Why a Performance Guarantee is Guaranteed Underperformance

Sorrebh Samdani, Applications Engineering Manager at infiswift

Many in the solar industry view the performance guarantee as an assurance that PV projects will produce the maximum amount of energy. While the performance guarantee does ensure that a PV project will produce above a minimum threshold, it does not ensure that it will perform to its maximum potential. In an ideal world, every participant involved in a solar project would be motivated to optimize the project’s Levelized Cost of Electricity (LCOE). In reality, the incentives of project participants are often misaligned, leading to sub-optimal performance.

It’s naive to expect that everyone will go out of their way to optimize plant performance when all that is expected is achievement of a minimum threshold (i.e. the performance guarantee). Observing the various stages of a project allows us to see how the performance guarantee convention actually discourages project participants from taking the right actions along the way to achieve optimal plant performance. Below we’ll take a look at the design, construction and operation phases of a simplified scenario in which an owner LLC wants to build a PV project.

Design Phase

Consider the long-term project owner, Owner LLC, who hires Engr Inc – a third party engineering consultant – to develop a preliminary design and a request for proposal (RFP) package. EPC Inc – an Engineering Procurement and Construction (EPC) contractor – decides to respond to the RFP. Several vendors have proposed products to EPC Inc, that can potentially increase the energy production with a slight increase in cost, but EPC Inc has not worked with these vendors before and does not know if the claims can be trusted. It could be risky for EPC Inc if the products do not work and if site visits are required to fix the problems.

Getting the contract is far more important than optimizing system production and EPC Inc knows that the proposal will be evaluated primarily on construction cost, as that is the key decision metric for Owner LLC’s construction team. Therefore, the system is designed with tried and tested and/or cost competitive products, and EPC Inc wins the project on the basis of construction cost. In this scenario, as is generally the case, EPC Inc has been asked to provide a performance guarantee as part of the bid, requiring them to devote resources to understand and keep track of system performance.

Even if everything works as expected, effort will still be required to prove and validate that the system is working as expected. Owner LLC also employs an Operations & Maintenance (O&M) team, which is separate from its construction team and has different Key Performance Indicators (KPI) on which success is judged. When performance problems arise, EPC Inc will have to coordinate between equipment suppliers and Owner LLC’s O&M team to get issues fixed. This work will need to be done in a timely fashion to meet EPC Inc’s performance guarantee, but EPC Inc does not have control over all aspects of the process. This is a potential risk for EPC Inc, and they address it by calling on Owner LLC to reduce the threshold of performance guarantee from 97% to 95%.

The performance guarantee requires a calculation of expected energy output using measured weather data like irradiance and temperature. It is, however, very difficult to do irradiance measurement with less than 2% error because sensors are not perfectly aligned with the modules, and the modules themselves have a small variation in their alignment. EPC Inc hopes that the on-site O&M team will not clean the irradiance sensor on a regular basis, and the measured value will be lower than actual. This will provide them an additional buffer on the guarantee.

During contract negotiations, the performance guarantee is perceived as a high risk by EPC Inc’s risk team. EPC Inc proposes a discount to the owner if the performance guarantee could be lowered to 90% or 85%. Owner LLC’s construction team, which is in charge of negotiations, agrees since the lower construction cost makes them look good.

At the close of the design phase in this scenario, Owner LLC has committed to a project with performance guarantee, but it a weak one at best.

Construction Phase

The first step of the construction phase is approving Issue for Construction (IFC) drawing sets. The O&M team is asked to provide feedback, but they miss a few details in the tight deadline given to them and approve the drawings.

During a routine site visit during construction, the O&M team notices that several improvements can be made to make the plant easier to maintain, such as wider rows or combiner boxes located closer to the road rather than the middle of the array. Some of the improvements, like changing row spacing, would require significant rework though, so the O&M team keeps mum since they already approved the plans.

