Is installing a battery 'construction'? And does it matter?

In the second article of our battery storage series, Dickon Court looks at the possible issues around defining the creation of a battery storage site as construction.

The number of utility-scale and large commercial battery storage installations in the UK is going to increase dramatically over the next few years. Market analysis suggests that the pipeline for the next few years may be more than 16GW of projects. That number really starts to look impressive when you consider that it is 10 times (or more) the current UK total operational capacity of these kinds of batteries.

Creating a new battery site feels a lot like construction work. There need to be surveys, groundworks, infrastructure connections and the usual site operations. Most batteries themselves do come in as ready built containers, but a lot more needs to be done than dropping them on the ground and plugging them in. If putting pre-built containers on a prepared site for MMC is 'construction' then it feels like large battery installations should also be construction.

Why is this definition important? It's important because if it is 'construction', your contracts for the project may not say what you think they say.

What happens if it is Construction?

If works creating a new battery storage site are for the carrying out of construction operations’ under the HGCRA 1996 (the Act) then the contract for those works is a ‘construction contract‘. That means that for the ‘construction’ part of the contract, statute creates in those contracts a staged payment regime (with tight timescales), the right to go to adjudication for disputes and a contractor’s right to suspend works for non-payment.

That may not seem like a big deal. But it becomes far more of an issue if, halfway through a project, it becomes clear that the contractor may in fact have the right to far earlier payments than expected and is allowed to walk off site if they are not received. Disputes do happen and where one side’s strategy is to be assertive and force the other side to spend money and time on a dispute, it can come as a shock to find with no notice and no preparation that you have to engage in a 28 day long formal process which could decide 6 or 7 figure sums.

Why the uncertainty?

Paraphrasing quite a bit, the Act says that where the primary activity of a site is power generation, then any installation of plant, machinery or steelwork is not 'construction operations'.

That is because, when the Act was being considered, one of the major drivers was to deal with cashflow barriers in the construction industry. The flow of cash down the contracting chain was being held up by relationships where the employing company didn't want to release money until the last possible moment and held much of the negotiating power. Further, even if contractors and subcontractors wanted to claim payment, disputes in the court system held up payment for further months and years.

The HGCRA protections were intended to force the industry to keep cash flowing and to make disputes quicker to resolve.

Those provisions were of course met with a lot of resistance, including from industries which argued that they had no problems with cashflow. Amongst them was the power generation sector and that group successfully lobbied to be excluded from the provisions of the HGCRA.

Perhaps in the '90s it was clearer what was and was not 'power generation'. But what does it mean now?

Battery storage looks a fair bit like power generation. It is an installation which provides power, either to the grid or for a local requirement. Co-location makes the issue even more challenging (and is the battery part of the same 'site' as the PV or wind installation?).

There has not yet been any judicial comment on this issue other than from a planning perspective in the case of ABO Wind NI Limited & Energia Renewables Company 1 Limited [2021] NIQB 96. This was a Northern Irish case in which it was highlighted that there is now a statutory definition of storage and that storage which is not pumped hydro is exempt from NSIP requirements associated with generating stations.

What is the current status?

It seems fair to say that there is not yet a mature, market standard contract for battery storage installations. The sector sits across a number of more ‘traditional’ legal practice areas and as such we have found that some parties and lawyers involved in these projects have no construction law experience. That involvement might be at the front end of contract negotiation or in the course of disputes. That means uncertainty arises when the contract is in operation and has caused some nasty surprises.

Most of the projects we have seen have been operating on a version of the FIDIC Silver Book contract for turnkey projects. Wording about adjudication sometimes looks a bit like this:

“Either party may refer any Construction Dispute to adjudication. A dispute or difference which is not a Construction Dispute shall not be capable of being referred to adjudication unless the Parties agree otherwise”.

Unfortunately, that doesn’t help much. It envisages the possibility of construction disputes, but doesn’t unpack what they are. Unless your contract specifically sets out what is a construction dispute and what isn’t, you fall back on the statute.

What do you think?

This uncertainty is causing confusion. For a turnkey project, where a lot of these problems seem to arise, whether the contract is a 'construction' contract likely doesn't cause parties to lose sleep when everything is going well, and they are just starting to build a new project. However, it may well cause loss of sleep when payment instalments become late, when funders get itchy feet or when the build is delayed.

Commentators on this issue have been fairly split. Some have suggested looking at the wording of the Act and on that basis have stated that, as a matter of science and the meaning of the words, battery storage does generate power. It stores energy in a different form and then generates it back as electricity when needed. However, that kind of argument seems tricky to me. Whilst not quite the same, a petrol station stores chemicals and chemical potential energy used to generate power, as do most batteries, but no-one suggests that installing petrol pumps is 'power generation'.

The fact that the process plant and power equipment sectors again were excluded from the Act when it was updated in 2011 has also been used to suggest that the public policy remains the same; that equipment used for electricity should not be subject to the Act.

Others have looked at the planning structure and suggested that because battery storage has been removed from the nationally significant infrastructure projects regime they are different to big electricity generation projects. On the other side some have pointed to Ofgem's suggestion that electricity storage is to be treated the same as other forms of generation from a regulatory perspective.

