The BESS is yet to come: Legal trends in Australia’s large-scale battery sector

Introduction

Australia’s push towards renewable energy has seen a sharp increase in utility-scale Battery Energy Storage Systems (BESS) projects. In 2023, Australia saw the strongest year for new financial commitments in large-scale storage and hybrid projects with storage, totalling AUD $4.9 billion. Building more large-scale BESS projects helps stabilise fluctuations in energy output from renewable sources such as wind and solar and enhances grid stability.

Alongside this growth, developers are adopting new procurement and contracting models. Increasingly, developers favour split contracting over the traditional engineering, procurement and construction (EPC) contract model. This article explores:

• the reasons behind this shift;
• the key differences between the two contracting models;
• key risks and potential solutions for developers; and
• where to from here – future contracting trends for BESS projects in Australia.

Reasons for the growing preference for split contracts over EPC contracts in BESS projects in Australia

Historically, EPC contracts have been the mainstay for large-scale energy projects in Australia, including BESS projects. An EPC contract is a fully integrated solution where a single contractor takes full responsibility for the engineering, procurement, and construction aspects of a project, excluding specified grid connection works. The contractor must reach commercial operation by a specified date for a fixed lump sum price, with limited entitlements to time and cost adjustments for specified events. The contractor also provides performance guarantees, which ‘wraps’ the performance risk of all the components, engineering and construction comprising the project.

Split contracting usually separates the procurement and construction elements into distinct agreements. This practice allows developers to select specialised suppliers / contractors for each package, ensuring that each package is handled by experts in that specific area. Typically, a split contract includes a BESS supply or supply and commission contract and a balance of plant contract. Some developers engage separate integration contractors for technical integration and supervision of testing and commissioning. Further package splitting may be possible – for example, supply of inverters and splitting electrical and civil balance of plant.

The key differences between split contracting and EPC contract models

The EPC contracting model has the advantages of relative simplicity, a single point of accountability, reduced interface risk for the developer and being preferred by Australian financiers.

However, in the current market a limited number of contractors in Australia are willing to take on a traditional EPC contractor role. A split contracting model opens the market to more tenderers for various packages, which may reduce reliance on a limited pool of EPC contractors and reduce overall project cost. As BESS projects evolve in complexity and scale, developers and stakeholders are looking to utilise split contracting models to cater for the current economic and procurement environment and to make projects economically viable.

Below we compare how the split contracting and EPC contract models deal with key risk issues.

Key risks and potential solutions for developers

Below we identify several key risks of split contracting and potential solutions for developers.

Key risk 1: Interfaces

Risk: No single contractor is responsible for the entire project. Contractors / suppliers will often not take the risk of delays caused by other contractors / suppliers. This can be complicated by issues related to battery degradation and storage requirements.

Solutions for developers

• Maintain a detailed project program, including the activity of all contractors involved. When a project needs to split the scope of work among multiple contactors, provisions in the separate construction contracts can be drafted to fill in the gaps caused by such splitting.
• If possible, coordinate milestones and liquidated damages regimes across contracts to cover critical path impacts on other contractors.
• Ensure contracts include divisions of responsibilities which set out works and program interfaces and activities. Ensure contractors allow for these interfaces and coordinate and avoid delays to other contractors' / suppliers' scope of work.
• The scope of work under each contract must, when reviewed as a whole, cover the full scope of the project. It may be appropriate to allocate any residual scope to the balance of plant contractor.

Key risk 2: Technical Integration

Risk: Incompatible equipment and software that does not work together as an integrated system.

Solutions for developers

• Use proven designs and equipment to reduce technology risk and expense from troubleshooting issues.
• Engage a trusted third party integrator to integrate the BESS components in a tested and proven manner.
• Engage a technical advisor / engineering consultant, from the initial stages of project development, who can provide expertise necessary to review specifications and advise on the technology integration.

Key risk 3: Implementation / project delivery

Risk: Implementation risk can test a developer's ability to manage 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.

Solutions for developers

• 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 developer 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.

Where to from here?

The shift towards split contracting models for BESS and other renewable energy projects will continue as contractors in the Australian market are increasingly unwilling to accept the risks associated with EPC contracts, and as developers seek to lower the cost of their projects and enhance flexibility, control and risk management.

This trend indicates a broader move towards project modularisation, where each component of a complex project is handled by a specific expert. A good example is offshore wind projects in Europe and Asia, where it is common now to see developers enter into a large number of separate contracts with specialised suppliers / contractors. We expect future projects to continue leveraging this model to drive efficiencies, save costs and manage the risk allocation across the contracting parties.

However, split contracts require careful management of the complexities and risks involved in coordinating multiple contractors and suppliers. Financing considerations, such as concerns around interface risks, operational risks and warranty coverage, will continue to influence the adoption of the split contracting module within the Australian market.

We expect that the EPC model will remain important in the Australian market given these challenges and while there remain several strong EPC contractors currently actively tendering for and constructing BESS projects.

As the renewable energy sector in Australia evolves, further innovations in contract procurement and management strategies will emerge, many borrowed from more mature overseas markets. Similarly, as more experienced and specialist suppliers and contractors enter and gain experience in the Australian BESS market, this will increase options available to developers and help overcome key risks in split contracting.

Norton Rose Fulbright is at the forefront of the energy transition and renewables project development. Complemented by in-depth knowledge of the Australian market, we will draw on our global expertise and experience to facilitate the delivery of your strategic BESS projects.

Please contact us for more information on how we can assist.