Battery Storage – Emerging and likely disputes

Warranties as to performance are always going to be a contentious area. I have already seen a number of disputes about availability assurance warranties, both as standalone fights about liquidated damages and as pressure points in the context of wider negotiations about the future of the project.

As the market has changed warranties have been provided by manufacturers, D&B contractors and/or O&M providers for an increasingly broad set of performance metrics. They might include, for example, warranties as to degradation profile; ramp rate; capacity and round-trip efficiency.

By their nature these kinds of warranties are complex. They are often also subject to caveats. For availability warranties we have seen liability disputed because of arguments about which part of the overall system caused any outage, whether any issues were covered by the relevant formulae and about third-party involvement. These issues are not going to become any easier as the use increases of multi-contract arrangements in preference to full-wrap EPCs.

In some circumstances these kinds of issues may lead to formal disputes, but it seems likely that informal disagreements on interpretation, calculation and allocation of responsibility will be more common. In those circumstances the best prepared party, using well prepared and tested technical schedules and perhaps with expert evidence on their side, is likely to have the upper hand.

Whenever something is being built there is a risk of the usual construction disputes. Even though a lot of battery storage sites are simple and can be built in a matter of weeks, we have already seen construction delays moving into dispute. Ground works and access can cause problems and larger, more complex sites carry higher risks.

As to defects, the allocation of risk remains an interesting negotiating point. Do all defects, including latent defects, end a certain time after completion (as is often the case in solar)? If so, very clear testing requirements are needed.  Disputes may arise when the actual and contractual timetables become misaligned – we have seen situations where testing and completion are delayed causing problems not only with the payment timetable, but also causing confusion about when liability ends. The concept of Final Acceptance is one where we have seen disputes where, for good project reasons, FAC is delayed or, more seriously, a party stops engaging in what should be a co-operative process. Pro-active project management is needed in these situations alongside an understanding of the contract.

Where a dispute arises from a construction contract then it may well be that the parties can use adjudication to resolve disputes. That means lower cost and a very tight timescale, and adjudication has its own set of tactical considerations. If the other side is not prepared or does not have experience of construction disputes you can have a big advantage. I will shortly be publishing an article expanding on whether battery storage project works count as ‘construction’.

The more parties there are, the more interfaces there are, the more likely there will be a dispute about who is responsible for an issue or cost. Division of responsibilities documents are great, but they are not able to record everything. For example, we have seen examples of cable failure where there is a dispute over whether it is the cable or the connector/terminal that was at fault. Where there has been water ingress there can be a lot of disagreement over how it got in (or even if it is condensation) and that disagreement prevents effective allocation of liability.

While most disputes over these issues will likely be resolvable without formal proceedings being necessary, they may still need independent experts to be involved. Where there have been works by numerous parties (specialist contractors, O&M and services contractors, others on a shared site) this can get more complex.

As we have seen on solar installations we will likely also see some issues about the provision of security and other non-technical services to sites, particularly after commissioning when attention has moved to other projects.

Funding is already the source of the larger disputes we have seen so far in this space. Funding disputes (which often centre around timing of payments) are of course not unique to battery storage, but they are likely to become more common as more money flows to the sector. As we transition from a fairly small group of funders and developers to a more diverse group with new entrants and differing approaches to risk, disputes become more likely. So far, we have seen disputes arise because projects have either not been completed or connected when expected. As such, funding has been outstanding for longer periods and, when parties lose trust, or their objectives change there may be ambiguity leading to disputes either in the contracts or the way they have been operated.

Linked to issues of funding are issues of security for funders and developers. Most projects will sit in SPVs and as such there will be a significant focus on the security for any lending. Share charges, bonds and parent guarantees are key, as is the due diligence sitting behind those agreements. Because they contain triggers for liability and because they only become relevant when something has gone wrong, these documents are often heavily disputed. Issues are likely to include the breadth of cover, whether relevant trigger events have occurred and whether appropriate formalities on events like assignment and sale have taken place. Errors in formality can have wide reaching effects.

As the market changes both aggregators and owners will want to change the services that are offered by the project. New additions to the stack like Dynamic Moderation might be desirable and older revenue generators will fall away (like EFR). Those drivers will result in parties wanting to change or remove existing contracts, possibly on short notice. In addition, contracts for system services already have a lot of termination events that can be triggered on short notice.

When contracts end there is often a party which will feel aggrieved. Even if not, where relationships are ending parties are often more willing to raise disputes to try to maximise value. Termination is a tricky legal area, as terminating incorrectly can lead to very large claims for repudiation.

While we hope that the contracts are getting more sophisticated, there have been issues already with conflicts between contracts for different services within a revenue stack. If two or more services provide for exclusivity or operation within the same period operators could end up in a difficult situation.  The same may be true if a service reduces the power available at the wrong time.

Thankfully there have been few instances of catastrophic failure so far. We have however seen a few fires, including issues with cabling as well as within containers.

In these circumstances there will be investigations to determine the cause and responsibility. Unless the investigations are completely conclusive (and sometimes even then) it will however be worth the cost for parties to try to distance themselves legally. There is likely to be legal involvement even if initially it is behind the scenes. In these sorts of circumstances all parties tend to rally round in the short term to ensure safety and resolve immediate concerns. Unfortunately, there will then be discussions as to who bears both the short-term costs and the longer-term liabilities.

Companies will come and unfortunately some will also go. Some will be purchased as part of consolidation by larger entities and others will fail. Both BESS assets and related obligations and liabilities will therefore transfer or cease as a matter of practicality. However well organised and drafted your contracts are, there are likely to be ambiguities or stranded obligations when counterparties disappear.

We don’t yet know how the Waste Batteries Regulations will be changed or how they will work in reality. While the producer responsibility regime is well understood in other fields there is a large lag in the time between utility scale batteries being put on the market and being recycled. There could well be a sea change in that time not only in the identity of producers, but in the technology of the batteries themselves.

We will shortly be providing a longer article on battery recycling in the UK but in short there is currently a sort of grace period for battery producers where they can put batteries on the market without paying for recycling. When utility scale batteries do reach end of life it is not yet clear what recycling will look like, and there may well be disputes and issues that arise. The WEEE compliance scheme system saw a number of disputes about its structure in early years, including accusations of anti-competitive behaviours.