Performance Guarantees: Fox Run's 2 MW Shortfall Costs $1.94 Million but the EPC Pays $1 Million
Fox Run Solar reaches the end of construction.
The plant is 200 MW AC.
The financing model expects 438,000 MWh of annual energy.
Now the EPC performance test produces a result.
Assume the contract has:
Guaranteed Capacity 200 MW
Minimum acceptance threshold 95%
Minimum acceptable capacity 190 MW
Fox Run's first corrected capacity test is:
194 MW
The plant is above the minimum acceptance threshold.
It is below the guarantee.
That is the first distinction to keep.
Minimum acceptance and guaranteed performance are different numbers
Fox Run's contract can have three economically different levels:
Expected / modelled performance 200 MW
Guaranteed performance 200 MW
Minimum acceptance threshold 190 MW
A result below 190 MW can create a rejection / critical-shortfall problem.
A result between 190 MW and 200 MW can be acceptable enough to proceed while still creating cure rights or performance LDs.
A result at or above 200 MW passes the guarantee.
Those zones are not interchangeable.
For Fox Run:
Initial test result 194 MW
Minimum threshold 190 MW
Guarantee 200 MW
The project is not a total failure.
It is also not contractually whole.
The cure right comes before the buy-down
Recent filed solar EPCs show why the performance-test clause should be read as a process rather than a single number.
The Axial Basin EPC, for example, measures Facility Performance during a defined Capacity Test and gives the contractor a remedy period for a Critical Performance Shortfall, including repair, replacement or installation of additional solar equipment within interconnection limits.
For Fox Run, assume the contractor elects to cure.
It repairs equipment and replaces underperforming inverters.
After cure and retest:
Final corrected capacity 198 MW
The contractor improved the plant by:
198 - 194
= 4 MW
The project still misses the 200 MW guarantee by:
2 MW
Now the cash remedy matters.
The performance LD is a contractual settlement, not the lost-energy calculation
Assume Fox Run's EPC uses an illustrative performance-LD formula of:
$500 per kW of permanent capacity shortfall
The final shortfall is:
2 MW
= 2,000 kW
So contractual performance LDs are:
2,000 kW × $500/kW
= $1.0m
That is the EPC settlement under the teaching formula.
It is not automatically the project's economic loss.
Translate the 2 MW shortfall into energy value separately
For teaching purposes only, assume Fox Run's final 2 MW permanent capacity shortfall is expected to reduce annual energy by 1% relative to the 438,000 MWh model.
The exact relationship between capacity-test shortfall and annual MWh is project-specific.
Here:
438,000 MWh × 1%
= 4,380 MWh/year
At a $45/MWh contracted value:
4,380 × $45
= $197,100/year
Now assume:
Remaining economic life 20 years
Discount rate 8%
The present value of a $197,100 annual revenue loss for 20 years at 8% is approximately:
$1.935m
Compare:
PV of modeled permanent energy loss $1.935m
Contractual performance LD recovery (1.000m)
-------
Residual owner exposure $0.935m
The EPC paid the negotiated formula.
The owner is still not economically whole under the model assumptions.
A buy-down is not a repair
This distinction matters to lenders.
After the contractor pays $1 million:
Plant capacity 198 MW
Plant energy expectation still lower
Cash received $1.0m
The money does not restore the missing 2 MW.
If the project debt was sized on the original energy case, the lender still has to decide whether:
- the reduced output remains inside sizing headroom;
- debt needs to be resized;
- sponsor equity needs to cure the shortfall;
- the LD proceeds must prepay debt; or
- another completion condition has failed.
A performance buy-down monetizes some loss.
It does not turn 198 MW back into 200 MW.
A minimum threshold can matter more than the LD formula
Now change the test result.
Assume the cure reaches only:
188 MW
That is:
94% of the 200 MW guarantee
and below Fox Run's 95% minimum acceptance threshold.
A cash LD formula may no longer be enough.
Depending on the actual EPC, the owner can have rights to:
- require further cure;
- reject acceptance;
- refuse Substantial Completion;
- terminate for failure to meet minimum performance; or
- use another defined remedy.
This is why the minimum threshold is a financing line item.
A lender may tolerate:
198 MW + $1m buy-down
and refuse:
188 MW + larger buy-down
because the asset itself has crossed the bankability floor.