On improvements that are more easily made like changing of wiring clips, the O&M team will make recommendations to the Owner LLC’s construction manager. Owner LLC’s construction manager requests a quote from EPC Inc for the improvements. EPC Inc had initially bid the project at a tight margin to increase the chance of getting the contract and thinks this is a good chance to make money from a captive customer.

The change order is priced at a high mark-up, and Owner LLC’s team rejects the proposal to make improvements for more efficient maintenance, deeming it as simply not worth it. It is noted as a lesson learned for the next project. However, design conditions and project teams often change and such feedback is not always documented or passed along.

When the system is mechanically complete, testing and commissioning begins, during which time a significant amount of equipment sits idle. There is, of course, considerable pressure to generate revenue from the investment, and contractors want to claim milestone payments. Most of the labor force is demobilized, and the excitement in the project decreases. Specialized testing and commissioning folks appear at the site talking in a cryptic language. Everyone involved in the construction project wants to be done – “close” the job, collect payments/bonuses and move to a more interesting job. A significant portion of the commissioning is done properly but some details slip through the cracks as people are busy planning their next moves/vacation.

Operations Phase

In an ideal scenario, the O&M team has complete understanding of how the system operates, what the different data tags mean and whether everything is working properly. In reality, the task is too complex to be done in the short amount of time allocated to commissioning and handover.

Owner LLC’s O&M team gets off to a difficult start. They have thousands of data tags to sift through and have difficulty determining if the values being reported are labelled correctly, within range and with correct calibration coefficients.

They discover that the current transformers were wired in in the wrong direction, and the system is reporting that it’s importing power when it’s actually exporting. When the O&M team reaches out to the construction team about the problem, they find that they have moved on to other projects and are uninterested in providing support. The problem never gets fixed, but eventually the O&M team resolves the major issues and the system begins to operate as it was designed.

Meanwhile, EPC Inc is producing periodic reports with details of performance guarantee status, as required by Owner LLC. Measured data is never perfect – sometimes it’s missing, irradiance sensors are not always clean and outage hours are often not clearly defined – and EPC Inc must make several assumptions to finish its performance calculations. Because of this, EPC Inc knows that if two engineers were to make independent calculations, there is a high likelihood that their results would not be the same.

If the first step calculations show that the performance guarantee has been met, EPC Inc does not put extra effort to verify data quality. However, if calculations don’t show the performance guarantee hasn’t been met, more exploration will be done. After each period, EPC Inc sends out its performance report and sees if it sticks with the owner. At EPC Inc, the feeling is that it can always be modified if assumptions are questioned. Later, an inverter shuts down with a ground fault, and EPC Inc is required to help resolve it.

In this case, EPC Inc is diligent in resolving problems proactively because they are worried about meeting their performance guarantee. The process of identifying the root cause of problem and collaborating with equipment manufacturers to resolve it is time consuming. However, toward the end of the true-up period over which performance is averaged, they realize that they are going to meet the guarantee comfortably, and become less proactive in resolving future problems.

Then a problem occurs with one of the system’s generation step up (GSU) transformer and the whole plant goes down. In this case, the owner procured the transformer for the EPC, which is not uncommon for big ticket equipment. The performance guarantee threshold is not met for the period, but Owner LLC struggles to force EPC Inc to make them whole since EPC Inc was not the one that specified or procured the equipment. After the true-up period ends, EPC Inc reduces its expensive proactive troubleshooting program and starts providing help only when required. They have met their contractual obligations and don’t benefit from additional energy production, so they no longer have any incentive to improve system performance.

Real life scenarios can be considerably more complex than this, but many of the issues identified above happen commonly. Although projects are capable of producing more, it’s often hard to realize their full potential because incentives are often misaligned despite best efforts. Sophisticated project owners must have a “prevention is better than cure” mindset in the case of performance guarantees, and keep in mind the incentives of various project participants.

Are there any scenarios you have experienced where misaligned incentives made it difficult to optimize solar plant performance?