Key Considerations for Utility-Scale Energy Storage Procurements

It’s generation . . . it’s transmission . . . it’s energy storage! The renewable energy industry continues to view energy storage as the superhero that will save it from its greatest problem—intermittent energy production and the resulting grid reliability issues that such intermittent generation engenders.

Market Overview

Energy storage can play the superhero role because it has features of both generation and transmission. Traditional generation converts energy from one medium to another, such as turbines that convert stored chemical energy in hydrocarbons, or photovoltaic panels that convert solar insolation. Energy storage also converts energy from one medium to another—whether it be mechanical energy in a pumped hydro facility or chemical energy in a battery—so that energy can be provided when it is needed by the grid.

Like transmission, energy storage can help to manage supply and demand over broad areas of the electric system because it can provide both generation and load by converting excess electric power into another medium to be stored for later use. Accordingly, energy storage has often been viewed as a non-wires alternative (NWA) to transmission grid upgrade requirements.

These dual features make energy storage the essential element of any energy transition to a renewable energy future. Therefore it should be no surprise that the market for energy storage has grown on the coattails of the growth of renewables.

Recent Growth

The utility-scale storage sector in the United States experienced tremendous growth over 2021 and 2022. Installed storage capacity in the United States more than tripled in 2021, growing from 1,437 megawatts (MW) to 4,631 MW.[1] While total 2022 installations have not yet been reported, utility-scale storage installations in the second quarter were the largest quarter on record with 1,170 MW installed, despite significant delays in the market.[2] Growth is expected to continue, especially with the enactment of the Inflation Reduction Act of 2022 (IRA), which includes significant new incentives for storage including availability of the investment tax credit (ITC) and new manufacturing credits.

As a result, the amount of storage installations in the United States is expected to increase from 4,631 MW in 2021 to more than 27,000 MW by 2031, and the US energy storage industry has laid out plans for 100,000+ MW of installed capacity by the end of 2030. By way of comparison, the installation of new gas-fired resources is expected to level off and begin declining by approximately 4% annually by 2030.[3]

Increasing Costs and Market Pressure

However, at the same time installations have grown, costs have also risen. Increased demand for batteries has put a strain on the market. Demand for battery metals in 2022 increased almost 30% over the prior year.[4] The dollar-per-kilowatt ($/kW) cost of storage increased from $1,580 in the first quarter of 2021 to $1,993 in 2022.[5] Continued pressure in the supply chain for storage components, including battery metals, has sustained increased prices and led to production and delivery delays. For example, more than 1,100 MW of utility-scale storage capacity originally scheduled to come online in the second quarter of 2022 was delayed or canceled.[6]

World events have also impacted the battery market. Nickel, cobalt, and graphite are all integral minerals in battery development. Russia is the world’s largest producer of battery-grade class-1 nickel, accounting for approximately 20% of global supply, and is the second and fourth largest producer in the world of cobalt and graphite, respectively. The Ukraine conflict and resulting sanctions on Russia further tightened the market for battery components.[7]

Supply chain issues in the US solar market have also impacted planned solar-plus-storage installations. The vast majority of storage installations are being co-located with solar. More than 93% of storage capacity installed in 2021 was constructed alongside solar.[8] In June 2022, the Uyghur Forced Labor Prevention Act (UFLPA) went into effect, constraining the solar module market. The UFLPA creates a rebuttable presumption that any goods mined, produced, or manufactured, wholly or in part, in the Xianjing Uyghur Autonomous Region (XUAR) were made with forced labor, and bars their importation into the United States. Now 95% of solar modules use solar-grade polysilicon, of which 45% of the world’s supply is manufactured in the XUAR.

