A construction introduction to contracting for energy projects

With an increasing focus on sustainability, many businesses are now incorporating green energy solutions in projects, or retrofitting systems into existing sites. From solar panels to EV charging points to ground source heat pumps, there are some key considerations when entering into a contract for energy assets.

So how does an energy contract differ from a typical construction contract?

There are a number of differences between a typical contract for a commercial development and a contract for an energy project. These include:

• Performance testing – ultimately the energy system needs to perform to a certain standard or it could be useless. Therefore there are various stages of testing which are typically completed in relation to plant contracts:
  • Pre-installation tests – these tests will be carried out by the contractor to confirm that the system complies with the design and operational specification in the contract
  • Tests on completion and commissioning – once the system is installed, further tests are carried out to ensure that it achieves the pre-determined requirements. This is an important step to ensure that the completed system can be used for its intended purpose
  • Performance tests – these are carried out following handover and once the system is in use, to ensure that it can perform in typical day-to-day scenarios.

The test criteria should be specified at the outset of the contract, and the client or their representative may be present during testing. The contract should also make clear what steps need to be taken if the testing shows that the criteria are not met, and what remedies are available to the client. These remedies can include liquidated damages, and may even include the right to reject the works and terminate the contract.

• Standard of care – commercial developers will be familiar with the usual standard of care being "reasonable skill and care". However, in energy contracts, the standard of care relating to particular parts of the system is often the higher standard of "fit for purpose" on the basis that it is imperative that the completed plant can be used for its intended purpose.
• Limitation period – the trade-off for the higher standard of care and the levying of performance damages is often that the contractor's liability period, or limitation period, is much shorter than would be common in commercial contracts. It is therefore important that any defects are raised with the contractor as soon as possible to minimise the risk of limitation expiring.
• Regulatory considerations – depending on the nature of the system being installed, there may be some regulatory matters to consider. For example, where solar panels are to be connected to the local grid, approval from the Distribution Network Operator may be required. Contracts should make clear who is responsible for dealing with any such regulatory matters.
• Intellectual property – copyright licences may not be as broad in energy contracts as they are in commercial contracts, as plant manufacturers seek to protect the intellectual property in the technology they have developed.
• Operation and maintenance – in some instances it may be necessary for an operation and maintenance (O&M) contractor to be appointed following completion of the works. This may be the same contractor that installed the plant, or it may be a third party contractor. In either case, the works contract and the O&M contract should be aligned.

What do I need to do?

Energy projects are typically more complicated than those for a commercial development, and so it is important for clients to understand the additional considerations, be clear on their requirements and engage with the contractor early.

The form of contract for such works is important too. Most commercial developers will be familiar with the JCT suite of contracts. Whilst these can be adapted for use in energy projects, there may be other more appropriate standard forms of contract available, such as the standard forms published by FIDIC and IChemE.

Our legal specialists are experienced in broad range of renewable energy projects and are able to advise on the most appropriate form of contract, as well as the considerations specific to your project.