As BESS projects grow more complex, so does the question of what ‘purpose’ even means in a construction contract, writes contracts lawyer Suriya Ashok of Clyde & Co.
Risk allocation sits at the heart of any BESS construction contract negotiation. Extensions of time, variations, delivery and completion mechanics, liability caps, force majeure, performance guarantees, degradation and interface risk are all examined, priced and allocated between the parties. Legal negotiations take time.
There is, however, another matter which is difficult to capture in a clause without considerable discussion.
It is what construction specialists negotiating EPC contracts call the “fit for purpose clause”.
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What is a fit for purpose provision?
In the BESS context, it can mean that the completed works, particularly the BESS, must comply with the technical specifications and must satisfy the performance guarantees at completion. This can typically be a relatively low-risk definition of fit for purpose because it is aligned with the product (that is the BESS) being marketed and is detailed by reference to the specifications. It gets more complicated when the contract starts defining the project’s purpose, more broadly.
For example, the project may include grid-forming infrastructure and be focused on providing inertia services. It may require compartmentalisation to facilitate optimal cycling or provide flexibility during the operational phase. There is then the ancillary infrastructure, including inverters and transformers, and the question of how they feature within the purpose. A purpose clause can also include a design life of 15 or 20 years (as examples), or access to markets detailed in the contract. But markets change and assets are used in increasingly innovative ways. Projects can also of course be augmented.
So, the question arises whether such a clause is needed at all. Its discussion often involves forecasting ahead and analysing what “purpose” means to the contractor, including whether the risk is insurable. It can therefore take a lot of time to negotiate.
Keep things simple
Contractors understandably want any purpose to be clearly defined and capable of being priced. An obligation tied to an unspecified future requirement, or to vague conditions intended to future-proof the asset, creates a risk which is difficult to quantify.
Owners and operators approach the issue from a different perspective. They are not investing in compliance with a technical specification for its own sake. They need an asset capable of performing the function for which it is being built, informed by the original business case and available market opportunities.
In my view, the conditionality list in BESS construction completion mechanics is critical, including the testing requirements which must be satisfied to achieve completion and the buy-down formula which makes adjustments if things do not go to plan. This is far more efficient in the “risk story” and of particular interest to investors, finance parties and off-takers, than a purpose clause which is, by its nature, closely aligned to history: a snapshot of the past.
Contrast with what we see today, the wonderfully innovative ways in which assets may be optimised, cycled and used to generate revenue. The energy we see within those driving this industry forward, where we have tolling agreements, swaps, such as the Statkraft/SSE arrangements, to leverage every layered aspect of the revenue stack.
I’d like to digress briefly, to point out how in The Story of CO2 Is the Story of Everything, Peter Brannen describes the microscopic interactions involved in photosynthesis as a form of “nanochoreography”. There is tremendous complexity, but it is complexity in service of a clear function. There is a parallel with battery energy storage. The underlying proposition is simple: energy is captured and stored so that it can be used at another time and generate revenue.
Energisation, cycling, the degradation curve, insurance, availability and efficient maintenance services which support revenue generation are key aspects of that functionality. They are what keep this industry ticking and investment flowing and are critical to any business plan.
Layered and lawyered contracts; sometimes not joined-up
The EPC contract is only one part of the picture. End-use and OEM warranties are often provided at completion and are integral to the defects provisions in the EPC contract and the LTSA. However, these warranties rarely contain the broader project purpose envisaged at the outset. The same is generally true of the LTSA.
Technology / warranty provider and on occasion the LTSA supplier may not be a party to the original EPC contract. Their obligations are generally directed towards the equipment and services for which they are responsible and do not necessarily carry through the purpose originally expressed in the EPC contract.
So, the practical priority: asset management
Based on discussions at the recent Battery Asset Management Summit UK & Ireland a few weeks ago, the LTSA phase appears to be a weak link in some projects. We have been seeing new products and consultancies entering the market to facilitate state-of-health and energy monitoring. Their focus is on giving owners and operators greater control during the operational phase, managing technology providers, ensuring that maintenance services are undertaken and that spare parts remain available.
In parts of the industry, there also appear to be practical difficulties in dealing with obsolete equipment (or soon to be) and ensuring the continuing upkeep of assets during the LTSA phase. This seems the greater practical priority.
A broad purpose clause will not on its own maintain an asset, monitor its state of health, secure spare parts or manage the technology provider. Nor will establishing its breach necessarily provide the practical solution the owner needs.
More positive project outcomes depend upon active asset management, adaptable decision-making and committed counterparties.
Legal documents as a tool
What matters is that the assumptions and decisions made as the project develops are understood across teams and properly recorded. This allows the project to adapt without losing sight of why decisions were made and where responsibility sits.
Legal documents should be practical tools. They should support simplicity, sensible risk mitigation, speed and adaptability. A sweeping purpose clause is unlikely to assist with these matters over the long term.
When an operational asset is not delivering what was expected of it, or a basis risk arises, the existence of a fit for purpose provision should not become the principal focus.
As my disputes colleagues would say, what may matter far more is good project management, committed counterparties and clear, contemporaneous records of conversations and decisions. BESS projects will continue to encounter technological, commercial, weather, cybersecurity risk, supply chain risk and geopolitical changes.
The contracts should support informed decisions as those projects evolve, rather than attempt to predict every future use of the asset. That may be the more practical meaning of future-proofing a BESS project.
The BESS market will continue to innovate. Our contracts should allow projects to do the same. They ought to reflect the market and its innovations, not try to predict them.
