference in London.  This event will also include the discussion, update and promotion of the 2.0 version of SolarPower Europe’ O&M Best Practices Guidelines.

Sophie Dinengen added, “We have been working for a couple of months on drafting the term sheet. The term sheet has been agreed upon over the summer and is now being finalized into a draft agreement. That agreement is, at the moment, being standardized in terms of ‘Force majeure,’ clauses which should be identical across the whole suite of contracts in order to make sure the contracts do not conflict with each other. That is quite important.”

“After that, we will work together with the work streams of the other standard agreements in order to achieve one solid standard package of different agreements, which will then be sent to market parties, such as banks, developers, contractors, and the members for consultation. Although we already have these parties gathered in the work streams and they are providing input, it is also important to seek consensus with the wider market. That will probably lead to some quite minor changes. But then it goes to COP23 where it’s presented. Then in January, hopefully, signed off by the governments.”

Perspectives on What’s at Stake for Solar Growth

“Offering a lower cost of electricity is precisely what the governments are waiting for and what is needed to accelerate the energy transition,” explained Pham-Ba.  “Industry players who will use the standardized documentation will have more chances to win. You can look at it like the invention of cars. When they were invented some were still thinking that there were better horse riders, that was the best way to travel. But at the end, in a few years, there were no more horses and carts in the streets of New York, only cars.”

As Pham-Ba pointed out, there’s incredible momentum for solar right now. Standardisation itself is a crucial part but only one aspect of a more comprehensive approach. It’s not only about the contracts. It’s also about the regulation. “In order to accelerate the market, the governments themselves need to do exactly what the private parties have done with the contract,” he said.

Jean-Pascal Pham Ba The Terrawatt Initiative SESI talk 1 Solar O&M Insider“The contractual standardisation is really to set common rules which will help facilitate the acceleration of the markets. There is also a de-risking side of it because, especially in the countries where you don’t have hard currencies, which are the low and middle-income countries, you still are facing some risks which can’t be addressed by the regulation or by the contract, which are linked to the economic situations.

Together with standardisation, and with harmonization of regulation, this can really change completely the organization of the market and the size of the market. If we are really serious about the Paris agreement objectives and just in solar PV, our calculation is that we will need to have installed capacity of 2.5 terawatts by 2025.”

According to IRENA, there is approximately $1.2 trillion worth of solar investment needed to meet the commitments put forth by countries in the Paris Agreement.

“That means that starting from now, we should be investing $750 million per day which we are not able to do because of non-standardised contracts, un-normalized regulation and a highly risky financial environment. We need to tackle all three at the same time, and it won’t work without the standardisation,” concluded Pham-Ba.