On-site energy generation - key considerations for developers and main contractors

14 January 2015


It is increasingly the case that major new commercial developments in the UK have attached to them, as part of planning requirements, an obligation to have some form of on-site renewable energy provision (such as biomass, solar, small scale wind or energy from waste). This is usually to provide electricity and/or heat to the owners and occupiers of the completed development.

This obligation introduces a new dynamic, both for property developers and for main contractors, who may find themselves dealing with the procurement and operation of such on-site energy facilities for the first time.

Paul Green, energy construction partner, sets out some of the issues faced by developers and main contractors in procuring on-site energy facilities.

Procuring on-site energy facilities

The first thing a property developer will have to decide is whether to procure the energy facility by way of separate procurement or to wrap it up as part of the design and build contract for the rest of the development. Developers used to having one point of responsibility for the construction of a development will be keen to get their main contractor to take on this responsibility. This will, however, add to costs and will raise issues that the main contractor will be wary off.

Key provisions

Whether the procurement is direct by the developer or sourced by the main contractor, there are issues to consider that both may be unfamiliar with, being more used to civil and structural projects, albeit with extensive mechanical and electrical works.

Foundation risk

Will the relevant technology simply be procured and placed in a building constructed separately, by or on behalf of the main contractor? Who is responsible for ensuring that the building foundations can accommodate the chosen technology?

Access/sequencing

Thought will need to be given to accommodating the installation of the necessary plant and equipment. It will be dangerous to leave the plant and equipment sitting on site awaiting installation but there will need to be sufficient space and access to the relevant area of the development. Often, the completed energy facility will need to be fully tested as part of completion procedures, and main contractors will need to programme in time for this.

Transport

Getting the plant and equipment to the site has its own challenges. Depending on the technology to be used, transport route surveys may be needed. It needs to be clear who has responsibility for this as well as the responsibility to obtain necessary import permits.

Insurance

Particularly if plant and equipment is coming from overseas, appropriate marine cargo insurance will be needed. And, as mentioned above, as commissioning of the energy facilities may be crucial to achieving completion, thought should be given to whether some form of delay in start-up insurance should also be maintained.

Remedies for delay and low performance

Delay damages can be dealt with in the usual way, but care should be taken to be clear about what triggers completion for the purposes of delay damages. The energy "centre" itself may be completed early in the programme, but be unable to be fully tested and commissioned until the electricity and/or heat network around the rest of the development has been finished.

What will be more unusual for the developer/owner, is the likely need for on-going damages should the energy facility not perform as required. Tenants of the completed development are likely to be entitled to receive the electricity and heat produced by the facility and may have remedies if this supply is interrupted.

Noting the comments below regarding consequential losses, are these remedies to be passed on to the plant and equipment contractor or to an appointed operator of the energy facility? If the latter, will the operator in turn have redress against the plant and equipment contractor? For this reason, should the plant and equipment contractor be asked to also operate and maintain the energy facility at least during the defects liability period? Should such remedies consist of liquidated damages or simply rely on a claim for breach of contract?

Consequential losses and caps on liability

The plant and equipment contractors are likely to resist picking up any liability over and above the cost of remedying defective work and will often insist on capping their liability to the contract price under their contract.

This is something that will need to be considered and addressed in the contractual negotiations so that the developer can consider its alternative options (and be mindful of this in discussions with tenants/occupiers) and main contractors can ensure that they don't get left with a liability that they cannot pass on.

Defects obligations

Developers and main contractors of commercial property will be familiar with there being a 12-year liability period for defects following completion of the works (assuming the building contract is executed as a deed). Plant and equipment contractors may limit their defects obligations to a much shorter period, commonly two to three years.

Again, this is something that will need to be considered and addressed in the contractual negotiations so that the developer can provide for ongoing protection under its operation and maintenance contract and main contractors can look to similarly limit their own liability period.

Operation and maintenance

Getting the energy facility constructed and commissioned is only half the story. As stated above, tenants, and possibly other occupiers, are likely to have the right to a supply of electricity and/or heat from the facility. That facility will need to be operated and maintained to keep it in good working order.

The identity of the entity which is to carry out the operation and maintenance should ideally be clear at the start of the procurement process. The operator may need to have input into the construction of the facility from an ongoing operational and maintenance viewpoint. As mentioned above, some of this may be simplified by getting the plant and equipment contractor to also undertake the maintenance during the defects liability period.


In case you missed it

The government handed out an early Christmas present at the end of 2014 by announcing that its 19 business 'pipelines' now include around £191 billion of opportunities. Access the updated pipelines here. Our previous alert on the August 2013 version of the pipeline is here, What's in the construction pipeline? £109 billion...


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