Transformation in the construction industry: Keeping pace with change
Three pillars are at the heart of global efforts to boost sustainability and make our built environment cleaner, greener and more socially responsible: construction, energy and technology. These three industries have come to be intricately connected in an era of transformation on a scale never seen before.
Across the world, leading construction industry players are developing innovative projects and deploying new technology to transform the way we live and work.
Meanwhile, energy and mining & metals companies in rural Africa are increasingly installing generating assets and distribution facilities to ensure continuity of energy supply for their operations.
The predicted increase in flexible working may well result in a more widespread move to the development of "smart cities," with technology built into the heart of daily life.
All this is happening amid the fallout from the COVID-19 pandemic, which has shifted perceptions of how the world may look in the future.
But the pandemic has also forced project owners, developers and contractors to look at their contractual terms more closely, as budgets are cut and works are interrupted due to government restrictions.
This compendium of articles, written by colleagues from offices across the world covers a wide range of issues, examines some of the key topics relating to the shifting relationship between the construction, energy and technology sectors in our rapidly changing world.
It looks at the role the construction industry is playing in the development of distributed energy projects in the US and battery storage in the UK.
In the Middle East, the boom in the construction of smart cities has led to the use of new project structures to embed energy -saving measures within the developments. In Africa, renewable energy projects driven by public procurement programs have attracted investors and developers from around the world, drawn by the vast opportunities on the continent.
Increasing work in a volatile environment, however, means that risk allocation and mitigation are more important than ever. Courts in regions as diverse as Russia, India, Latin America, the Middle East and the UK have all been examining force majeure and risk clauses within contracts. Industry players would be wise to take note of these decisions and trends as markets are beginning to return to post-coronavirus normality.
Insolvency can also be another resultant risk, with recent reforms in the UK, Australia and Singapore affecting the construction sector if contracts are not carefully reviewed and, potentially, redrafted to reflect the new rules.
Although the current environment may have raised awareness of risk in construction projects, there is no doubt that the recent disruption and focus on innovation, new technology and sustainability is bringing immense opportunity to the industry around the world with a real chance of lasting impact.
“Focus on innovation, new technology and sustainability is bringing immense opportunity to the construction industry around the world”
Construction considerations in the US distributed energy market
The commissioning and startup phase of any energy project—liquefied natural gas, power, renewables, petrochemical—represents an important, and potentially perilous, transitional period during the construction process.
The coronavirus pandemic has had, and will continue to have, profound effects on the global construction industry. There have been and will continue to be substantial delays and cost impacts as a result of labor shortages, disruption to supply chains and financial pressure.
Delays in construction projects are common and even more so at the moment, and so the question of ensuring that there is a mechanism for the prompt payment of damages in the event of a contractual breach is arguably now more important than ever.
In 2020, the UK courts heard two significant cases with an impact on the way construction contracts and subcontracts are drawn up and carried out, affecting employers, contractors and subcontractors to major projects.
Increased battery storage capacity can and is being encouraged in order to facilitate the move towards the decarbonisation of electricity generation and can contribute to greater resilience and efficiency of integrated grids.
COVID-19 has had a significant effect on construction projects around the world, delaying work and forcing many parties to go back to their contracts and examine whether there is scope for a claim, and Saudi Arabia was no exception.
Where large projects exist, disputes will often arise. The Indian construction sector is no exception, but the lack of a standard form contract and the option of several forms of dispute resolution means that resolving disputes can be complex.
Microgrids have flourished with the rise of the "prosumer"—the historically passive energy consumer who is now armed with data and equipped with a new menu of energy solutions to address unique business needs.
In the US, microgrids gained a new level of interest in 2012, after Hurricane Sandy inflicted devastating damage on energy infrastructure and left more than eight million customers without power. Businesses and communities began looking for options that would provide a reliable source of power not dependent on the aging and vulnerable electricity grid.
Since 2012, these concerns have only increased, as wildfires on the West Coast and extraordinary storms elsewhere have emphasized the growing threats posed by climate change.
Improvements in technology since 2012 have increased the range of microgrid options and made them financially feasible for a wider range of users. Alternative business models, such as "energy-as-a-service," have also created new possibilities.
With energy-as-a-service, a provider such as the Schneider Electric and The Carlyle Group joint venture AlphaStruxure will install a microgrid at its own expense and risk in exchange for the customer’s commitment to purchase energy from the microgrid over a specified term.
The range of options for configuring microgrids, in size, nature and complexity, is virtually unlimited. "If you’ve seen one microgrid, you’ve seen one microgrid," goes the saying.
The basic elements are one or more sources of distributed energy, such as solar panels, wind turbines or generators, possibly coupled with a means of storage such as batteries, and integrated through a central controller that operates as the "brain" of the system. The microgrid provides one or more local users with continuous power, and when necessary can be "islanded" to operate independently of the larger electricity grid to which it may be connected.
A developer looking to arrange for the construction of a number of microgrids is often interested in efficiency. Practical means to realize this include developing ongoing relationships with reliable individual vendors, including contractors and engineers. A single reliable vendor is good, but a collection of them is better.
Just as modularity is an efficiency driver with respect to the components of a microgrid, it can also be used in the contractual arrangements for construction. For example, a developer could negotiate standard terms and conditions with a group of reliable vendors, leaving only the business terms to be established for individual projects where a vendor in the group is selected.
Another cost-saving option for a sophisticated developer is to unwrap a project, so the developer engages individual vendors directly, potentially using pre-negotiated terms and conditions. This differs from the more traditional model of engaging a design-builder as a single-source provider that in turn engages the individual vendors and charges a commensurate fee.
The largest downside and deterrent to the unwrapped model, namely the risk of gaps between warranties, can be mitigated by at least two factors common in the sector. One is that each component of the microgrid, like solar panels or generators, is typically modular, self-contained and mechanically distinct from the rest of the microgrid, and will have its separate warranty from the vendor of that component.
Another is that the technology involved in such individual components is increasingly proven and reliable, so the developer can be less concerned about warranties than it would be in a situation where a design-builder is delivering a bespoke product that may or may not operate as intended.
Much has changed since Thomas Edison constructed New York City’s Pearl Street station, arguably the first microgrid, in the late 19th century.
But despite various legal and regulatory questions that are not yet resolved in the US, microgrids seem well positioned to expand substantially in the next ten years.
Even COVID-19, which has slowed the rate of microgrid construction has exposed the fragility of the "normal" and the need for individual businesses and institutions to make their own arrangements for unexpected events. All of these factors make microgrids an increasingly attractive option.
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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.