1. INTRODUCTION
The rising costs resulting from the global energy crisis and the goal of achieving carbon-neutral targets have sparked a major wave of investment in solar power plants (SPPs) in our country, particularly in the field of “License-Free Electricity Generation.” Industrialists’ motivation to generate their own energy has turned rooftop and ground-mounted SPP projects into a massive market. However, this rapid sectoral growth has also led to a significant increase in the number of projects that lack technical competence and are focused solely on completing assembly and physical installation, often disregarding engineering ethics.
Solar energy investments are projects that, by their very nature, require a high level of technical expertise and are based on long-term efficiency. For this reason, it is not sufficient for the system to merely be installed on-site; it must also generate energy in a sustainable and safe manner and at a level consistent with the project’s economic expectations. Disputes that arise in practice typically stem from a clash between the contractor’s defense that “I delivered the system in working order” and the investor’s valid objection that “the facility is not delivering the expected energy output and financial returns.”
At the heart of these multi-million-dollar investments—and serving as their legal shield—are Engineering, Procurement, and Construction (EPC) contracts. In massive projects across complex sectors such as energy, transportation, and irrigation, the EPC model has become an increasingly popular and preferred option. Under this contractual structure, all responsibilities related to the facility’s design, engineering, material procurement, construction, and commissioning are consolidated under a single entity—the contractor. In the EPC model, the employer (investor) primarily commits to paying the contract price and assumes the role of monitoring the quality of the work for potential defects, while the contractor assumes all risks related to time, cost, and quality.
Within this legal framework, the EPC contractor is not merely a supplier providing panels or inverters to the facility, but holds the status of a “system architect” responsible for every detail of the project from start to finish. In EPC contracts, contractors also explicitly guarantee that the facility they deliver will meet specific performance standards. If this promised generation capacity cannot be achieved, a chain reaction of commercial disasters begins that could lead to the investor’s “economic ruin” under a debt burden of millions of dollars.
In this article: we will examine, from both legal and commercial perspectives, the investor’s rights to remedy defects in the event that the Performance Ratio (PR)—the lifeblood of GES investments—is not met (i.e., shortfall in production), the right to compensation for lost profits, and the “Liquidated Damages” mechanism—the sharpest sword in EPC contracts—which addresses production shortfalls.
2. The Crucial Difference Between Production Volume (MWh) and Performance Ratio (PR), and the Limits of Liability
In practice, the biggest conflict between solar power plant (GES) investors and engineering, procurement, and construction (EPC) contractors arises when the facility fails to generate the expected amount of energy. The defense mechanism contractors most frequently resort to in such cases is excuses such as, “The weather in the region was constantly cloudy and rainy that year, and production dropped due to meteorological conditions.” Legally and technically, the only way to prevent contractors from hiding behind this argument is to clearly distinguish between the concepts of “Production Volume” and “Performance Ratio (PR)” in the contract.
Generation volume is the total amount of electricity the power plant feeds into the grid and, by its very nature, depends directly on the meteorological conditions of that year—that is, how much sunshine there is. On the other hand, the Performance Ratio (PR) serves as a measure of the power plant’s internal engineering efficiency. The PR is a mathematical ratio that indicates, regardless of meteorological conditions, what percentage of the available sunlight hitting the facility can be converted into electricity without loss.
In other words, while the amount of electricity generated reflects the state of the sky, PR reflects the quality of the ground-based facility and the engineering success of the EPC firm. If the weather remains overcast throughout the year, total production will naturally decline because less sunlight hits the panels, and the contractor cannot be held responsible for this meteorological decline. However, no matter how overcast the weather is, even that small amount of light hitting the panels (for example, 82%) must be successfully transferred to the grid. If the contract specifies an 82% PR guarantee but test results show this rate has dropped to 70%, the cause is not clouds or rain; rather, it is the use of low-quality cables that convert energy into heat and waste it, improper string design, faulty inverters, or panels arranged at incorrect angles that cast shadows on one another. According to the view accepted in the established case law of the Supreme Court, a professional contractor acting in a commercial capacity cannot eliminate liability for defective performance by later defending itself with abstract justifications such as “unforeseen circumstances” or “weather conditions” regarding technical factors—such as shading, dust accumulation, or ground conditions—that should have been anticipated during the design phase (and could have been calculated in advance using simulation software). Failure to meet the scope of the PR commitment constitutes a clear “functional defect” (delivery of defective work) under Turkish Contract Law.