The Wall Street Journal reported in November 2022 that UFLPA enforcement since June caused approximately 1,000 MW of solar panels to be detained by US Customs and Border Patrol. The panels cannot be released until the importer has produced “clear and convincing evidence” that the modules have not been, and do not contain goods or materials, manufactured in the XUAR.[9]

The solar market was further constrained by an ongoing petition before the US Department of Commerce alleging that certain solar manufacturers in Southeast Asia were circumventing antidumping and countervailing duty (AD/CVD) orders on solar cells and modules from China. In December, the Department of Commerce issued a preliminary determination that certain solar components exported from Cambodia, Malaysia, Thailand, and Vietnam using parts and components produced in China are circumventing the AD/CVD orders on solar cells and modules from China.

It was also recently reported that China is considering an export ban on manufacturing methods key to producing advanced solar wafers. If China does ultimately issue such a ban, it could negatively impact the ability of other countries to develop domestic solar manufacturing capabilities.[10] These disruptions in the solar module supply chain are negatively impacting solar-plus-storage development.

Electric Vehicle Competition

Utility-scale storage is also competing for batteries with the electric vehicle (EV) market. Lithium ion is the most prevalent type of battery technology for utility-scale storage in the United States, accounting for more than 90% of storage installations in both 2020 and 2021.[11] The EV market, however, also relies on lithium-ion batteries. The shift to electric vehicles in the automotive sector will lead to exponential growth in the demand for batteries by EVs and place further constraints on battery availability and the minerals necessary to manufacture them.[12]

The flip side to this argument is that increased production of batteries will lead to economies of scale. Manufacturing capacity for lithium-ion batteries is expected to increase more than five-fold to approximately 5,500 gigawatt-hours (GWh) between 2021 and 2030.[13] Notwithstanding the recent increases in the installed cost of battery energy storage systems, the cost of utility-scale energy storage systems is projected to decline roughly 40%.[14]

The key takeaway: The energy storage industry is encountering near-term headwinds but the long-term outlook remains bright. As a result of these headwinds, the pace of installations has slowed relative to prior projections. That said, the general view is that these near-term issues will be resolved and the industry will continue to grow, with projected installations of more than 400 gigawatts (GW) globally by 2030, which is 15 times the level of the market at the end of 2021.

Contracting for Energy Storage

The majority of new energy storage installations over the last decade have been in front-of-the-meter, utility-scale energy storage projects that will be developed and constructed pursuant to procurement contracts entered into between project developers (or a special-purpose project company owned by such developers) and the utilities.[15] These contracts allocate the risks of project development, construction, and performance between the parties and include the price that will be paid by the utility for the resource or energy storage services provided. There are three key types of procurement contracts—power purchase agreements (PPAs) or energy storage services agreements; engineering, procurement, and construction (EPC) agreements; and build-transfer agreements (BTAs)—and several key risks that must be allocated between the parties.

Utilities under procurement mandates or requirements to consider storage in integrated resource planning will need to carefully consider these risks. Delays in the procurement of batteries could lead to failures to comply with regulatory mandates, or, for utilities opting to install storage as NWA in place of other system upgrades, the failure to implement necessary system improvements.

The same considerations apply to developers that are considering entering into procurement contracts to deliver energy storage systems. Delays and price increases may lead to an inability to deliver such projects on time or for a cost that is economical and thus lead to a risk of loss of performance security as well as reputational harm.

Power Purchase Agreements

A PPA for new resources typically covers 100% of the output of the project, including full dispatch and charging control. For standalone energy storage contracts, these are typically structured with a fixed monthly capacity payment plus some variable cost per megawatt hour (MWh) of throughput. For a combined renewables-plus-storage project, it may be structured with an energy-only price in lieu of a fixed monthly capacity payment.

While all output PPAs are the most common structure, there are other constructs that can be used. Some PPAs for new energy storage resources have been structured as capacity-only contracts in which the developer is responsible for the sale of energy and all costs associated therewith—including the costs of the required energy procured from the utility. These contracts shift the task of determining the value of the storage resource back to the developer, and developers that enter into these contracts must have a robust outlook on how the storage resource will be able to generate revenues long into the future. This task is further complicated by the evolving market rules around energy storage.

