Battery purchase contracts

Battery purchase contracts

December 14, 2021 | By Luke Edney in Dallas

The latest update in market trends from the Energy Information Administration predicts installed capacity for battery energy storage projects will contribute more than 10,000 megawatts to the grid between 2021 and 2023 – 10 times the capacity in 2019.

If the aggressive rush that the market has seen in 2021 for battery projects continues, this will turn out to be a conservative number.

However, the rapid growth in this sector has not been without considerable growing pains. While many look to contract in this space based on the concepts and approaches used in solar, wind or gas turbine power projects, the reality is that battery projects require a paradigm shift backwards. Battery energy storage systems have matured as the technology, quality, performance and reliability have also matured. The contract structure has not.

Two main issues should be considered when developing a battery energy storage system or “BESS” project.

The first is the general contracting structure. The second is key pitfalls when drafting and negotiating specific contracts. This article focuses on the contract structure.

Turnkey v. Separate Contracts

Legacy energy projects, such as the gas turbine power plants, have traditionally been built by a third-party contractor under a lump-sum, turnkey engineering procurement and construction contract. Both lenders and project developers prefer this approach because it shifts as much risk as possible from the developer to a single EPC contract.

Handing over of risk from the developer to a single point of responsibility greatly de-risks execution of a project for both the owner and its lenders. However, this transfer of risk to the EPC contractor has always come at a price, and with implications for the construction schedule. The more risk that is transferred, the more contingency in price and schedule will be added by the EPC contractor.

EPC contractors have historically been able to reduce the amount of contingency they include as technology and project risk have decreased. When an EPC contractor is building its fifth or tenth gas turbine project, the implementation risks are well known and therefore much more manageable.

There has been a partial move away from this approach in the wind and solar sectors for two reasons.

In solar, there is little implementation risk, but the large cash flow requirements to procure solar panel modules can affect the competitiveness of a EPC contractor bid. As a result, owners are often more open to direct procurement of modules and perhaps inverters, with the owner supplying such items to the EPC contractor at the project site as owner-supplied equipment.

With the wind projects, the large capital cost, need for specialists to commission the wind turbines and the more generic nature of the large volume civil construction and assembly work has led to a split scope, with one contract covering the wind turbine manufacture and commissioning and the other covering the civil construction and assembly.

BESS projects have added complexity, involving the following core elements. The different elements may require as many as four separate contracts, with the BESS and battery management system in one contract, the power conversion system and inverters in another contract, the civil construction and electrical installation in another contract, and the energy management system in a separate contract.

The most common procurement structure for BESS projects is to combine the first two elements — the BESS and inverters — in one contract and leave the rest separate.

A number of companies offer to provide a fully-wrapped lump-sum turnkey EPC that covers all elements of a BESS project. However, the cost of such a procurement strategy may be more than the developer wants to pay compared to the cost of a piecemeal approach.

Four Key Issues

While stepping away from lump-sum turnkey contracting lowers the cost, it exposes the project owner to a number of commercial and technical risks that must be managed throughout implementation. There are four key issues to consider.

The first is delay.

With multiple suppliers and contractors performing pieces of work, the contracts must work together as a “package” by addressing key points of interaction so that delays by one supplier do not then entitle the other suppliers and contractors to cost or schedule relief.

It is common to hear contractors complain they cannot agree to a schedule because they are not handling the full scope. This need not be the case. Instead of setting fixed delivery and performance requirements, consider aligning delivery dates to be X plus Y days, where X is a necessary performance milestone of another contractor that must be completed as a condition precedent. For example, electrical installation must be completed and tested before the BESS supplier commences commissioning of the BESS. The BESS contractor commissioning deadline should then be “Z days after notice of completion of cold commissioning.”

Another key contracting challenge is division of responsibility.

Care must be taken to ensure that all scoping documents require the same division of responsibility. A frequent complaint from project owners involves contractors claiming that certain work was not understood to be part of their scope, but rather included in the scope of one of the other contractors. Each contract should take into account the work scope being undertaken by other contractors and ensure that each contractor makes representations and warranties about its work scope and performance obligations.

The third issue to address is commissioning.

The sequencing and process need to be worked out so that everything comes together at the same time to avoid not only cost and schedule issues, but also to avoid having each contractor blame another for failure of the system. Each contract should include the full sequence of commissioning and require each contractor to coordinate with the other contractors. Each contract should require the contractor to provide reasonable assistance to each other contractor throughout the commissioning process. Such coordination should not entitle any contractor to cost or schedule relief.

The final issue is project risk.

A single point of responsibility with a lump-sum, turnkey approach gives the project owner a single point of recovery for delay liquidated damages, performance guarantees and any associated performance liquidated damages.

With the owner taking on a direct relationship with each key contractor, if something goes wrong, the owner will have smaller, separate claims based on the value of each individual contract.

A frequent concern is performance of the energy management system. The energy management system is a critical component of a BESS project, giving the project the ability effectively to discharge and charge to the grid in accordance with applicable grid requirements.

Unavailability of the energy management system can shut down the entire project. Inability of the energy management system to manage the project in accordance with grid requirements can expose the owner to penalties or even disconnection. However, the cost of the energy management system as a portion of the entire project is small, and it is not commercially practical for the company providing the energy management system to take on performance guarantees and potential damages that are sized to the value of the project compared to the value of the energy management system contract.