3. First Step If Performance Cannot Be Achieved: Notice, Right to Cure, and Loss of Income
If a performance (PR) test fails, the investor’s immediate suspension of payments and termination of the contract may not be consistent with the normal course of business or the nature of large-scale investments. For this reason, in qualified EPC contracts, the “right to request free repair of the work” provided for in Article 475 of the Turkish Law of Obligations is subject to a specific procedure.
The contract grants the contractor a specific period (e.g., 30 days) under the “Right to Cure” to identify the source of the performance deficiency and remedy the defect (e.g., by replacing faulty panels or inverters). However, during this period while the contractor is attempting to identify and remedy the fault, the power plant will either shut down completely or continue to operate at reduced capacity. One of the most critical provisions that must be included in the contract to protect the investor (the project owner) is a clause stipulating that the contractor will compensate the plant or the investor for the loss of revenue resulting from the inability to generate electricity during the repair period.
4. Liquidated Damages as a Final Remedy and Their Calculation
If the contractor is unable to raise the facility’s PR value to the level specified in the contract within the repair period granted to it, the “Production Shortfall Liquidated Damages”—the investor’s final and most powerful legal recourse—comes into effect.
The concept of lump-sum compensation serves the purpose of establishing a fixed amount—previously agreed upon by the parties—to be paid upon the occurrence of a specific event (such as failure to meet the targeted performance) before the actual amount of the loss has been fully determined. Since it can be difficult to prove and calculate potential losses that may arise in the future in large projects, nearly every international EPC contract requires contractors to agree to a lump-sum penalty to prevent potential disputes. As recognized in Anglo-Saxon legal systems, the purpose of this indemnity is not to impose excessive penalties on the contractor but to compensate the employer for damages and losses in a swift and straightforward manner.
The structure of this mechanism in the contract is quite clear. If the Guaranteed PR (e.g., 82%) specified in the contract falls below the actual PR (e.g., 78%) as determined by the performance test, the difference is calculated as a “Production Shortfall” in MWh (megawatt-hours). According to the formula specified in the contract, the amount of MWh not produced is multiplied by a fixed unit price predetermined in the contract (e.g., $100 per MWh). If the facility produced 500 MWh less than promised that year, the calculated amount of $50,000 becomes immediately collectible from the EPC firm.
However, there is a technical detail regarding “measurement uncertainty” that legal professionals must not overlook. Pyranometers (sensors) used to measure solar radiation have a built-in margin of error of between 2% and 3%. If a “tolerance margin” of this nature has been specified in the contract and the PR has dropped from 82% to 80.5%, the EPC firm may avoid compensation by arguing that this 1.5% deviation falls within the device’s measurement error margin. When conducting contract negotiations as the investor’s representative, care must be taken to ensure that this tolerance margin is kept at a minimum level (not exceeding 2–3%) or is set to zero. The moment the tolerance margin is exceeded (for example, when the result is 77%), the penalty clause for each MWh of shortfall begins to apply without interruption.
5. Freedom of Trade, the Risk of “Economic Collapse,” and the Liability Cap
The question of whether the amount of lump-sum compensation (penalty clause) can be freely determined is one of the most contentious legal issues in EPC contracts. Pursuant to Article 22 of the Turkish Commercial Code, since both the investor (project owner) and the contractor (EPC firm) are considered merchants, they generally cannot request the court to “reduce the penalty clause on the grounds that it is excessive.” The parties are free to determine the amount.