The key advantage of a PPA from the perspective of the utility is that it allows the utility to avoid any risks associated with the ownership of a project or the project’s failure to perform. If the project does not perform, the project owners will not be paid; if the failure to perform continues unabated, the utility may even be able to terminate the contract. Moreover, if the project is over budget and/or behind schedule, the developer is responsible for all incremental costs or delays, as applicable.

Another contract structure is a virtual power purchase agreement. These are oftentimes entered into by companies seeking to reduce their greenhouse gas emissions by acquiring the rights to renewable energy without actually acquiring the underlying energy and capacity, and payments are settled through financial settlements (similar to a so-called contract for differences). As companies have focused on offsetting their carbon emissions on a real-time basis, they have also sought to procure storage services (either directly or through a virtual contract) to offset their consumption of energy in real time.

Finally, a shared savings contract structure can be used, primarily for behind-the-meter (or customer-side) projects. Under these contracts, the customer shares the savings that it receives as a result of the energy storage unit with the project developer. These are primarily used if a customer is subject to high demand charges because its load at certain times is very high. For such a customer, an energy storage project may allow the customer to reduce its peak demand periods, and thus the associated demand charges, by reducing grid power consumption during its peak periods (so-called “peak shaving”). If a customer is on a time-of-use tariff, the energy storage project may also allow the customer to shift its grid power consumption to lower cost periods. Under a shared savings contract, the savings realized by the customer would be split between the customer and the project owner in a manner that is at least sufficient to compensate the project owner for its capital outlay plus some return to be agreed.

Engineering, Procurement, and Construction Agreements

Utilities may also solicit contracts to develop new generation resources that will be owned by the utility. In such an event, utilities will typically solicit bids for an EPC contract. Utilities often prefer to structure these contracts on a “full-wrap,” “turnkey,” and “fixed-price” basis.

A “full-wrap” means that the developer is responsible for warranting the performance of all subcontractors and vendors (including, in the case of a battery energy storage project, the batteries and inverters) and for completing the project in its entirety on time. The term “turnkey” means that the project will be fully completed by the developer. The developer is responsible for coordinating the activities of all the other contractors and delivering a completed project to the utility. Finally, the term “fixed-price” means that the price to be paid by the utility will be set in advance and, absent certain previously agreed-to exceptions, the developer will not be entitled to pass through any cost increases to the developer. These exceptions are becoming more heavily negotiated given some of the volatility in the battery supply market.

EPC contracts can be used by utilities to take advantage of preexisting sites that may be well situated for new generations. This is particularly true for battery energy storage, which has a relatively small footprint and can often be developed by utilities on utility-owned land that is immediately adjacent to substations and where such energy storage resources may have incremental value in terms of deferring upgrades. Such sites also may be easier for the utility to permit.

Note that under an EPC contract structure, the utility may be responsible for certain aspects of a project’s development. For example, if the project is developed on a utility-owned site, then the utility likely is responsible for any environmental conditions on the site or any change orders required as a result of subsurface discoveries below the site. In addition, the owner under an EPC contract is typically responsible for permitting a project and for interconnection-related risks. If an issue arises in connection with the construction of a project, the utility may be required to enter into a change order that may shift the risk of incremental cost or delay to the utility. These risks can be mitigated to some extent through the EPC contract itself.

The parties may also elect to enter into a construction or equipment supply agreement that does not provide a full-wrap, turnkey, and/or fixed-price solution. In such a case, the owner typically enters into separate contracts for the equipment supply and the balance of the plant. While this approach is likely to be cheaper than a traditional EPC approach, the owner will need to bear the risk of finger-pointing among the various project contractors in the event that something goes wrong and, depending on the structure of the contracts, the risk of cost overruns.

Build-Transfer Agreements

Another approach that contains some features of both a PPA and an EPC contract is a BTA. Under a BTA, the developer is responsible for all of the same things it would be responsible for under a PPA (i.e., all risks associated with the development and construction of a project). Unlike a PPA, however, once a BTA project achieves commercial operation, the developer sells the project to the utility. This provides the utility with long-term ownership but without the risks inherent in project development and construction.

