Compact linear Fresnel reflector. Image: AREVA Solar.

By Ángela Castillo

The costs stemming from delays will depend on the length of the delay and the penalties negotiated in the contracts signed with EPCs and off-takers. For example, CSP Today discovered that the Shams 1 project, in Abu Dhabi, had a one year delay at a rate of approximately US $100,000 per day.

In order to present a wider picture of what delays mean in economic terms, we had a look at CSP projects that have either experienced delays or currently face delays in different regions. We examined the causes for their postponement, approximate timeframes, cost overruns and possible legal consequences in places like the U.S., India, the UAE and South Africa.

USA: permitting hurdles in California

When consulted about the main cause for delays to develop CSP projects in the U.S., most sources agree that intricate permitting proceedings are a major concern. An example of this is the Palen project.

BrightSource Energy acquired it from the Solar Trust of America on 27 June 2012, and then went through a twenty one month permitting process before the California Energy Commission (CEC), to allow the permit to be converted from parabolic trough to tower.

The CEC released its decision on 12 September 2014 and accepted the conversion, but recommended a reduction in the acreage and a single tower as opposed to the two 250 MW towers originally proposed. Only 14 days later, Palen Solar Holdings (the consortium behind the project formed by BrightSource Energy and Abengoa) withdrew their proposal.

Palen’s fate is not sealed yet. On 4 November 2014 Abengoa announced it had acquired BrightSource’s interest in the project. The Spanish company indicated that it will continue to use tower technology, and will include molten salt and thermal energy storage in its design, unlike the previous configuration.

It is very likely, though, that the project will have to go through a similar lengthy process to obtain the permits for this new configuration. As the company has not yet presented a formal certification for application, the CEC did not comment on the next stages in the process.

In an attempt to present average timeframes for permitting CSP projects in California, the following table takes in account five projects in the period between the first application for certification and the CEC’s final decision.

Source: California Energy Commission, 2014.

Calculating costs associated to permitting delays is a complicated task, according to Jennifer Hernandez, partner at Holland & Knight LLP and specialist in large-scale projects permitting proceedings in California. “Construction and technology expenses are quite high, but the permitting costs come up front and without successfully leading through that process, the project is dead”, she states.

Furthermore, Hernandez adds: “Some facilities that were promised permits were built and now have no permits due to environmental concerns. That has sent a strong message to the financial market”. To make matters worse, Hernandez reminds us of the multiple permits these projects have to obtain: “A developer can have its main permit from the Energy Commission, for example, and then not quite get the permit it needs from Federal agencies”.

Construction challenges

Once a developer has managed to obtain all of the necessary permits, the construction work begins. In the case of Crescent Dunes, the 110 MW molten salt tower project in Nevada, it began in September 2011 and concluded in May 2014, totalling thirty two months. Initially, the company set a goal to complete construction by the end of 2013.

Kevin Smith, CEO of SolarReserve, the lead developer behind the project, explains that although the construction ran relatively smoothly, “these are complicated large-scale projects”. He explained that there were no financial or technological issues involved in the delays, but rather normal logistics of a large construction project.

“These projects are built on remote sites where you have to bring construction labour from various parts of the region, with all the potential delays involved in transportation and industrial issues”, he explains.

India: the Reliance Areva CSP 1 project

Sometimes delays are due to scalability issues involving relatively new technologies and particular corporate decisions taken over the lifetime of a project. That was the case of Reliance Areva CSP 1, a 125 MW Fresnel plant located in the Rajasthan State, in India.

This project was selected under the phase 1 of the Jawaharlal Nehru National Solar Mission, in December 2010 and began commercial operation four years later, on 11 November 2014. The fact that this was the first Fresnel project built at a larger scale than 100 MW (the biggest operating Fresnel plant at the moment was the 30 MW Puerto Errado 2, in Spain) posed a challenge from the beginning.

The difficulties continued when the technology provider, Areva, decided to sell its solar steam equipment and manufacturing lines in May 2013, finally exiting the CSP business in August 2014. The project also faced several difficulties to connect to the grid, including two sandstorms and synchronization issues.

Jayesh Goyal, Global Vice President of Sales at AREVA Solar, the lead EPC contractor behind the Reliance project, indicated that “settlement discussions for any claims or penalties related to the delay will occur after the plant reaches full commercial operation”.

