Managing key risks in BESS projects

Battery Energy Storage Systems (BESS) projects are becoming increasingly pivotal in the transition to renewable energy, offering a means to store excess energy which can be generated from sources such as wind and solar. 

Globally, growth of grid-scale BESS in 2024 grew 52% compared to 25% market growth for EV battery demand. The UK is an established market, in Europe otherwise Germany, Italy, and Netherlands are establishing themselves to be attractive markets for BESS investment. However, developers, investors and contractors are facing the need to adapt to changing contracting models, emerging physical risks such as thermal runaway, and regulatory challenges, all which have the potential to give rise to disputes. 

What are the key challenges associated with BESS projects and how do stakeholders mitigate those risks?

Risk: Changing contracting models. In terms of construction contracts, the industry has generally followed two models: 

• a full turnkey EPC agreement, where one provider is responsible for building and delivering the entire project, taking on full liability and “wrapping” the risks; or
• a split contracting agreement, where there is a battery supply agreement (BSA) and a separate “balance of plant” (BOP) agreement. The operation and maintenance of the BESS is typically governed by a Long-Term Service Agreement (LTSA)

Split contracting regimes are becoming more prominent in the industry but both models require careful handling of interface risks, particularly with co-located assets, and the risks associated with delays, performance issues, and defects. 

Mitigation: it is important to ensure that the terms of one contract do not prejudice the other. 

Contracts should clearly set out each party’s responsibilities and liabilities, including when one contract ends and another begins. They should also cover how parties will co-operate in relation to any other projects co-located at the site. Indemnities should be considered to address risks linked to those co-located projects. 

Risk: ‘Need for speed’. This is particularly prevalent in BESS projects. The BESS system is likely to be comprised of many components, including inverters and transformers, and so managing the lead times in the current market conditions can be difficult. 

Mitigation: Developers and investors should set out clear project timelines and key milestone dates early on. Contracts should include commercially acceptable caps on liquidated damages, especially for developers delivering a BESS system. Strong supply chain planning is also crucial.  For example, developers should be giving early consideration to raw material sourcing which, due to the dominance of only a few key players, has the potential to distort supply chains and lead to price volatility.

Risk: Tariffs and pricing. Global tariffs can cause market volatility, impacting supply and demand. The impact is felt especially in the BESS sector as potential higher prices may result in investment into existing projects coming to a halt or deferring entry into pending contracts.  

Mitigation: Thorough analysis of contractual provisions in agreements with suppliers, construction, and O&M providers should be done in light of increasing tariffs. Where appropriate, parties should also consider whether amendments should be made to change in law provisions to account for tariffs applicable to the BESS. Such provision can then shift the burden of additional cost due to increased compliance measures on the appropriate party, and address any ramifications of delay. 

Risk: Degradation, roundtrip efficiency and availability issues. These factors are becoming more important to ensure lenders feel confident about investing in a project. BESS projects can also involve multiple, independent warranties, which cover manufacturing and performance issues.

Mitigation: Parties must record clearly how the warranties address workmanship issues, responsibilities for diagnosis, replacement parts, on-site removal and installation of new hardware. Under an LTSA, usually for payment of a warranty fee, a supplier will be obliged to meet a certain threshold criterion, around guaranteeing performance of the battery, as well as carrying out any urgent maintenance during the term of the contract. Any failure by the supplier to meet the performance criteria is likely to attract operational liquidated damages (as above, these should be capped at a level that’s commercially acceptable).

Risk: Thermal runaway. This happens when a battery cell - typically a lithium-ion cell, overheats due to internal short circuits, overcharging, or external conditions. This can lead to fires, explosions, or the release of toxic emissions. The risk of thermal runaway can vary depending on battery type. There is an added complication around limited guidance on fire safety regulations surrounding a BESS and regulatory uncertainty as the Lithium-Ion Battery Safety Bill (and the Product Safety and Metrology Bill which may well end up incorporating some provisions on lithium-ion batteries) work their way through Parliament. 

Mitigation: given the regulatory uncertainty, developers and investors should ensure that core protection provisions are drafted adequately to cover thermal runaway events. Typically, this sits within the technical documentation, and sign-off required from the developer’s technical advisor. Other key points for consideration include:

Site responsibility: Contracts should clearly state who is responsible for the site during the relevant phases of construction and operations, and include requirements for on-site fire safety equipment, alarms, and notifying local fire services.

Insurance: Developers should discuss insurance requirements to ensure adequate coverage (such as for fire risk). This includes policies for operational risk, property damage, business interruption, and third-party liability. 

Compliance: Insurance claims may depend on whether safety codes and standards were followed. Developers and contractors should align on health and safety policies and agree on the standards to be used for the project.

Risk: Regulatory issues. Developers need to be cognisant of evolving permitting standards in response to fire safety concerns. The industry is awaiting a Defra consultation which could bring BESS projects under the Environmental Permitting (England and Wales) Regulations 2016, with the potential for retrospective application. 

Mitigation: Again, given the regulatory uncertainty developers can only prepare in line with the highest available safety standards and factor in changes to such standards through change in law provisions to the extent commercially palatable. 

What to do when things go wrong?

Disputes can happen at any stage of a BESS project - during construction, testing and commissioning, operations and maintenance, or at decommissioning stage. To manage the risks that come with disputes, consider the following:

• Act quickly and be informed: Understand what has happened and take advice on what your contractual position is, has the risk been addressed under the relevant contractual document(s)? Is your exposure capped? What are your dispute provisions? Does the contract provide for a formal meeting (even if they don’t, consider having one). Keep under consideration any formal alternative dispute resolution process such as mediation
• Protect your position: Check if any actions are required under your contractual documents (and any warranties / guarantees as applicable), such as notices, and discuss the matter with your insurance broker straight away (and any funders if applicable / required). Consider whether other steps may be needed such as termination, depending on the issue which may have arisen
• Keep communication clear (this can also assist in seeking to preserve relationships / avoiding escalation): Ensure communication within your team and with your opposite number. Be clear on who is leading on the issue to ensure consistency and coordination (be mindful of privilege in relation to communications / documentation being produced)
• Maintain thorough records: Make sure all documentation / data is saved (which can include emails and even WhatsApp messages). Issue data preservation notices to those involved in the project and think about using an electronic review platform to hold, organise and review the documentation

After a dispute, take time to reflect on what went wrong and how to prevent similar issues in the future. Also consider what worked—or didn’t—when managing the dispute itself. The more you learn, the better prepared you’ll be to manage risks on future projects.