Unique Considerations in EPC Contracts for Battery Energy Storage System Projects

EPC Contracts Generally

Engineering, procurement, and construction (EPC) agreements for renewable energy projects require an EPC contractor to undertake some variation of the following responsibilities: system design and engineering; procurement of system (excluding any equipment an owner independently procures) and components; installation; testing and commissioning; performance testing and guarantees; and warranty obligations. EPC agreements for battery energy storage system (BESS) projects may appear at first glance to look like EPC agreements for any renewable project, but EPC agreements for BESS projects are unique and therefore require particularly careful planning, review, and negotiation.

EPC Agreements for BESS Projects

Turnkey Structure Model

EPC agreements for BESS projects are typically structured in one of two ways. The first structure, which is less common, is a turnkey structure where an original equipment manufacturer (OEM), or a system integrator, acts as the EPC contractor and is responsible for the entirety of the supply and construction scope, including design, procurement, installation, and commissioning of the entire BESS project. Under this model, the OEM or system integrator is the single point of responsibility. This structure is less common because most OEMs are not in the construction business. The system integrator model has become marginalized because OEMs generally now provide fully integrated BESS systems. The EPC agreement may also include a comprehensive "wrap" warranty provided by the OEM or integrator where the contractor is the single point of responsibility for all warranty claims (rather than only a workmanship warranty). Historically, this model has been preferable to financing parties who are risk averse and prefer a single point of responsibility, however financing parties are now very familiar with the owner-furnished equipment structure, which has become more commonplace. Ultimately, financing parties desire to ensure that BESS projects include all warranties and performance guarantees whether they are included in one EPC agreement or a suite of agreements. 

Owner-Furnished Equipment Model

The second structure, which is more common, is an owner-furnished equipment model, where the project owner procures the BESS equipment directly from the BESS supplier, while the EPC contractor procures everything else (sometimes referred to as the balance of plant, or BOP) and then installs the entire project, including both the BESS and BOP components. The EPC contractor installs all of the equipment and then the supplier separately commissions the BESS under the supply agreement with the owner. The EPC contractor's and supplier's responsibilities are typically set forth in detail in an exhibit to the EPC contract that is referred to as the "Division of Responsibility," or "DOR". Under this structure, the EPC contractor provides a workmanship warranty for the entire project while the BESS supplier provides the BESS equipment warranty. In addition to the supplier's commissioning obligation, the supply agreement may also include a short-term performance guaranty (the supplier would provide any long-term performance guarantees under a separate long-term service agreement or LTSA).

The owner-furnished equipment structure is attractive to project owners because it allows them control over their supply chain and it can take real cost out of a project. EPC contractors mark up major equipment that they then provide it under a turnkey EPC structure. This approach reduces a project owner's project costs, but the savings come with a trade as it shifts significant coordination and interface risk to the owner, rather than the EPC contractor. This requires careful alignment between the supply agreement and EPC contract, particularly with respect to delivery schedules, commissioning obligations, warranty coverage, and short-term performance guarantees. It is critical for a project owner to ensure that between the supply agreement and the EPC agreement, there are no gaps in performance, including commissioning, warranty coverage, and short-term performance guarantees.

Conclusion

EPC contracts for BESS projects are complex, highly negotiated agreements that include significant construction, schedule, and performance risk. Whether using a turnkey EPC structure or an owner-supplied equipment model, careful coordination among supply agreements, EPC contracts, and financing requirements is essential to successful project execution.

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Shab Puri is a partner in DWT's San Francisco office. If you're contemplating a structure, or if you have chosen a structure and need assistance with the contractual arrangement, Shab or another member of our energy, infrastructure, and projects and engineering, procurement, and construction teams can help. We advise project owners with all aspects of procurement, construction, and service agreements, including financing and complex tax considerations to minimize project risk and ensure successful project execution. To stay informed, sign up for our alerts.