As New Zealand continues towards electrification of its energy system to assist the transition to net zero emissions, more renewable energy projects are starting to move through the development phases and are reaching the start of construction.

With the Government having pledged to triple renewable energy by 2030 and confirming New Zealand’s domestic and international commitments to reducing emissions, we expect a significant amount of growth in solar and onshore wind projects reaching the construction phase within the next five years. 

This article explains the commonly adopted approaches to contracting for the construction of renewable energy projects in New Zealand and looks at some key issues our energy and construction teams have come across when advising contractors and developers in the energy sector. 

The issues explained below make contracting for the construction of renewable energy projects in New Zealand a specialised area where sound knowledge of the market practice and the relevant legal and regulatory regimes is critical to success. 

Contracting approaches 

One of the initial questions that renewable energy developers and contractors will need to agree on is the approach to construction contracting to be used for delivery of the renewable energy project. The key types of approach are as follows:

• "EPC” or “Turnkey” contract, where the contractor essentially provides all the required design, engineering, procurement and construction works necessary to deliver a complete, and operational facility to the project owner (using subcontractors as necessary to achieve this purpose); and
• “Multi-contract”, where the contractor generally provides the main construction works required to complete the project, but other workstreams such as design, engineering and procurement of equipment and materials are provided by other contractors under separate agreements. 

One of the main drivers for and major advantages delivering a project under an EPC or turnkey contract, as opposed to adopting a multi-contract approach, is that project developers and project finance lenders have a single point of responsibility. It is a ‘high risk, high return’ arrangement for the contractor, who accepts sole risk of delivering the project on time and within budget but is generally rewarded with premium pricing for its services under the EPC contract. 

Conversely, a multi-contract approach can offer cost savings to the project developer but increases the level of complexity in project documentation and requires a keen focus on ensuring risks are appropriately allocated across the different contractors. In addition, such an approach introduces potentially significant interface risk that needs to be carefully managed during the construction phase of the project. 

EPC contracts for renewable projects in New Zealand

EPC contracts are commonly used overseas (including in Australia). However, until recently, they have not been as frequently or commonly used in New Zealand, and there is currently no New Zealand standard form EPC contract available for use by renewable energy developers. The closest standard form equivalent in the New Zealand market is the NZS 3916 Design and construct contract (D&C contract) which imposes primary design responsibility on the contractor. However, we expect that EPC contracts will become the primary contracting approach for most utility-scale renewable energy projects, and that an increasing level of standardisation should be expected as the market continues to evolve. Ultimately, consistent approaches to EPC contracts should assist developers, financiers and contractors to reduce overall costs and increase efficiency of negotiations. 

In our experience, developers of renewable energy projects in New Zealand are currently either adapting international standard forms of EPC contracts (such as the FIDIC Silver Book) or, more often, using bespoke forms of contract that are frequently based on bespoke EPC contracts developed by Australian law firms for projects in Australia. Adapting Australian or other international EPC contracts will often make the contracting process initially more efficient, but can also raise additional challenges, including the need to understand the differences between market practices and regulatory and legal regimes in the different jurisdictions. Our energy group is well-equipped to assist with any EPC contracting queries, with expertise gained in overseas markets as well as strong connections with energy teams from overseas firms. 

Key negotiating issues for renewable energy EPC contracts

We set out below some of the key negotiating issues that contractors, developers and financiers will likely need to consider when agreeing the term sheet or full form documentation for an EPC contract to deliver a renewable energy project. This is not a comprehensive list, and there are many aspects for each party to consider, particularly regarding the appropriate allocation of risks amongst the parties, who should all obtain legal advice for this purpose from appropriately experienced advisers. 

1. “Bankability”
   Most renewable energy projects require project finance, and for those projects a critical aspect of the EPC contract is its “bankability”. This means simply that the EPC contract has an allocation of responsibility for risks that is satisfactory to the project financier. Early consideration of the project financier’s requirements by the parties when negotiating the EPC contract is therefore critical, and likely to result in substantial time and cost efficiencies in comparison with addressing a project lender’s requirements at a later stage. The selected project lender will be able to provide its criteria on request, and it will be prudent to obtain those criteria before the parties sign the term sheet for their EPC contract to ensure all criteria are adequately addressed. 
   
   
2. Use of early works contracts
   Early works agreements are a common feature of renewable energy projects and are often used to deliver key preliminary stages of work prior to the parties finalising the terms of and executing an EPC contract. The scope of the early works carried out will vary depending on the particular project, but will often include geotechnical investigation of ground conditions, engineering studies and/or early engineering design work and the procurement of long lead components for the project.
   
   
3. Responsibility for inaccurate or incomplete information provided by employer
   Similar to “Principal’s Requirements” commonly found in a D&C contract, an EPC contract will generally include “Employer’s Requirements”. This is often a limited output specification, which sets the parameters and objectives that the contractor must meet. 
   
   The employer may provide other information separately (eg geotechnical surveys) but will generally seek to include strict limitations on the extent to which the contractor can rely on this information. It is generally the contractor’s responsibility to obtain and interpret other information that may be necessary to understand the risks, contingencies and circumstances that may affect the works.
   
   
4. Risk allocation for ground conditions and other “unforeseen” circumstances
   Consistent with the principle of close to complete risk transfer to the contractor under an EPC contract, employers will often propose that the contractor should bear sole risk for ground conditions. 
   
   For example, the FIDIC Silver Book requires the employer to make available to the contractor all relevant information in its possession concerning ground conditions at the site. However, the employer bears no responsibility for its accuracy, sufficiency, or completeness. The contractor must verify and interpret such information.
   
   Contractors that are not prepared to accept the full risk of unforeseen ground conditions can either seek to negotiate a more evenly drafted clause which permits a greater degree of reliance on information provided by the employer or attempt to mitigate the risk by agreeing to conduct early works (including more detailed site investigations) prior to executing (and assuming greater risk for ground conditions under) the EPC contract. 
   
   
5. Interface with O&M contracts
   In many cases, the contractor under an EPC contract will also be contracted to operate and maintain the renewable energy asset once its construction is completed. This role is separately carried out under an Operations and Maintenance (or O&M) contract.
   
   Where the contractor under the EPC contract is required to operate the asset following completion, it is important to ensure that the terms in the O&M contract are consistent with those in the related EPC contract. This involves consideration of the obligations on the contractor under each contract in respect of issues such as the procurement, storage and warranty of spare parts and replacement components. 

For more information or guidance on negotiating and entering into EPC contracts, please contact one of our experts.