Traditionally, building an ethanol plant involved working with one of a handful of process providers that offered turnkey design and construction services, either directly or through one or more subcontractors, under a design-build contract. The contract covered not only the process provider's core technology, but also the remaining "balance of plant," often including all facilities from grain receiving to fuel storage and everything in between.
 

 Under this structure, the process provider was responsible for ensuring that the fully integrated plant would be constructed on time and according to specifications, and that the plant design would produce the desired functionality. This form of engineering, procurement and contracting agreement was commonly known in the industry as a "full wrap."
 
 However, over the past year, industry expansion has strained the capacity of some process providers to supply full-wrap services. In fact, some traditional technology firms have shifted away from taking an active role in detailed design and construction altogether. Those firms have instead chosen to focus on licensing their core technologies, leaving most of the design and the construction of the facility—including core technology—to outside engineers and constructors, many of whom have limited industry experience.
 
 As a result, the responsibility and risk of ensuring that the disparate pieces of a plant will fit together to form an integrated, operable whole often falls squarely on the owner, who must find creative ways to bridge the gaps that may arise between design and construction. 
 
 The following are a few brief suggestions for dealing with that risk:
 --Spot gaps during the design phase. The owner should focus substantial due diligence on choosing a core technology, and the interface between that technology and the balance of the plant. If the owner doesn't have adequate in-house expertise for this purpose, he can engage an independent engineering firm to review all design work and confirm that the various pieces of the project are capable of being connected into an integrated, functioning whole.
 
 --Close gaps during the contracting phase. The owner may be able to further temper project risk by carefully drafting construction and license agreements. For example, even where design and construction services are sourced from separate providers under separate contracts, it's possible to align the interests of those providers by tying key payments under both contracts to the achievement of a common milestone (e.g., the successful completion of plant performance testing, incentivizing even unaffiliated providers to work together to overcome gaps as they arise). Moreover, if the completed plant doesn't conform to agreed plans and specifications, or operate according to performance targets, the resolution of the underlying problem will likely involve both the process provider and constructor. In order to resolve the matter without the delay and expense of simultaneous disputes with both service providers, the owner should seek to draw them into a single action. In order to do so, both the design and construction contracts must call for consolidated mediation and/or arbitration proceedings under a common governing law, and an identical set of arbitration rules and procedures, in a common location.
 
 --Provide for contingencies in other project agreements to address gaps that might arise during construction. To temper the risk of a breach of contract in supply and offtake agreements for the project that might be caused by a delay in construction completion or a failure in performance, the owner should structure such agreements to become legally effective only upon the achievement of commercial operation of the plant according to agreed specifications.
 
 While it may not be possible for the owner to avoid all risks associated with this emerging paradigm for ethanol plant development, the owner who approaches a project mindful of these risks will be better prepared to bridge any gaps that may arise.
 
 Randy Shefman and John Eustermann are project development and finance attorneys with Holland & Hart LLP, a national law firm. Their practice focuses on all aspects of the biofuels industry. Shefman can be reached at <a href=mailto:"rshefman@hollandhart.com">rshefman@hollandhart.com</a> or (303) 295-8312. Eustermann can be reached at <a href=mailto:"jeustermann@hollandhart.com">jeustermann@hollandhart.com</a> or (208) 383-3952.

Dealing with Risks in Ethanol Plant Development

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Upcoming Events

2024 International Fuel Ethanol Workshop & Expo

Biodiesel Summit: Sustainable Aviation Fuel & Renewable Diesel

Carbon Capture & Storage Summit

North American SAF Conference & Expo

2025 International Biomass Conference & Expo

Dealing with Risks in Ethanol Plant Development