An EPC bond is a three party contract in which one party, a surety, stands behind the obligation of performance by a second party, the principal, for the benefit of the third party, the obligee.
Also known as a performance bond, or payment and performance (or P&P) bond, EPC bonds can save your company money over collateralized alternatives, such as a letter of credit.
Working with a surety to gain access to EPC bonds can make your business more competitive and capital efficient.
What Is An EPC Bond?
An EPC bond is a three party agreement that provides a financial assurance regarding payment and performance.
One party, the surety (i.e. the insurance company providing the bond), provides financial assurances of the performance of the second party, the principal (i.e. the EPC that has the bond requirement), for the benefit of the third party, the obligee (the beneficiary of the bond, usually the client – such as a solar or wind developer, or a utility that is putting pressure on the developer to have the EPC bond).
In a nutshell:
- Surety: Provides financial assurance that principal will perform according to the terms of the contract.
- Principal: The EPC that buys for the bond. The EPC is underwritten based on the financial strength of the EPC. The bond premium is 1-3% of the value of the bond.
- Obligee: The developer requiring the bond is the beneficiary of the bond in the event the surety steps in to fulfill the terms of the contract on behalf of the principal.
The EPC bond is a financially underwritten financial assurance by the principal that it will perform according to the terms of the development contract, such as build a certain project, pay its suppliers, partners and sub-contractors, deliver the project on time, etc.
EPC Bonds vs. Letters Of Credit
For business owners, EPC bonds are preferable over pledges of cash or letters of credit because a surety bond will not appear as a liability on the company’s balance sheet.
Instead of having to pledge collateral guaranteeing the payment and performance of your company for a construction project, the surety is lending you their balance sheet for the term of the surety bond.
As a solar or wind developer, or EPC, tying up cash in the form of a letter of credit reduces your ability to do business.
Utilities, developers and municipalities often prefer letters of credit to surety bonds because they are demand instruments and are highly liquid…
However, by working with an insurance broker who has expertise in renewable energy surety bonds these liquidity requirements may often be overcome in a way that is agreeable to the obligee and surety, while also being capital efficient (off balance sheet) for the principal.
EPC Bond Pricing
Renewable energy bonds, such as EPC bonds, decommissioning bonds, interconnection and procurement bonds, community solar subscriber bonds, pre-development PPA and conventional PPA bonds are financial credit instruments.
As mentioned in the video above, bond pricing is determined by a financial underwriting process evaluating the financial strength of the principal.
Other factors that will affect the bond premium include your company’s surety history, the value of the bond you are requesting, your location and industry and any economic factors affecting bond capacity. Also, the competitiveness of your company – or lack thereof – will affect pricing.
The price of the EPC bond should range from 1-5% of the value of the bond itself. If your company is investment grade, with excellent financials and regular, transparent, historical financial reporting, your premiums will be on the lower end of this range.
The bond premium is the % you pay * the full face value of the EPC project bonded… As such the price of the bond, or premium, will equal 1-5% of that project value.
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