Why FIDIC Is Becoming The Chosen Standard For BESS Projects?

Gowling WLG


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Gowling WLG are advising many developers, investors, lenders and contractors on Battery Energy Storage System (BESS) projects globally. The BESS industry is one of the fastest growing technologies...
UK Energy and Natural Resources
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Gowling WLG are advising many developers, investors, lenders and contractors on Battery Energy Storage System (BESS) projects globally. The BESS industry is one of the fastest growing technologies in the energy sector as the energy transition gathers pace.

There are many different forms of contract being used across the sector and in this note we consider the use of the International Federation of Consulting Engineers (FIDIC) suite of contract forms and how these are being used and adapted on BESS projects. We most commonly see the FIDIC 1999 Yellow Book (Plant and Design-Build) and Silver Book (Engineer, Procure and Construct (EPC)/Turnkey) being utilised based on the procurement approaches adopted, however this wouldn't preclude the use of the Red Book (Build only) and the Green Book (minor Works).

In this article, we outline what you need to know when using FIDIC forms of contract, exploring the key considerations and adaptations to be mindful of when working on international and domestic energy and infrastructure projects, with a particular focus on BESS projects.

What colour FIDIC book should you use?

This choice will depend on your procurement strategy. The Silver book can be used for more wrapped approaches (e.g. EPC) and usually on an adapted form basis. We see the Yellow Book for more disaggregated models (e.g. for separate supply and installation of Balance of Plant, transformers etc.) and the developers should weigh the preferred risk allocation alongside bankability concerns.

It should be noted that for the large majority of BESS projects, the FIDIC 1999 versions continue to be used, despite the introduction of more recent forms (e.g. 2017).

Why is FIDIC beneficial to BESS projects in particular?

For the same reasons as most other projects – well-established forms, international familiarity and recognition. The wind energy industry (both onshore and offshore) continue to use FIDIC forms, albeit heavily adapted for offshore wind, and we expect the use of FIDIC to only grow as BESS projects grow exponentially.

Other factors:

  • Clear risk allocation - This provides comfort to both sponsors and financiers, especially in the emerging BESS sector where there is less familiarity with the route to market contracts (e.g. optimisation agreements) coupled with disaggregated construction approaches. International contractors/suppliers are also familiar with it which is quite important given the involvement of the far eastern supply chain;
  • Relief events - The FIDIC approach to extensions of time and adjustments is clearly set out;
  • Flexibility with procurement approach - Financiers' willingness to accept disaggregated procurement approaches sees the Yellow Book commonly used on balance of plant and transformer contracts;
  • Silver Book – less popular due to cost competitiveness and Contractor appetite to contractually wrap equipment; and
  • Dispute resolution – the FIDIC's dispute adjudication board (DAB) concept can be structured to deal with interface issues (especially on a disaggregated procurement model).

BESS supply contracts with Far East manufacturers

We are currently seeing the majority of BESS equipment coming from the Far East. Those manufacturers often seek a bespoke form of contract but which is often unpalatable to financiers and therefore, a common ground is FIDIC due to its familiarity. For developers going to market, initiating the supply chain discussions on a FIDIC basis (e.g. in a term sheet) can assist in setting the preferred approach at an early stage.

Other considerations and adaptations for BESS contracts

In the UK, one should be mindful of:

  • Battery recycling regulations (The Waste Batteries and Accumulators Regulations 2009);
  • The payment and adjudication provisions of the HGCRA;
  • CDM Regulations – fulfilling the roles such as the 'Principal Contractor' and the 'Principal Designer';
  • Manufacturer warranties – assignable by way of security to funders?;
  • Intellectual property (IP) – who retains ownership?;
  • Forms of performance security - PCG and Bonds, on-demand? Consider other protections. We will be publishing an article soon on the key considerations for these instruments (so watch this space!);
  • Dispute resolution – consider what the escalation of disputes should be for the project and the seat and rules of arbitration;
  • Construction Industry Scheme (CIS) – contractors deducting tax from any subcontractor payments;
  • Ethical sourcing/supply chain and ABC clauses;
  • Shipping and delivery to site;
  • Familiarity with UK project finance norms e.g. direct agreements and assignment;
  • Force Majeure – geographical scope?; and
  • Change of Law – foreseeability?

Key Takeaways

FIDIC (or adapted versions of FIDIC) remains the most popular form of contract for use on most energy and infrastructure projects internationally, and we are seeing it being used much more frequently on UK projects. We expect that its use on BESS projects will continue to rise given the international aspects of the supply chain and the current surge in BESS developments as more renewable energy is brought onto the grid and the system learns to cater for it.

Read the original article on GowlingWLG.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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