Passing a capacity test does not prove the annual energy case
Now take a different Fox Run year.
Assume the plant has fully passed its EPC capacity test at 200 MW.
The lender's long-term annual energy case remains:
438,000 MWh
But measured solar resource during Year 1 is 6% below the long-term expectation.
If the plant performs exactly as expected given the weaker measured resource:
438,000 × 94%
= 411,720 MWh
Energy is below the lender's long-term case by:
26,280 MWh
At $45/MWh:
26,280 × $45
= $1.183m lower annual revenue
The EPC contractor can still have a perfectly compliant performance ratio.
There is no contradiction.
The resource was weak.
Performance ratio is designed to remove the weather
DOE/FEMP describes solar performance ratio as actual production divided by model production using the same measured solar resource and temperature data over the selected period.
That means the comparison is approximately:
Actual production
÷
Modeled production under actual measured conditions
not:
Actual production
÷
Long-term P50
For Fox Run:
Long-term P50 438,000 MWh
Measured-resource model
under the weak year 411,720 MWh
Actual plant production 411,720 MWh
The plant can be:
~100% of weather-normalized model
while still being:
94% of long-term P50
A strong PR result does not insure the lender against resource risk.
Curtailment creates the same distinction for a different reason
Use the Market Structure example.
Fox Run / Prairie Ridge can have:
Available generation 438,000 MWh
Grid curtailment 6%
Delivered generation 411,720 MWh
The lost MWh can be completely unrelated to EPC plant performance.
If the contractual performance test excludes qualifying grid curtailment, the contractor can pass while project revenue falls.
Again:
Contract test
≠
lender energy case
The financing model should keep:
- equipment performance;
- resource;
- availability;
- curtailment;
- basis;
- degradation
as separate risk buckets.
The test normalization table should sit in diligence
For Fox Run:
| Variable | EPC acceptance test | Long-term financing model |
|---|---|---|
| Solar resource | measured / normalized per test | long-term distribution |
| Temperature | corrected / modeled per contract | long-term forecast |
| Curtailment | contract-specific exclusion | revenue impact |
| Grid outage | contract-specific exclusion | revenue / availability impact |
| Equipment availability | test-specific | annual operating assumption |
| Degradation | limited relevance at acceptance | 20–30 year assumption |
| Test period | defined test window | full operating horizon |
The point is not that EPC tests are weak.
They are designed for a different question:
Did the contractor deliver the plant it promised under defined test conditions?
The financing model asks:
How many MWh will the asset generate and sell over the debt tenor?
Cure outages have an opportunity cost
Fox Run's contractor improves the first test from 194 MW to 198 MW.
Assume the cure requires a five-day operating outage after the project could otherwise have generated revenue.
Use an illustrative average:
Expected generation during cure period 1,200 MWh/day
Realized project price $39/MWh
Cure outage 5 days
Lost project revenue during cure:
1,200 × $39 × 5
= $234,000
The contractor may bear some cure costs under the EPC.
The owner can still lose operating cash while cure occurs.
So the performance settlement page should include:
Value of performance improvement
-
owner revenue lost during cure
-
retest cost retained by owner
=
net cure value
A cure right is not economically free just because the contractor pays for the replacement equipment.
A post-COD energy test can reopen the acceptance economics
Some filed solar EPC structures use more than one performance test.
A project can have:
- an initial capacity / acceptance test; and
- a later energy-performance test over an operating period.
The later test can alter the final performance settlement.
For Fox Run, that means the timeline can be:
Initial capacity test COD period
Cure / retest shortly after
Provisional performance LD paid / reserved
Adjusted energy test Year 1
Final performance settlement after Year 1 test
If the later test can reimburse or recalculate an earlier LD, then the $1 million performance payment is not necessarily final on the day it is first calculated.
The model and closing checklist should keep the claim open until the contractual true-up is resolved.
Shared caps can reduce performance protection after the delay series
Fox Run has just come through the Completion & Delay series.
Assume the EPC has:
Delay LD sub-cap $1.5m
Performance LD sub-cap $1.5m
Aggregate LD cap $2.5m
Fox Run already used the full:
$1.5m
delay-LD cap.
