As the energy and renewables sector evolves, large-scale battery energy storage systems (BESS) are becoming increasingly critical and prevalent. BESS projects bring a range of legal, commercial and technical challenges. Without the right team and approach, this can lead to a procurement and negotiation process which is drawn out, inefficient and frustrating. Drawing on recent experience, this article provides practical insights for project sponsors to assist in successfully managing these challenges.

These insights build on the insights in our previous publication on success factors for Battery Energy Storage System projects.

Original Equipment Manufacturer leverage

There is an increasing demand for batteries in a market with a limited pool of suppliers, meaning battery Original Equipment Manufacturers (OEMs) have significant market power. Combine this with a heated infrastructure market and a limited pool of experienced balance of plant (BOP) contractors and it means owners have to accept a significantly different risk profile when compared with more traditional infrastructure projects they have previously delivered.

Each project (and the view of stakeholders such as financiers) will be different, but the changes in risk allocation proposed by OEMs may extend well beyond the usual refinements, such as the scope of time and cost relief available to the OEM as a result of events impacting the manufacture and delivery of the BESS. OEMs who supply globally require standardisation of their supply terms to manage their business risks, particularly in key areas such as warranties and customer remedies. Owners who fail to properly engage on these terms risk OEMs refusing to tender or contract, or applying very significant risk provisions in their pricing and programs. For that reason, there is appeal in requesting tenders on the basis of a tailored version of usual OEM terms, or based on owner's terms which are heavily modified to 'meet the battery OEM market'.

The benefits of this approach include:

• increased market engagement, shorter tender periods and faster negotiations;
• the OEM's supply terms being customised for the manufacture and delivery of the BESS; and
• improved commercial offerings.

A challenge for owners is that OEM terms are not 'uniform' and the owner's team may need to review multiple long form documents from each tenderer to identify 'red flags' relevant to the evaluation of tenders. For owners accustomed to using their own supply terms, there can be challenges with understanding the risks the owner is taking on, and communicating with senior management about those risks. This concern can be mitigated by going to market with 'key terms' which are critical to the owner (and its financiers if relevant), such as regarding site safety, compliance with owner policies, indemnities, liquidated damages, liability limits and data security.

Whichever approach is adopted, communicate with senior executives from the outset to obtain 'buy in' and ensure internal stakeholders understand the anticipated risk profile. As part of this process, we also suggest establishing benchmarks against which to evaluate and negotiate supply terms (including on matters such as intellectual property).

Is there market appetite for wrapped EPCs?

The differences between a 'wrapped' EPC (under which a single contractor supplies, installs and commissions the BESS, resulting in a 'turnkey' final product for the owner) and a split scope EPC (where the supply of the BESS is separate to the BOP works) are shown in the diagram below.

For most projects, the wrapped EPC has long been the preferred delivery model for owners (and financiers), because it provides the owner with a turnkey product and a single point of accountability in the case of defects and performance issues. We have seen a general shift in the renewable energy market towards split scope EPC contracts – even if tenderers are willing to submit tenders on a wrapped EPC basis, it comes at a significant premium.

Some other factors have also contributed to this shift:

• even under 'wrapped' EPCs, significant risks (such as risks associated with connection) are being retained by owners, diluting some of the value in that model; and
• some OEMs' reluctance to fill the role of EPC contractor and if the BOP contractor fills that role, the owner may in any case need to enter into direct contractual arrangements with the OEM in respect of long term maintenance and warranties (i.e. which means, again, it is not a fully 'wrapped' solution where owners' rights in respect of long term warranties are against the OEM, not the BOP contractor).

The consequences of the 'split contract' approach is that the owner retains significant interface risk, particularly if divisions of responsibility (DORs) are not comprehensive and appropriate. We provide below further insights into DORs and other key strategies to mitigate this interface risk but as with the delivery of any project where scope is split, the owner does not have a single point of accountability for the engineering, procurement and construction of the facility and associated works, and is likely to take a level of 'gap risk' for various delays and issues by the BOP contractor which have an impact on the OEM (and vice versa).

Articulating the interface and gap risks and finding ways to mitigate these may require a significant level of due diligence of the relevant documents, including liaising with the legal, commercial and technical teams. From a technical perspective, this is often done through the development of DOR matrices allocating responsibility for the delivery of the different parts of the overall scope as well as the various requirements necessary for connection.

As part of the process of identifying other interface risks, map out the interaction between the parties.

Owners must identify the input and assistance required from the BOP contractor to facilitate the completion of the relevant requirements under the OEM supply agreement, and vice versa. This should cover matters such as delivery, storage, inspection and testing, risk and insurance, handover and site safety.

Scenario test how delays during the project will be addressed in terms of both liquidated damages for delay payable by the OEM or BOP contractor to the owner, and also liability for delay costs to which the OEM and BOP contractor are entitled.

Interface risks can be mitigated by:

Preparing DOR matrices

Prepare DOR matrices which clearly allocate each element of the scope and related interface responsibilities between the owner, OEM and BOP contractor, noting that:

• the DOR matrices and other terms and conditions of the contracts need to be consistent; and
• the DOR matrices should explain what is required from each party - in most cases a level of consultation is required with the other parties even if one party is primarily responsible for an item in a DOR matrix).

Ensuring sufficient consideration

As part of the evaluation criteria used in the procurement process, ensure sufficient consideration is given to the experience of OEM tenderers and BOP tenderers delivering similar projects together.

