Large Scale Solar 4 – Things to consider in contract management

With recent announcement by the Government of Malaysia on the execution of Large Scale Solar 4 program, every companies that involve directly with solar and renewable energy are busy looking into suitable land for leasing as well as structuring their bidding documents. Ways ahead, the plant owners then should enter into contractual arrangements with the contractors – Engineering, Procurement, Construction & Commissioning and Operations & Maintenance. In some instances, Supply Contract is also required for the LSS project.

Thus, every LSS plant owners have to be concerned on salient items on those contracts, including the following:-

  1. Contract Sum/Contract Price

Determining the fixed rate of Contract Sum/Contract Pricing is important for any construction project. This would ultimately lead the parties to understand the Scope of Work as well as specifications of the materials and equipment for the LSS project. Some LSS plant owners would require polycrystalline while some might be needing monocrystalline solar panels.  However, in certain project, the LSS plant owners should also consider any extra room for variation on the Scope of Work – that may be caused by variable factors – condition of the land, requirement of the authorities and changes in output generation. But, it shall be in the best interest of the LSS plant owners to limit the variation cost as any open ended figures would be jeopardizing the contract pricing/projected revenue of the LSS plant.

  1. Timeline

With certain datelines of Commercial Operation Date/Scheduled Commercial Operation Date are already stipulated in the Power Purchase Agreement with Tenaga Nasional Berhad, the LSS plant owners have to consider those datelines in their contracts with EPCC and/or Supply Contractors. Datelines for execution on Scope of Work i.e. application of Development Order, land clearing and procurement of equipment from offshore parties must be specified and finalized. The LSS plant owners may consider late charges to be imposed on the contractors on any delay for any Scope of Work. This has been the implemented by Tenaga Nasional Berhad where certain sum of Performance Guarantee to be deposited before the execution of the LSS project. Alternatively, certain Performance Guarantee/Bank Guarantee can be required as a form of security in due performance of those Scope of Work.

  1. Financing/Funding

While working on the LSS, every plant owner to have be concerned on their financial capabilities to complete the project, achieving its Financial Close and subsequently the Commercial Operation Date of the project within the stipulated datelines. In ensuring smooth execution of the Engineering, Procurement, Construction & Commissioning of the project, the plant owners may consider various avenues in achieving the Financial Close and raising sufficient fund. This could be done by way of RCPS/CPS to investors, creation of charge over the plant to any financial institution or investors or issuance of Green Sukuk that has been trending as the viable fund raising method for LSS around the world. However, close attention should be given on any restriction of interest over the plant that always be stipulated in the Power Purchase Agreement.

Nazmi Mohd Zaini is the Partner of Nazmi Zaini Chambers. He has advised clients in the execution, construction and commissioning of LSS 1 & 2 and currently advising clients on their participation on LSS 4.