However, this typically comes at a price that is higher than what the utility would pay for a comparable project under an EPC structure. Unlike a PPA, where the developer can ascribe some value to the post-PPA life of a project, under a BTA the developer has to assume that there is no upside beyond the purchase price. Thus, developers need to price all contingencies into their bids. This includes risks associated with development and construction that would be borne by the utility under an EPC contract structure. In addition, BTAs can be more difficult to negotiate than PPAs and EPC contracts because they involve combining many of the features of an EPC contract with a purchase agreement. Moreover, it is typically more difficult to obtain a change order under a build, operate, transfer (BOT) contract than under an EPC contract, which means that the parties will spend more time finalizing a detailed scope for the project.

Note that the constructs described above are not mutually exclusive. For example, a utility may offer a PPA that contains an option for the utility to purchase the project at the end of the term (or a right of first offer in the event the project will be sold or if a change of control will occur).

Oftentimes, utilities will structure solicitations for more than one type of contract. For example, a utility may ask for bidders to price both a PPA offer and an EPC and/or BTA offer. Utilities will sometimes do this to determine whether it would be cost-effective for the utility to acquire a new resource as opposed to contracting for the resource through a PPA. In the case of investor-owned utilities, such data can be useful to present to the applicable public utilities commission if the utility decides to enter contracts for utility-owned resources and seeks approval to add such assets to its rate base.

Regardless of the contract structure selected, developers will need to source equipment from their vendors that can meet whatever commitments the developers have made to their utility counterparties. Developers can use a variety of contract structures to do so and will often enter into EPC contracts and long-term service agreements with their vendors that will warrant the long-term performance of their projects.

Key Contractual Considerations

Utilities and developers will encounter many of the same issues in an energy storage solicitation as they would in any other competitive solicitation for generation-only resources, including the timing of delivery of the project, finance ability–related provisions, and the general allocation of development, construction, and operational risk related to the project. However, these negotiations will differ from negotiations for generation-only resources (whether conventional or renewable) because energy storage resources require charging and storage in addition to the discharge of energy.

In addition, energy storage oftentimes involves new and advanced technologies with a variety of use cases as both load and supply. Moreover, if the energy storage system is being paired with a renewable energy resource, whether on a hybrid or a co-located basis, then the procurement contracts will need to address issues that are relevant for both generation and energy storage. As a result, energy storage procurement negotiations involve issues and terminology that differ from those involved in the negotiation of conventional and renewable resources.

Take capacity as just one example. Both energy storage and conventional and renewable generation will have a maximum-rated power output. However, unlike for conventional and renewable generation, the capacity of an energy storage project will also be limited by the number of MW that can be used to charge the project (which amount may vary depending on the state of charge of the project) as well as the total number of MWh that can be stored. In most cases, the cost of an energy storage project will be more closely correlated to its MWh of storage capacity rather than its MW of output capacity, which is very different than conventional and renewable generation, for which the cost is typically based on the nameplate capacity in MW. As a result, energy storage negotiations will involve the consideration of new terminology (charging capacity, charging duration, storage capacity) and new issues (how quickly can the unit charge and how much energy can it store).

In many ways, storage procurement contracts incorporate certain features of both conventional and renewable generation procurement contracts. Like conventional gas-fired peaking generation, storage is typically dispatchable (in fact, this ability to be dispatched and ramp up quickly is why storage has grown as a necessary complement to intermittent renewable generation), and therefore the payment structure for energy storage PPAs typically includes some fixed cost recovery through a capacity payment. Like renewable generation, battery energy storage is a modular technology. Accordingly, we oftentimes see buy-down concepts (or options to increase the size) if the originally promised storage capacity cannot be provided (or if excess capacity is desired and is supported by land and interconnection constraints). In addition, buyers will consider the risk of serial defects and may request some sort of a serial defect warranty, particularly in the EPC and BTA contexts.

Key Terminology

The following key terms and issues are useful in the negotiation of energy storage procurement contracts.