Engaging early with the BOP contractor and OEM

Engage with the BOP contractor and OEM as early as possible to manage interfaces, requirements and timing.

Imposing obligations

Impose obligations on each party to cooperate and coordinate with each other.

Establishing an interface coordination group

Establish an interface coordination group or similar oversight body which meets regularly.

Timing and staged commencement

As explained in our previous insights publication on the success factors for battery energy storage system projects, the timing challenges presented by BESS projects are significant. Owners must simultaneously:

• manage the procurement process for the OEM / EPC / BOP / WSA contractor(s);
• arrange connection agreements with the relevant network service provider; and
• secure suitable Generator Performance Standards (GPS).

In the context of the procurement process with the OEM and BOP contractor, consider the following factors:

Connection arrangements

Owners will require assistance from the OEM and BOP contractor to provide all of the technical information and data (e.g. model and source code) required by AEMO and the network service provider for the connection application. Owners need to engage with the OEM and BOP contractor, the network service provider and AEMO in parallel through the procurement process to ensure connection arrangements are in place at an appropriate time.

Early commitment to lock in manufacturing slots

OEMs will ordinarily seek a commitment from the owner as early as possible to lock in manufacturing slots and the tendered price. Consider the levels of commitment that you are willing to make at different stages, including prior to finalising connection arrangements and achieving contractual and financial close, noting that some OEMs may be unable or unwilling to provide security in respect of advance payments.

Cost escalation

Tender validity periods (the period over which contractors are able to hold tendered pricing), have significantly reduced so just like the OEM, the BOP / EPC contractor is likely to seek an early commitment to lock in pricing and subcontractor availability. Owners should ensure tender validity periods provide sufficient time for evaluation and negotiation with the preferred OEM / contractor, and consider hedging strategies.

Timing for internal approvals

Consider the point in the process when the owner will have obtained full internal approvals / final investment decision to proceed with the project. If a CP or notice to proceed regime is used, obtain early input regarding any cost involved with exiting the project if CPs are not satisfied or a notice to proceed is not given within agreed timeframes.

Other 'hot topics' to consider

Dynamic market

While some contractual positions remain relatively settled, meaning parties can leverage well established market positions, the renewables and BESS market is evolving relatively rapidly. It is important to establish parties' expectations on the key issues as early as possible during the procurement process. For example:

• Security and insurance – The form of and level of bonding offered by OEMs may materially differ from the expectations of owners and their financiers.
• Insurance, safety and care of the BESS and the BOP Works – Responsibility for the care of the BESS and BOP works and responsibility for safety on site.
• Compliance with the owner's site rules and corporate policies –OEMs and BOP contractors may push back on compliance with the owner's generic site rules and corporate policies (which are otherwise routinely accepted).
• Liquidated damages and delay costs – A consequence of the split scope approach is the dilution of liquidated damages protection for the owner. The owner is still partly protected from the cost impact of delays by the liquidated damages recoverable from the OEM or BOP contractor, but may have to carry and manage a level of 'gap risk'.
• Escrow / IP – Owner's will ordinarily require the OEM's specifications and source code to be held in escrow and released in the event the OEM is unable to continue to provide services or support.

Resourcing

Adequate resourcing across all teams, and effective engagement with consultants, is a key practical consideration which will be vital to the project's success.

Jurisdiction specific risks

State and Territory legislation and policy can vary and have a major impact. For example, Queensland has specific licensing laws for construction work and the Queensland Government is considering additional industrial relations requirements for renewable energy projects.

Offtake agreements

Offtake agreements may be a key component in the BESS business model for owners looking for secure revenue rather than directly participating in energy or ancillary service markets. The negotiation of risk allocation in offtake agreements is important, and concurrent negotiation with OEMs and offtakers can add further complexity and time to project development, particularly if direct alignment of offtake agreement with OEM and BOP contracts is sought in key risk areas (e.g. performance guarantees, functional specifications, liquidated damages and timetables).

Scenario testing

Owners should always 'take a step back' and consider how their contracts will respond if key risks eventuate. For example:

• Scenario 1 – Battery fire

There have been a number of high profile instances of fires in lithium batteries. Such a fire could result in damage to or destruction of parts of the BESS and could also cause damage to other property of the owner and its contractors, personal injury or death, statutory liabilities (e.g. environmental and / or work health and safety investigations and prosecutions), revenue losses and rectification costs. How is this risk addressed and mitigated?

• Scenario 2 – Supplier performs a firmware update

A supplier performing a firmware update may reduce its maximum response capacity as approved by AEMO and results in a contravention of the National Electricity Rules (NER).

This occurred recently in Australian Energy Regulator v Hornsdale Power Reserve Pty Ltd [2022] FCA 738, where the Court ordered the developer to pay $900,000 as penalties for contravening the NER. This case serves as an important reminder to check which party controls updates to the battery control systems and software in compliance with the NER.

• Scenario 3 –Defects or performance issues emerge down the track

If defects or performance issues in relation to the system emerge down the track, what rights will the owner have? How can the owner protect those rights, through its operations, maintenance and record keeping? Consider limits of liability and limitation periods for actions.

Delivering a large scale BESS brings opportunities, challenges and risks. An increasing demand for batteries in a rapidly evolving market may mean owners and financiers need to accept different contractual terms and risk profiles and risk mitigation strategies

Contact us if you would like to find out more about successfully preparing for and delivering your next BESS or other renewable energy project.