Update on split contracting legal trends in Australia’s renewable energy sector

Introduction

In our August 2024 article “The BESS is yet to come: Legal trends in Australia's large-scale battery sector”, we discussed the rise of utility-scale Battery Energy Storage Systems (BESS) projects in Australia and the shift away from the traditional engineering, procurement and construction (EPC) contract model to a split contracting model to deliver these projects.

This update aims to provide our latest insights on the continued preference for split contracting to deliver BESS and other renewable energy projects, focusing on the material issues encountered in negotiating split contracts.

Split contracting is now the preferred procurement model for BESS and other renewable energy projects

Since our last update, the trend towards split contracting for BESS and other renewable energy projects has solidified. Other than for utility-scale solar projects where the EPC contract model is still utilised, usually with the free issuing of the modules and other equipment, developers are favouring a split contracting model due to its flexibility, cost-effectiveness, and ability to engage specialised suppliers and contractors for different project components.

The split contracting model allows for a more balanced risk allocation and better management, which is crucial as projects grow in complexity and scale, and to keep down costs in the current inflationary market environment.

Main issues encountered in negotiating split procurement contracts

While split contracting offers several advantages, it also presents unique challenges that must be carefully managed during negotiations. Below, we outline some of the main issues we are seeing in the market:

Interface and coordination of design and performance of work

One of the critical challenges in split contracting is ensuring seamless coordination between multiple contractors and suppliers and the interface of the various works. This issue becomes particularly pronounced when parties do not agree to a separate coordination and interface deed. In such cases, the developer must take on the responsibility for ensuring that all contractors and suppliers coordinate effectively in preparing the designs, performing the works and that works correctly interface with each other. This requires the developer to have personnel with the necessary skill set to manage these complexities and risks.

Whilst the developer generally assumes the risk for any failures in coordination or interface under a split contracting model, entering into a separate coordination and interface deed with the contractors and suppliers assists in shifting some of the coordination obligations and interface risks to the contractors and suppliers, thus reducing the potential for delays and increased costs.

Obligations and risks related to grid connection

Grid connection continues to be a complex and high-risk area in renewable energy projects. We are now seeing matrices for grid connection obligations becoming even more detailed, reflecting the increased complexity of these projects and the increased risks faced by a project connecting to a grid that is currently hosting a number of competing projects, or will in the future.

Developers are taking on more obligations and risks related to grid connection, which requires careful management and detailed allocation of obligations and risks to mitigate potential issues. This also requires the developer to have personnel with the necessary skill set to manage these obligations and risks.

Global procurement risk

The global nature of procurement for renewable energy projects has always added additional risks to these projects.

Potential delays and increased costs resulting from force majeure events, changes in law or the application of sanctions are risks faced by every renewable energy project. In the past, contractors and suppliers have generally accepted these risks occurring outside of Australia, as risks inherent in their international procurement business model.

Given the current uncertainties in global trade developers are increasingly assuming these risks, especially for wind projects, with the potential for significant impacts on the project timeline and costs, as well as financing costs and contingencies.

Conclusion

The shift towards split contracting models for BESS and other renewable energy projects continues to gain momentum. While this model offers several benefits, it also requires the developer to take on more project risk and to carefully manage the complexities of delivering these projects. This comes with additional costs which may offset a large proportion of the cost benefits obtained from using a split contracting model.

As the Australian renewable energy procurement market evolves, we expect further innovations in contract procurement and management strategies, drawing on experiences from more mature overseas markets. Our team at Norton Rose Fulbright remains at the forefront of these developments, ready to assist our clients in navigating the challenges and opportunities in the renewable energy sector.

For more information on how we can assist you with developing, financing and delivering your renewable energy projects, please contact our team.