Rigid COD deadlines do more harm than good

A utility executive responsible for procuring renewable power recently lamented that, at the time of contract execution, renewable “projects” are typically at a very preliminary stage of development, offering scant information about project specifics. Regulatory or other objectives often cause the utility to require that the power purchase agreement be executed before critical permits have been obtained, transmission arrangements have been finalized, or the quality of the project’s fuel source has been determined. The utility spokesperson contrasted this “amorphous” state of renewable projects as of contract execution with natural gas projects, which have far fewer “unknowns.”

 

Despite their recognition of the schedule challenges confronting renewable projects, utilities usually insist that project sponsors commit to an absolute, firm guaranteed commercial operation date (COD) and that substantial “daily delay” and other damages be imposed for any delay. Issues relating to the COD—including security, penalties, and reasons for not imposing delay penalties—typically emerge as the most contentious issue in negotiations.

Benefits of punitive COD deadlines are Illusory

Utilities have legitimate reliability and economic interests to justify their demand that the COD be specified and that the supplier contractually commit to achieve that date. However, these needs do not justify imposing a “do or die” COD deadline accompanied by draconian penalties. Utilities rationalize these measures on the basis that they are “relying” on the project’s capacity to meet their load as of the “guaranteed” COD and are “providing” the project sponsor the necessary “incentives” to commence operating as soon as practicable.

Neither ground justifies the resistance to offering renewable projects some degree of scheduling flexibility. On the contrary, the insistence on “guaranteed” CODs increases project costs—to the detriment of the utility, electric consumers, and the project sponsor—while failing to increase the likelihood that the target COD will be achieved.

Ironically, an inflexible COD may be more likely to delay a project’s on-line date. The scheduling uncertainties endemic to developing a renewable project, coupled with harsh “late” penalties, offer the project sponsor a perverse incentive to commit to a later COD than is potentially achievable, because any risk of being “late” must be avoided. This risk of daily delay damages, coupled with the security the utility requires to cover that contingency, necessarily increases project costs.