With regards to the time spent on the project, he indicated that: “In retrospect, everyone has realized that an 18-24 month timeframe for a first-of-a-kind project of this magnitude in a remote area was too optimistic. If you take the actual time that was taken from the signature of the contract [with the developer] to the time it was connected to the grid, that is to say about 3 years, it is not unreasonable, and it is in line with other CSP projects of this magnitude built around the world”.

UAE: execution problems at Shams 1

Shams 1 plant in Abu Dhabi. 

In the worst cases, delays during the construction phase could last as long as twelve months. A source close to one of the developers of Shams 1 (Abengoa, Masdar and Total), who wishes to remain anonymous, revealed that the liquidated damages clause in that contract established a penalty for delays of around US $100,000 per day, totalling a staggering US $36,5 million.

“In this case, EPC contractors (Abener and Teyma) failed to deliver on time. They had built many 50 MW parabolic troughs, but this one was their first 100 MW parabolic trough project and the design was very different. Every time you are building something new, you will experience considerable delays”, our source added.

Climatic conditions and the particular characteristics of the plant’s location did not help either. The lack of water, the presence of wind, the high dust concentration affecting direct solar radiation values and the sandy soil, were all contributing factors to the delay.

Pulling out of the project or footing the bill?

However, could a project with a CAPEX of US $600 million, like Shams’, afford such a penalty? It is not that simple to abandon a CSP project, in the opinion of Kieran Whyte, partner at DLA Cliffe Dekker Hofmeyr, in Johannesburg. He has advised Eskom as off-taker in the South African Government’s Renewable Energy Independent Power Producer Procurement Programme (REIPPPP).

“Any developer in the world will always try and save the project, but in order to do so it will have to receive the consent of the lenders and the off-taker on the new commercial operation date”, he says. “The extension they get depends on the grounds they claim for it and there is no specific time frame set for that. They will also have to pay the corresponding liquidated damages”, warns Whyte.

“Under the REIPPP programme, that would be something between 20% and 30% of the total contract price. So let’s say a developer has a ZAR 8 billion project [US $ 709,997,235 calculated at a rate of 1 ZAR = US $0,089 on 7/11/2014] and they have negotiated liquidated damages of 20%. The off-taker then will take some ZAR 1.6 billion [US $ 141,948,360.62]”, explained Whyte.

If the developer decides, nonetheless, to abandon the project, Whyte explains that under the REIPPP programme, for instance, a penalty of ZAR 200.000 per MW is set out for the preferred bidders. Thus, for a 100 MW project, the penalty would be US $ 1,780,403.

“If developers abandon a project in South Africa, they will also have to pay termination costs to some of their contractors depending on what they negotiated. Additionally, they will have to pay back the lease on a property they will not develop and deal with all the licenses that they got over that property”, adds Whyte.

Nonetheless, delay penalties are different in every contract, depending on the local regulation governing the agreement and the off-takers’ particular needs. Therefore, the penalty clause negotiated in South Africa might not be the same in the UAE, for instance.

The importance of the financial model

So, what can developers do to reduce the risks of losing money as a result of delays in their projects? Paul Weber, partner at Chadbourne & Parke LLP, in New York, and experienced in structuring finance for renewable energy projects, sums it up:

“The best strategy is, first, getting an insurance to cover for any possible ‘force majeure’ event, any strike or permitting delays. Second, developers have to plan their financial model so that they have all sort of contingencies covered”.

When a company is both the developer and the EPC, Weber explains that it can try to undertake legal actions against suppliers. “For instance: if the heliostats did not arrive on time, that provider will be liable for breach of contract”, Weber says.

Whyte agrees on the importance of planning ahead through the financial model. “There could be many consequences to a delay and the best way to deal with it is planning what they might be. The best place to start is to have a look at the financial model and see what is required, when do you have to draw the funds, when do you have to start paying back and what is the financial cost of being delayed”, adds Whyte.

Lessons learnt from previous project delays mean developers and policy makers alike must ensure that projects have realistic time frames otherwise they face hefty costs. However, as more expertise is developed in each location, the market will see significant improvements in this regard.