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.
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. It can also provide solutions for local and off-grid users of electricity, but nevertheless there are still a number of barriers to widespread adoption.
In recent years, the energy markets have seen a lasting and increasing transition towards electricity generated from renewable, sustainable sources.
The dependence of renewable energy on the sun and wind results in a variable and relatively unpredictable output, which can create an imbalance between the energy generated and consumer demand in the short as well as the medium term. Energy storage can help to resolve this, with the demand for storage solutions rising in parallel with demand for renewable energy generation sources.
Pumped hydro currently dominates the energy storage market overall and accounts for approximately 94 per cent of global market capacity. However, in recent years the use of batteries has increased as a result of cheaper production costs and greater capacity; it is predicted that the installed costs of battery storage could further decrease by between 50 per cent and 66 per cent by 2030, a substantial increase in the market share for storage.
The interest in battery storage globally has grown as more countries pursue and extend renewable energy strategies as well as make a transition to local or smart grids. The increase in the usage of battery storage has also been facilitated by advances in the digital technologies harnessed by companies to provide ancillary services which benefit utilities and grid operators.
Examples of this type of innovation include aggregation models, powered by artificial intelligence and predictive analytics which allow a number of distributed energy resources to be grouped together and create capacity while retaining flexibility and fast response times.
There is also now a recognition that battery storage is faster, cleaner and cheaper than traditional "peaking" plants, which are able to respond quickly to balance fluctuations in the grid but are commonly gas or diesel -fired.
Lastly, battery storage has lower transmission costs on the discharge side and can also be provided either as an integrated part of generation facilities being developed, an addition to existing generation facilities or on a stand-alone basis.
Despite the benefits of battery storage, there do remain a number of barriers to widespread adoption.
Regulatory policy tends to lag behind changes in the evolving sector, although there are some positive signs that regulators and legislators are seeking to make policy changes that will benefit the industry.
For example, following a 2019 consultation, the UK government announced it would exempt almost all battery storage projects—from the nationally significant infrastructure projects (NSIPs) regime. This means planning permission for battery storage falls under the Town and Country Planning Act instead, which should reduce the development time and cost investment required under the NSIP regime.
Another key challenge for battery storage is the unpredictability of revenues over the medium to long term. Battery storage projects will typically have multiple revenue streams and, while those can assist in offsetting the risk associated with any individual revenue stream, such "stacking" of revenues brings its own challenges for their longer-term investment prospects.
Compared to other energy storage methods, revenue contracts for battery storage are still relatively short. The length of an enhanced frequency response contract for example, a mainstay in a battery storage revenue stack in the UK, is usually between one month and two years.
It is not just money matters which pose a challenge to the uptake of battery storage. The limited shelf-life of batteries, the amount and nature of the raw materials required for their production, and the considerable pollutants generated during manufacturing, storage, treatment and disposal of large-scale batteries in particular have given rise to significant environmental and more general sustainability concerns.
Given the various components making up a battery storage project, the contract structure for any project is likely to be correspondingly simple or complex.
Battery storage projects to date have generally been let using either an engineering, procurement and construction contract, which often involves a contractor joint venture between the main battery supplier and a construction and installation contractor; or by letting various elements of the works separately, in effect providing the batteries and associated equipment as 'free issue' materials to the construction and installation contractor.
Battery storage projects often use nationally or internationally recognised standard form contracts with amendments as necessary to reflect the relevant procurer's requirements as to risk transfer and retention.
Key terms particular to battery storage projects include enhanced environmental indemnities and payment terms reflecting the up-front cost of reservation and manufacture. Defects liability periods or warranty periods are also amended to reflect the expected life cycle of the batteries and related equipment, as well as the traditional expiry period for related infrastructure.
On the operation and maintenance aspects, leaving aside routine activities, any requirements as to ongoing performance levels of the assets are usually provided under and tied to ongoing arrangements with the relevant suppliers, or dependent upon operating and related requirements being complied with.
Given the fast -paced development in the sector, a more recent development has been to negotiate and include terms for upgraded equipment to be provided and installed when available to the project specifically or in the market more generally.
A market set for growth
Storage as a subsector within the electricity sector is one which is a necessary and now established part of the energy transition in that industry.
The increase in renewable generation combined with improvements in both battery technology, the range of ancillary services and its uses, whether as part of a local grid or an isolated user of electricity, clearly indicate that demand for and reliance on battery storage will continue to grow—something that is being increasingly recognised by governments and regulators both in developed and developing markets.
From a construction perspective, while it is true to say that there are certain procurement choices to be made, in common with the early days of the solar sector, the market is currently dependent upon and effectively led by the manufacturers. However, more contractors specialising in battery storage will undoubtedly emerge both due to its importance and scope, and also as a result of the ability of storage systems to be integrated within existing and new-build power generation projects.
Kit Goodfellow (Trainee Solicitor, White & Case, London) contributed to the development of this publication.