PV Magazine - June 22, 2020
The negotiation of an engineering, procurement and construction (EPC) agreement for a battery energy storage systems (BESS) project typically surfaces many of the same contractual risk allocation issues that one encounters in the negotiation of an EPC agreement for a solar or wind project. However, there are several issues that merit special attention in the context of an EPC agreement for BESS projects.
Equipment Procurement and Warranties
Full-wrap, turnkey EPC agreements – where the EPC contractor takes full responsibility for the engineering, equipment procurement, construction, commissioning, testing and turnover of a completed project to the owner – have historically been favored by energy project owners and their project finance lenders, due largely to the benefits of having a single, creditworthy counterparty responsible for all delivery aspects of a fully completed and properly performing project.
That said, as the project finance market for BESS projects is still developing and equity remains the more typical source of financing, alternatives to the full-wrap, turnkey EPC agreement have been utilized on BESS projects, largely to reduce equipment procurement costs to the owner.
EPC agreements providing for owner-supplied equipment will need to address the allocation of responsibilities as between owner and EPC contractor that would typically be borne by the EPC contractor in a typical full-wrap EPC, with respect to all such owner-supplied equipment (most typically the batteries themselves for BESS projects) – including delivery, risk of loss, title transfer, installation in conformance with supplier guidelines/recommendations and equipment warranties. In addition, issues of creditworthiness and/or credit support with respect to the equipment supplier will need to be addressed in a similar manner as the credit of the EPC contractor is resolved in the EPC agreement.
To the extent equipment warranties are provided directly to the owner by the equipment supplier and not wrapped by the EPC contractor in its project-related warranties, care needs to be taken to properly structure the EPC contractor’s warranty obligations such that, together with the equipment supplier’s warranty obligations, they provide full warranty coverage to the owner.
Performance Tests and Guarantees
Whether acquired from the EPC contractor in an EPC agreement or an equipment supplier in an equipment supply agreement, typical performance guarantees for BESS projects include round trip efficiency, capacity, speed of charge/discharge, availability, ramp rate/response time and noise.
An EPC agreement containing BESS project performance guarantees will contain detailed testing procedures as well as provisions for liquidated damages in the event that a constructed BESS project is unable to pass applicable performance testing. As with most EPC agreements, provisions related to the amount of such liquidated damages and any applicable caps on such liquidated damages can be expected to be a point of heavy negotiation. EPC agreements may also provide the EPC contractor the ability to permanently “buy down” BESS project performance via payment of agreed liquidated damages, subject typically to specified minimum levels of performance required to be met or exceeded under all circumstances.
Decommissioning and Disposal
The costs of decommissioning a BESS project and disposing/recycling battery equipment at the end of a BESS project’s useful life is currently a material cost item, particularly in connection with lithium ion batteries, which will be classified as a hazardous waste, with the owner being considered a hazardous waste generator liable for proper disposal under applicable EPA rules. Thus, the EPC agreement should explicitly address which party bears this burden. Sometimes the obligation to decommission and dispose of the batteries for a BESS project is retained by a third party O&M provider.
To the extent decommissioning is addressed in the EPC agreement and the obligation allocated to the EPC contractor, a specific decommissioning plan will often be attached as an exhibit to the EPC agreement. Given the evolving nature of rules and standards for the decommissioning, disposition and/or recycling of energy storage projects, it is recommended that any such decommissioning plans retain a reasonable degree of flexibility to accommodate potential changes to such rules and standards after the date of execution of the EPC.
An EPC agreement for a BESS project would be expected to contain concepts of force majeure and/or excusable event pursuant to which events beyond the reasonable control of the EPC contractor (force majeure) and/or certain specified events (excusable events) may entitle the EPC contractor to an adjustment to the EPC agreement’s milestone schedule and/or an increase in contract price to account for such changed circumstances. As for the foreseeable future COVID-19 and related governmental shutdowns and/or supply chain disruptions have the potential to affect the EPC contractor’s performance, the EPC agreement for a BESS project should carefully define the “status quo” vis-à-vis COVID-19 as of time of execution of the EPC agreement and specifically address the extent to which subsequent changes in circumstances related to COVID-19 from and after the date of the parties’ entry into the EPC agreement do or do not entitle the EPC contractor to any schedule and/or cost relief.