Remaining aggregate headroom is:
$2.5m - $1.5m
= $1.0m
Conveniently, Fox Run's teaching performance LD is also:
$1.0m
So the full claim still fits.
Now change the final performance shortfall from 2 MW to 2.5 MW.
At $500/kW:
2,500 kW × $500
= $1.25m
The performance sub-cap may permit $1.25 million.
The aggregate cap only has:
$1.0m
left.
Actual maximum LD recovery becomes:
$1.0m
The construction-delay history just reduced the value of the performance guarantee.
Security can also step down before the performance tail ends
Assume Fox Run's EPC security reduces at Substantial Completion.
But the adjusted energy-performance test occurs during Year 1.
The owner can therefore have:
Performance claim still unresolved YES
Hard EPC security already reduced YES
A post-COD guarantee is only as useful as:
- the contractual entitlement;
- the remaining liability-cap headroom; and
- the counterparty / security available when the claim is finally determined.
The security schedule should remain linked to the performance-test schedule.
The banking-case bridge should show four different performance levels
For Fox Run:
Installed / contractual nameplate 200 MW
EPC minimum acceptance 190 MW
Final tested / cured capacity 198 MW
Long-term lender energy case 438,000 MWh
These are not competing answers to one question.
They are different dimensions.
A clean credit memo can also show:
EPC guaranteed capacity 200 MW
EPC final result 198 MW
Expected long-term annual energy 433,620 MWh
after illustrative 1% permanent shortfall
P90 / downside energy [IE]
Now the lender can see:
- what the contractor guaranteed;
- what the asset actually demonstrated;
- what the IE expects over time; and
- what case sizes debt.
The lender should compare economic loss with contractual recovery
Fox Run's teaching permanent shortfall:
Annual lost energy 4,380 MWh
Annual lost revenue $197,100
20-year PV @ 8% ~$1.935m
EPC performance LD recovery $1.000m
-------
Residual owner exposure ~$0.935m
The next financing question is:
What happens to the $1 million LD payment?
Possible outcomes include:
- retained as project cash;
- applied to debt prepayment;
- applied to remediation;
- distributed only after lender consent; or
- used as part of a completion cure.
The credit agreement controls.
The EPC does not decide how lenders treat the recovery.
The performance test page should be a calculation, not a paragraph
For Fox Run:
Acceptance
Guaranteed Capacity 200 MW
Minimum threshold 190 MW
Initial test 194 MW
Cure / repair 4 MW improvement
Final test 198 MW
Final shortfall 2 MW
Contract remedy
Illustrative LD factor $500/kW
Shortfall 2,000 kW
Gross performance LD $1.000m
Aggregate-cap headroom $1.000m
Collectible contractual recovery $1.000m
Project economics
Illustrative annual energy loss 4,380 MWh
Value at $45/MWh $197,100/year
PV over 20 years @ 8% ~$1.935m
Less contractual recovery (1.000m)
-------
Residual owner exposure ~$0.935m
The calculation makes the guarantee bankable to analyze.
"Capacity guarantee included" does not.
What finance, legal and engineering should reconcile
For Fox Run:
- What exact metric does the acceptance test measure?
- What measurement point is used?
- What resource / temperature normalization applies?
- What periods are excluded?
- What is the minimum acceptance threshold?
- What is the higher guaranteed level?
- What cure and retest rights exist?
- How much outage can cure require?
- Who pays for retest?
- What is the performance-LD formula?
- Is the LD formula intended as a full buy-down or only partial compensation?
- What performance sub-cap applies?
- What aggregate LD headroom remains after delay claims?
- What security remains when the claim is determined?
- Is there a Year-1 or other post-COD energy true-up?
- How does the permanent shortfall change the lender energy case?
- What does the credit agreement require the project to do with LD proceeds?
Fox Run's contractor can comply with the contract and the project can still miss the lender's energy model.
That is not a drafting failure.
It is the difference between an acceptance test and a 20-year cash-flow forecast.
Primary sources: DOE/FEMP — Understanding Solar PV System Performance · DOE/FEMP — Optimizing Solar PV Performance for Longevity · SEC — Axial Basin Solar EPC Performance Guarantees · SEC — First Solar Performance-Test Disclosure · SEC — Solar EPC with Initial Capacity and Adjusted Energy Tests