An EPC bond is a three party contract in which one party, a surety, guarantees the performance of a second party, the principal, for the benefit of the third party, the obligee.
Learn why engineering, procurement and construction (aka “EPC”) bonds are preferable over letters of credit or pledges of cash collateral and how to use such bonds to 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 a guarantee of 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 guarantee 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.
For a solar or wind developer, or EPC, tying up cash in the form of a letter of credit reduces their 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.
However, the price of the EPC bond should range from 1-3% of the value of the bond itself.
If the bond is equal to the full value of the EPC project, then the price of the bond, or premium, will equal 1-3% of the project value.