As countries intensify their pursuit of net zero, innovative grid sharing arrangements are enabling a greater number of renewable energy projects to be built. However, while grid sharing can unlock grid capacity, it also presents technical, legal, and contractual challenges for the parties involved, particularly engineering, procurement, and construction (EPC) contractors. EPC contractors need to be aware of these challenges, and how to manage and mitigate the potential risks that may arise.
What is grid sharing?
Grid sharing is a novel a strategy by which multiple renewable energy projects, such as wind farms or solar parks, share a single grid connection. This arrangement allows for more efficient use of the electricity grid capacity, reduces connection costs for energy developers, and enables more renewable energy projects to be built. Grid sharing projects can also decrease the variability of energy supplied to the grid.
As countries across the globe ramp up efforts to reach net zero, demand is growing for renewable-generated electricity. In the UK, for instance, the Government has committed to decarbonise its electricity system by 2035 (opens a new window), while wind and solar generation is expected to quadruple by 2050 (opens a new window). Higher demand requires more capacity, or the optimisation of existing capacity. For renewable energy developers facing grid constraints for their new projects, grid sharing represents an innovative solution.
Despite its benefits, grid sharing is not without risk. The practice also poses significant technical, legal, and contractual risks for the parties involved, especially for the engineering, procurement, and construction (EPC) contractors who are responsible for building the projects. EPC contractors need to be aware of the implications and requirements of grid sharing, and how to manage and mitigate the potential risks that may arise during the project lifecycle.
Technical risks
Grid sharing agreements involve connecting multiple renewable energy projects to a single grid connection point, using shared equipment and infrastructure, such as switchgear, cables, and meters. They also require the installation of equipment and infrastructure to enable each project to individually operate and track its output, such as pseudo MPANs.
EPC contractors who are involved in building projects that will be part of a grid sharing agreement may face various technical risks that could affect the quality, performance, or safety of the projects. Some of these technical risks are:
Faults or failures in the project itself or in the shared equipment or infrastructure
Delays or disruptions in the construction or commissioning of the project
Inadequate or incompatible design or specifications of the project
Poor workmanship in installing any components correctly
While these risks will generally be present in the installation of stand-alone projects, EPC contractors will need be wary of using components that are not compatible with the shared infrastructure. Different manufacturers will have different standards, and what may appear to be a ‘standard’ component may differ depending on who it was manufactured by.
Unlike stand-alone projects, the impact of any technical failures may not just affect the EPC contractor’s direct client, but is likely to have a knock-on effect on the other projects connected under the grid sharing arrangement. As such, the liability for such a failure may be significantly increased compared to a stand-alone project.
Legal and contractual risks
Grid sharing involves entering into various legal and contractual agreements between different parties, such as the project owner, the distribution network operator (DNO), the other project developers, and the suppliers and subcontractors. These agreements define the terms and conditions for grid sharing, such as the rights and obligations of each party, the scope and price of the services, the schedule and quality of the deliverables, the allocation and management of risks and liabilities, and the dispute resolution and termination mechanisms.
EPC contractors who are involved in building projects that will be part of a grid sharing agreement may face various legal and contractual risks that could affect their reputation, profitability, or sustainability. Some of these legal and contractual risks are:
Liability or damages arising out of delays, which may be set at a fix cost per day that a project is not completed by a target date (known as delay damages)
Set compensation levels for defects (known as liquidated damages)
Warranties as to the performance level of the project
Warranties or indemnities as to the project not causing the client to be in breach of the grid sharing agreement
Warranties or indemnities in relation to the damage caused to shared infrastructure
With stand-alone projects, there is minimal risk of claims from third parties, as any loss is largely limited to the EPC contractor’s client’s loss of income under a Power Purchase Agreement. However, with grid sharing agreements, the client is likely to also have additional liabilities to the other parties to that agreement. For example, if the project accidentally exports more electricity than it is permitted to do, then the DNO may take action under the grid connection agreement which would negatively impact the income of the other project owners. Faulty equipment which impacts on the shared infrastructure could also damage the other projects.
As such, clients often impose more onerous terms on their contractors, so that they can more easily pass on any liability they incur. For EPC contractors, grid sharing projects therefore present a greater-than-ordinary risk of contractual liability.
Exclusions under PI insurance
In the construction industry, it is often assumed that professional indemnity (PI) insurance will capture all types of liability that may befall a contractor. However, the truth is more nuanced. Professionals may find themselves at risk of uninsured loss if they are not aware of the limitations of PI insurance.
Typical PI polices include exclusions for claims relating to:
Deficient workmanship (e.g. failure of an EPC contractor to correctly install components)
Liquidated or delay damages
Increased liability due to a warranty or indemnity
Liabilities arising purely from the wording of the contract itself (i.e. liabilities that do not otherwise exist under law)
Risk mitigation – the importance of contract reviews
EPC contractors need to be aware of the implications and requirements of grid sharing, and how to manage and mitigate the potential risks that may arise during the project lifecycle. At the same time, as developers increasingly enter into grid sharing agreements as a creative way of accessing the grid, they in turn are leaning heavily on their contractors. Should developers be in breach of their obligations, they will not be shy in bringing a claim against a contractor.
Actions to minimise the risk of incurring a claim include:
Ensure the appropriate procedures are in place in terms of supervision and checking of workmanship
Communicate with other EPC contractors, or Balance of Plant contractors (in the case of wind projects) to ensure that the compnents are compatible and do not lead to delay or an increased risk of fire or project failure
Review contracts carefully to understand obligations and potential liabilities, and to minimise the risk of uninsured loss
At Lockton, all our clients have access to our Contract Review Service, a dedicated team set up for the purpose of reviewing construction contracts and identifying issues that may impact on PI coverage.
For more information, please visit our Construction PI (opens a new window) page, or contact:
Nick Rains, Legal Group Executive
E: nick.rains@lockton.com