With a great deal of respect to all those positions, and they all have merit, I don't think that they quite go to the heart of what a court would consider if this issue was considered. The court would follow the rules of statutory interpretation to work out what the exclusion for power generation means. In my view there is enough ambiguity in whether batteries are 'power generation' to get that process started.

Statutory interpretation

The literal meaning of the words might be relevant, but in my view, a scientific understanding of the words 'power generation' is not an appropriate use of the rule on using literal meaning. The courts these days are wary of this kind of over-literal approach to what words mean that doesn't give the words their social and political context. Whether under a more purposive approach or in the case of persisting ambiguity, it is open to the courts to look at why the rule was made. If a court allows itself to get to that stage, it means we can look at Hansard, the official record of what was said in Parliament when the Act was being drafted and debated.

When the Act was being debated, a distinction was drawn between process engineering (including plant, machinery and steelwork for power generation) and other types of construction activity.

In the House of Lords on 20 February 1996, it was remarked that the exclusion of process plant engineering was because: "The engineering work involved in assembling plant to carry out a process is subject to very different contractual arrangements from traditional construction work. There is a strong feeling in the process plant engineering sector that such operations should be excluded from any legislation on the grounds that existing contractual relationships in the sector operate satisfactorily and without conflict". The policy seems to have been that the power generation industry didn't need the protections for subcontractors that the wider construction industry did.

Later, in the second reading in the Commons (7 May 1996) it was suggested that the best way to secure the objectives of the Act was to have the widest possible definition of 'construction operations'. The response from the government was that it wanted "the widest possible definition consistent with excluding those areas where there is no problem in practice". It was even asked whether that was the reason for excluding 'process engineering', because there was not much litigation in that field. The response was that the process engineering industry had made it clear that they did not have "the same dispute and payment problems as the construction industry as a whole. That is why we decided that that industry should be excluded. In reaching that conclusion, we do not seek to exclude ordinary construction processes—there is sometimes a little of both on site. We are trying to address that consideration without embracing an industry that does not have any real problems".

The fairly clear policy behind the exclusion was that the changes brought in by the Act were a big interference in the rights of parties to contract how they wish. Some commented at the time that the Act's provisions were a way of punishing or shepherding the wayward construction industry that had been acting improperly. In that context the government decided to exclude process engineering, as it didn't have a problem.

Even back in 1996 the exclusion of the process industries was controversial. The Opposition at that stage suggested that they were excluded because the government lacked faith in the bill (also recorded in Hansard) and noted that while the process engineering sector was "not as speculative as some parts of the building industry … That does not mean to say, however, that [they are] a utopia for sub-contractors … Modern processes, which often lead to more work being done off site, should not for some strange reason be excluded from the excellent provisions of the Bill".

But the government's reasoning in 1996 doesn't apply to the battery storage sector, does it? I have already seen instances of funders falling out with EPC contractors. The payment waterfall on these projects is complex and frequently linked to revenue generation, potentially slowing cashflow down the supply chain to subcontractors. That delay makes the risk of insolvency at some point of the chain more acute and, in an emerging industry, there will almost certainly be some insolvencies.

The exclusion was drafted by reference to an established industry of power generation where the projects were big power stations and connected infrastructure – the 1996 government referred to the process engineering sector as having a small number of clients and contractors and commented that therefore the good relationships between those participants should not be interfered with by government. None of that is true for battery storage, it is an emerging market with numerous stakeholders. Subcontractors on turnkey battery storage projects are doing the same things as subcontractors on MMC projects would do – groundworks, access, infrastructure connections, landscaping etc. Why should they have less protection just because the container to be put on the site is a battery rather than a segment of a different building?

What does that mean?

It means in my view that there is a decent chance that if the 'power generation' exclusion in the Act is considered by a court, it would be found that battery storage projects are 'construction operations', even those parts that are associated with the plant and machinery for the battery. That is because these projects are different from the kind of 'power generation' projects, parties and context envisaged by the Act. That allows the court to look at the purpose of the Act. The exclusion in the Act had a specific reasoning that does not apply to battery storage projects unless they are attached to large generation projects. Even then the reasoning for the exclusion seems to me to be wearing thin.

Since 1996 adjudication and a better payment regime has not only become the norm, it has been celebrated by dispute resolution commentators. A process that costs 1/10 of the cost of litigation, that solves the problem in 28 days and which keeps money flowing? Those in 3 year court proceedings look on with envy. Adjudication is not without its flaws, but the fact it is being rolled out to professional negligence claims and considered in other fields is testament to the views of the legal profession and the courts that it works.

The courts have always interpreted the exclusions to the Act narrowly. In the context of a very strong policy towards ADR and prevailing views about both adjudication and a strong payment regime, the courts seem more likely as a matter of policy to want to keep battery storage projects 'inside' the Act. And rightly so, in my view.

However there remains an ambiguity and a risk. While the Secretary of State has always retained the power to amend the exclusions to the definition of construction, no change has been made, even through fairly major renovations to the Act. You might well ask why not?

So what should you do?

As with everything, you should think about this issue when contracting. Don't assume either way. If you want adjudication and payment protection (likely if you are a contractor) then agree that the contract is subject to adjudication, and there is no argument. If you want some wiggle room, don’t, but be aware of the difficulty of a 'hybrid' contract where some provisions apply to some parts of the works but not to others.

For more on battery storage, read Dickon's previous article: Battery Storage – emerging and likely disputes.