Splitting the equipment procurement and construction work on a battery energy storage project (BESS) among multiple contractors is a complicated process that can be done, but that carries risk.

The most common split is having different contracts to procure the DC block, AC block and energy management system of the battery separately, instead of procuring a fully-integrated BESS system.

Such split contracts require careful attention to avoid gaps among contracts. There are also financing considerations with such a contract structure.

This is the third article in a series. In previous articles ("Battery Purchase Contracts" in the December 2021 NewsWire and "Battery Purchase Contracts: Key Pitfalls" in the August 2022 NewsWire), we analyzed typical construction contract structures for BESS projects and the key pitfalls when negotiating equipment procurement contracts.

Technical Integration

The most prominent risk with a split-contract structure is that the equipment being purchased is not compatible.

A developer procuring equipment from different suppliers must confirm, itself or through third party advisors, that the equipment will not only work together as an integrated system, but that it will also be capable of serving the business use case that the developer has in mind for its project.

The separated procurement creates higher risk for developers that equipment may have to be modified or replaced in order to operate or that the developer may have to accept operational limitations not contemplated by its business use case.

The market has adopted three approaches to address the technology risks.

One is insisting on proven designs and equipment. Using a combination of technologies that other developers have used successfully reduces the technology risk, as others have tested it and incurred the expense of troubleshooting issues. This also applies to using equipment for a proven use case, such as resource adequacy, frequency control and load shifting.

A related approach is to rely on a third-party integrator to integrate the BESS components in a tested and proven manner. There is a price to pay for this knowledge and the warranty value from such an integrator must be considered to confirm whether the service offered makes commercial sense. Integrators seek to limit their liability to the amount paid for services rather than the cost of remedying the impact.

A similar option is to involve a technical advisor or engineering consultant, from the initial stages of project development, who can provide expertise necessary to review specifications and advise on the technology integration.

Another approach to minimizing integration risk is to use off-the-shelf equipment. Using stock DC blocks, AC blocks and energy management systems further reduces integration and execution risk, as it allows current design, installation, operations, maintenance manuals, specifications and materials to be used. Presumably these have already been proven.

Once equipment has been chosen, the developer should collect data and have a single source do the detailed engineering work for the project. By doing this, scoping and procurement can be completed using one design for the entire project.

Cost and Schedule

Another challenge with using multiple contractors to build a project is one contractor's action may affect the work being done by other contractors and may entitle the other contractors to receive cost or schedule relief.

Wind and solar developers have learned to manage risk associated with multiple contracts. Wind projects have a turbine procurement contract and a separate balance-of-plant construction contract. Solar projects have a module procurement contract and a separate balance-of-plant construction contract.

However, the risk is multiplied when additional contractors and suppliers get involved, as can happen in battery energy storage projects.

It is easy for projects to experience a snowball effect of split scope where multiple contractors can cause multiple impacts across project agreements, with overall project cost and schedule being materially affected.

In battery energy storage, this can be complicated by issues related to battery degradation and storage requirements for battery units, causing the developer to have to spend money to store and maintain the batteries when other contractors or suppliers are behind schedule.

The key to managing cost-and-schedule risk associated with multiple contractors is to have a detailed timeline and to keep close watch on it.

For example, the timeline might have three phases.

During phase 1, the focus is on getting advice on the various project equipment packages and designs that will be incorporated into the project. Developers may have an integrator set up standard configurations and write out the information for engineering the entire project, including all the equipment design, installation and operational information.

Phase 2 has two parts. In phase 2a, the detailed engineering and design work are completed. Then a detailed balance-of-plant contracting cost and schedule are set up. In phase 2b, if the equipment options are locked in, then procurement can start.

Phase 3 is the balance-of-plant contracting. It is done last because it requires completion of the detailed engineering and completion of the equipment specifications to ensure pricing and schedule can be fixed.

When a project needs to split the scope of work among multiple contactors, several terms in the separate construction contracts can be designed to fill in the gaps caused by such splitting.

"Interface activities" need to be priced in the contracts, includ-ing via representations and warranties about each contractor's scope of work.

Project information must be incorporated into each contract and shared among the various contractors.

Liquidated damages regimes must be coordinated to cover critical path events that affect other contractors.

Individual contract schedules must be consistent among contracts so that the developer can merge schedules and manage key milestones.

Finally, the scope of work under each contract must, when reviewed as a whole, cover the full scope of the project. This last step of checking the various work scopes often ends up being the biggest single risk mitigant that a developer can deploy.

A common way to ensure the scope has been fully executed among all contractors is to use one contractor — almost always the balance-of-plant contractor — to perform "all other activities necessary to complete the project."

To do this, BOP contract should incorporate the requirements for installation, operation and maintenance of the owner-supplied equipment — equipment that the developer procures directly from vendors and supplies to the contractors to install — into its scope and performance requirements. The balance-of-plant contractor should warrant that the engineering and installation and balance of site will be capable of supporting full operation of the owner-supplied equipment and comply with all manufacturer requirements.

Implementation

Implementation risk ultimately tests a developer's ability to man-age contracts during the design and construction phase. Developers implementing a split-scope procurement approach must consolidate design and delivery schedules, create consolidated progress reporting, address flow-on impacts between contractors, and manage multiple contractors at the project site.

Fully-wrapped projects do not require developers to have as much management skill.

However, it is critical in BESS projects for the developer to have enough capacity to run multiple agreements, manage multiple contractors and address the impacts of individual contractor failures to perform.

Strong owner control can help mitigate implementation risks. If the developer lacks the resources itself to do the job properly, then it should bring in third-party consultants to manage these activities for it.

Financing Considerations

The procurement and construction period are the most risky for lenders. They will be concerned about how the developer performs the tasks described in this article.

Although lenders tend to be relatively flexible on schedules (but will still set deadlines for when a project must be on line and earning revenue), they are more sensitive to the cost-and-schedule risk for a merchant project.

Lenders are also much less flexible when there is a deadline in an important agreement such as an offtake contract or interconnection agreement to be in commercial operation or to reach a key milestone.

Supply-chain issues have been a focus for lenders since the pandemic.

Taking these potential delays into account when building the project construction schedule either through contingencies or a more conservative schedule can help make the project more likely to be financed.

Lenders are also focused on potential operational issues after the project is completed. For example, they will want to know what operational risks are covered by warranties and guarantees, who is standing behind the warranties and guarantees and how creditworthy are they. If a piece of equipment fails, is there a back-up readily available to install? If not, how long will it take to procure back-up equipment? Proactively procuring spare parts to replace vital equipment (such as a main power transformer) could reduce project downtime from many months to only days.

Integration of the equipment is one of the operational risks that lenders tend to review closely. For financing purposes, the developer must make clear which contractors have responsibility for which equipment or service so that there are no gaps in warranty coverage. Ensuring that an independent engineer is comfortable with the split of responsibilities will be vital to closing on the financing.

Another issue for financiers is that there are limited warranties and remedies for failed engineering and design work compared to the overall value of the project.

This is because balance-of-plant contractors who pick up the equipment information after the engineering work has been completed come in at a later stage in the development cycle. Flaws with the design can be discovered too late without sufficient remedies or warranties. Having the engineering work done early in development, such as during phase 2, can help to mitigate some of these risks and increase the level of comfort for lenders and overall bankability of the project.