Engineering, Procurement & Construction Best Practice Guidelines (Version 2.0)

This chapter builds on Chapter 4 of SolarPower Europe’s Lifecycle Quality Guidelines, Fundamentals of Lifecycle Project Management by mapping out techniques for identifying and mitigating risks. Whilst risks are present throughout all stages of a project’s lifecycle, they must be mapped and mitigated in the project development phase to reduce the likelihood of their occurrence and the weight of their impact further down the line. There are always multiple points of view on the size and likelihood of a risk. To better understand the risk perspective of an Asset Owner, consult SolarPower Europe’s Asset Management Best Practice Guidelines (Version 2.0).

2.1. Quantification of risks

The typical approach in risk analysis in technical projects is to apply a classic Failure Modes and Effects Analysis (FMEA) where the various risks, belonging to a certain phase and component, can be prioritised through their Risk Priority Number (RPN). In the FMEA, each identified risk is typically evaluated for its severity (S), occurrence (O) and detectability (D); numbers are used to score each of these evaluation parameters. Typically, the RPN is then obtained by multiplying these three factors with the following formula:

RPN = S_RPN x O_RPN x D_RPN

Technical risks are those that arise from the PV module, inverters, and other mechanical and electrical components, as well as system engineering, energy prediction, and installation. Some risks are confined to specific phases of development, such as construction risk, while others persist throughout the entire cycle from planning through operation, such as default risk. For more information on the quantification of technical risks, using FMEA, please refer to the Solar Bankability project at www.solarbankability.org.

The cost of mitigation measures needs to be included in a cost benefit analysis, which must consider the expectations of the stakeholders that are involved in a PV project.. Mitigation measures must be identified along PV the value chain and assigned to various technical risks. Typical mitigation measures during the design phase are linked to the component selection (e.g., standardised products, products with known track record), O&M friendly design (e.g., accessibility of the site, state of the art design of the monitoring system), LCOE optimised design (e.g., tracker vs. fixed tilt, central vs. string inverter, quality check of solar resource data). Mitigation during transportation and installation is linked to the supply chain management (e.g., well organised logistics, quality assurance during transportation), quality assurance (e.g., predefined acceptance procedures), grid connection (e.g., knowledge of grid code). These mitigation measures positively affect the uncertainty of the overall energy yield, increase the initial energy yield, and reduce the cost of O&M during the operational phase.

It is important that risk ownership is also considered to better understand which stakeholder is responsible for mitigation of a risk. Suitable planning, supervision, and quality assurance actions are critical at all stages of a PV project to minimise the risk of damages and outages, optimise the use of warranties, and the overall performance of the PV plant. . In practice, it is important to understand the combined effect of mitigation measures to be able to calculate their impact and assess their effectiveness. The cost-benefit analysis can include the combination of various mitigation measures and derive the best strategy depending on market segment and plant typology.

Particular attention needs to be paid to technical risks which are related to Health, Safety, Security, and Environment (HSSE) issues. Some HSSE risks are not linked to any performance loss, they must however be dealt with to reduce possible harm (risks leading to electrical fault, fire, etc.).

2.2. Financial risk factors and bankability

It is usually the equity side that is significantly compromised if a PV power plant project does not perform. This is because, across a project’s lifetime, the development and the EPC phases have the highest risk. Financial risk involves market, modelling, credit, liquidity, operational and other risks (e. g. reputational, legal, IT, to name a few). In many projects, the financial modelling already poses an inherent risk, particularly when optimistic assumptions are taken, and no sufficient sensitivity scenarios with critical influencing factors are used. For the EPC part of a financial risk assessment, it is important to have an understanding of (however, not limited to) the following risks: market risks (particularly price and currency fluctuations from time of engineering/design through Commercial Operation Date (COD)) and cash related transaction risks, for example, how a pre-payment can effectively be secured against future deliveries. Examples of risk mitigation measures include performance bonds backed by internationally accepted financial institutions and escrow accounts. Another important aspect of financial risk analysis relates to solvency of the parties involved in the project and their individual business habits. Especially when it comes to a first-time interaction with a new business partner, business habits, including their value set, can have a significant impact on the financial stability of a project. There are several background checks that can help reveal the reliability of a new partner, such as references and financial health (credit) checks. One important point of consideration for financial risks is the bankability. It is important to note that different banks have different standards of assessing a project and its underlying risk. Two factors are essential from an EPC perspective: Firstly, it is essential to make sure that your own bank accepts any bonds issued by banks of your business partner. Secondly, it is important to understand the technical requirements of the lending bank (often only for the long term) of the buyer of the PV power plant and to adhere to these. 