However, despite this strict rule in Article 22 of the Turkish Commercial Code, the Supreme Court’s well-established case law includes an extremely important “economic ruin” criterion. If the penalty amount specified in the contract is so disproportionate and high as to cause the contractor’s bankruptcy or the complete cessation of its business operations, the judge may reduce the penalty or cancel it entirely under Article 27 of the Turkish Law of Obligations (violation of public policy).
To avoid this legal risk and ensure that the penalty remains immediately enforceable without having to go through court, it is mandatory to include a “Liability Cap” in compensation for production shortfalls in accordance with international EPC contract standards. For example, establishing a reasonable upper limit in the contract, such as “The maximum PR penalty payable shall not exceed 10% (or 15%) of the total EPC contract value”, prevents the judge from concluding that this penalty would bankrupt the contractor and safeguards the compensation. Otherwise, not only will contractors avoid signing on to unlimited liability, but banks or insurance companies may also block project financing by refusing to provide a “Letter of Credit” for the project—thereby creating a bankability issue—unless they see that the firm’s risk is capped in the contract. EPC contracts limit contractors’ liability in this manner to the extent permitted by applicable laws, and in general practice, the total liability limit does not exceed 100% of the contract price.
6. The “Buy-Down” Mechanism and the Absolute Rejection Threshold (Right of Rejection)
In practice, the most critical concept related to the liability cap is the “buy-down” principle. When the EPC firm pays the penalty for the PR production shortfall (e.g., $50,000) up to the cap specified in the contract, the facility is deemed to have been “accepted” by the investor even in that state of underperformance. In other words, by collecting an upfront penalty payment, the investor has accepted the production loss (e.g., 4%) that the facility will experience over its 25-year economic life and has effectively purchased the facility in its defective state (buy-down).
However, this mechanism raises the following critical question: If the system was guaranteed at 82% PR but a disastrous installation resulted in a rate of 65%, is the buyer obligated to accept this non-functional facility for life, merely by paying a penalty? The answer is definitely no.
To protect the investor against such catastrophic scenarios, a “Minimum Acceptance Threshold” must be included in EPC contracts. For example, if this threshold is set at 75% in the contract and the PR tests fall below this absolute threshold, the contract grants the buyer the direct “Right of Rejection” of the facility. At this stage, the investor no longer has to deal with calculating liquidated damages; by declaring that they do not accept the facility under any circumstances, they terminate the contract for just cause, demand a refund of all payments made to date, and order the EPC firm to dismantle the panels and steel structures on-site and restore the area to its original condition (Make good / Clean the site).
7. Exceptions That Exceed the Liability Cap (Carve-Outs)
Although the CAP mechanism, which limits the contractor’s liability, is a necessity in commercial life, exceptional circumstances (carve-outs) in which this cap is waived and the contractor remains “unlimited liable” for the protection of the investor must be explicitly stipulated in the contract. Physical injuries to third parties caused by the EPC firm’s willful misconduct or gross negligence, fraud, or faulty installation, as well as intellectual property infringements, must be explicitly excluded from the established liability cap, and the contractor must be held liable without limitation in such cases.
8. CONCLUSION
Solar power plants are not merely simple construction and installation projects; they represent an entirely new financial venture backed by long-term loans. As a result of this investment—for which the project owner has allocated a massive budget—the contractor’s responsibility does not end when the last screw is tightened on-site; rather, it truly begins when the system starts generating energy in accordance with the promised technical standards.
It is of vital importance for project owners to have an independent technical audit (Third-Party Audit) conducted before signing the facility’s provisional or final acceptance reports, and to include specific performance criteria—such as PR guarantees, liability caps, and absolute rejection thresholds—in their EPC contracts.
In conclusion, when technical disputes involving millions of dollars are brought before the Commercial Courts of First Instance, the only protection that will shield the investor from lengthy and grueling evidentiary processes is an EPC contract whose details have been meticulously thought out. It must not be forgotten that in such complex energy investments, the outcome of a dispute is determined not by the difficulties in proving the “substantive truth,” but by the unshakable power of the “formal truth” enshrined in the contract from the very beginning.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