2.3. Country and regulatory risk factors

Country risk refers to the risk of investing or lending in a country. For example, financial factors such as currency controls, devaluation or regulatory changes, or stability factors such as mass riots, civil war and other potential events contribute to companies’ operational risks. This term is also sometimes referred to as political risk. A differentiated country risk classification is offered by various institutions e. g. OECD, S&P, Moody’s, Fitch, World Bank, and other institutions.

On the soft side, the cultural background in which a country is embedded also provides important hints that are usually not reflected in the country risk classification. As an example, in many countries, it may not be a general cultural exercise to admit to failing to fulfil a task.

For EPC service providers, the main tangible country risks directly affecting a project are given by customs clearance, local codes, local law (incl. labour law) and its effectiveness of enforcement (including when an EPC contract is subject to the law of a different country), local content requirements, local site conditions, currency risks (particularly also restrictions of currency trade), business habits (including bribery), and political stability (including violence). To evaluate the risk of being faced with bribery one can query a given country’s corruption index on Transparency International. It is usually also reflected in countries’ risk classification schemes mentioned above.

2.4. Contractual risk factors

Often contracts do not refer to the entire project or are not well defined, and therefore bear a significant risk of interpretation. To prevent unexpected risks and thus disputes during construction, international contractors should pay close attention to local project characteristics and contract practices. For details on this subject, refer to section 12.2. Contractual risk allocation. For an off-the-shelf O&M contract template that equally distributes risk amongst the signatories, please refer to Open Solar Contracts (available at https://opensolarcontracts.org/).

2.5. Technical risk factors

The main technical risks associated with EPC are related to using key components properly. Key components are defined as the essential components that are needed to operate a PV system safely such that it performs to a minimum acceptable standard. Under this definition, key components of a PV system are

• Modules
• Inverters
• Mounting structure
• Cabling - including connectors
• Transformers

Generally, international, and local standards and codes (e.g., IEC standards) are supporting documents to enable a minimum set of technical risk analyses. However, there are other technical risk aspects involved in an EPC project that are not covered by such standards.

While testing the key components is recommended as part of Quality Review (QR), correct installation of those components, using state of the art techniques, is more critical to building a high-performance power plant. Studies have shown that low plant performance is most likely due to system problems.

For more details on specific requirements, see Chapter 6 on Engineering, Chapter 7 on Procurement (section 7.5. on Specific requirements per key component) and Chapter 8 on Construction.

2.6. Other risk factors

Other risk factors that play a role in an EPC project that have not yet been addressed may include:

• Availability of components
• Transportation, transportation damages
• Delays, e.g. in shipments
• Local certifications, import rules
• Import taxes

2.7. Conclusions and recommendations

In conclusion, even though the upfront cost in Quality Management may add about 2% to the cost of a PV system, if properly performed, Quality Management, including proper conformity assessment, especially during the EPC phase (or the inception phase) of a PV project, pays off in the long run. There are too many examples of non-performing assets in the field, some of which even represent safety hazards. The bill after ostensibly benefitting from saving during the inception phase can result in severe, unplanned costs for taking corrective actions in the long run; see a case study outlined in figure 4-4. While this does not even represent the worst case, the 5 years of operation until failure represent less than 20% of a system lifetime, and the damage resulted in an additional, unplanned investment of approx. 38% in the fifth and sixthyears.

Proper quality and risk management should have their place in any PV power plant project throughout its lifetime. Getting the PV power plant inspected and rated in regular intervals is always confirmation of a healthy, well performing system – so is flagging any corrective measures to be taken early-on.