MW and MWh: An “MW” is a unit of power and describes the instantaneous rating of power at any given moment in time. It is the equivalent of 1,000,000 watts, or 1,000 kilowatts. An “MWh” is a unit of energy and is the amount of energy equal to a single MW delivered over a period of one hour. In the context of energy storage, an MW is used to describe the amount of power that a project can either charge or discharge at any given moment in time, oftentimes referred to as the nameplate capacity in the context of conventional generation. Unlike generation-only resources, energy storage resources are also limited by their storage capacity, which is the amount of energy (typically in MWh) that the facility can store.

Accordingly, the size of an energy storage facility should typically include both a reference to its power rating (MW) and energy storage capacity (MWh), such as a 100 MW/400 MWh facility. In lieu of referring to the number of MWh that a project can store, the size may also include the duration for which the facility is capable of discharging its maximum output, such as a 100 MW – 4-hour facility. This is equivalent to a 100 MW/400 MWh facility since the facility would discharge 400 MWh over the course of four hours at its maximum discharge capability.

State of Charge: The “state of charge” (SOC) of a battery is typically expressed as a percentage of the total storage capacity of the battery that is currently being used. Certain types of batteries will degrade if they are kept at a SOC that is either too high or too low for long periods. In addition, the performance of certain batteries may vary depending on their SOC. For example, many batteries charge more slowly as they near a 100% SOC and will discharge more slowly as they near a 0% SOC. These constraints should be considered in the procurement contract and may also be addressed through overbuilding a battery.

Cycles: A battery “cycle” represents some level of charging and discharging of the battery. A “deep” or “full” cycle typically refers to a complete charge (up to ~100% SOC) and a complete discharge (back to ~0% SOC). As the name implies, a partial cycle refers to a charge/discharge that is less than the full energy storage capacity of the battery. Most batteries degrade based on the number of cycles, particularly “deep” or “full” cycles, and many procurement contracts will include limitations on the number of full cycles (or their equivalent). These limitations are also sometimes expressed in a throughput limitation. A throughput limitation is a limit on the total number of MWh that can be charged and/or discharged into or out of the battery.

For a 100 MW/400 MWh battery, a 40,000 MWh throughput limitation would be the equivalent of a 100 full-cycle limitation (assuming that the cycle limitation aggregated partial cycles). It is important to note that different battery chemistries can have different cycle lives (i.e., the number of cycles a battery can undergo during its useful life). The cycle life may be impacted by a number of factors, including ambient temperatures, SOC management, and the rate of charging and discharging.

Round-Trip Efficiency: The “round-trip efficiency” (RTE) of a storage resource is expressed as a percentage and refers to the percentage of charging energy that can be returned as discharging energy after accounting for losses during energy storage. For example, a storage resource with an RTE of 80% will return 80 MWh for every 100 MWh used to charge such storage resource. Note that the RTE can vary depending on a number of factors, including ambient temperatures, the type of storage technology being used, the duration for which energy is stored (with longer durations resulting in a decrease in the RTE due to loss of charge over time), the SOC, the rate of charging and discharging, and the number of cycles. The RTE tends to degrade over time for storage resources.

Operating Limitations: This terminology is not unique to batteries as many conventional generating resources will be subject to various operating limitations. As the name implies, these limitations restrict the operation of the facility. The reason that it is flagged here is because energy storage systems tend to have a number of operating limitations that are not relevant in the context of generation-only facilities. For example, many battery energy storage systems will include limitations on the average SOC, the number of cycles, and/or the periods of time between charging and discharge. And, of course, the operation of any energy storage resource will be subject to providing such resource with the requisite charging energy. These limitations should be reviewed carefully since they can limit the ability of the storage resource to fulfill certain use cases that may be valuable for the off-taker/owner.

Augmentation: In the context of energy storage, “augmentation” refers to the process of adding storage capacity to a project over time and is typically seen in the context of battery energy storage projects. Battery projects tend to degrade over time and augmentation can be used to restore a project to its former capabilities from an energy storage capacity standpoint. However, augmentation is not limited to this purpose and can also be used to increase the capacity of an existing resource beyond its original capabilities. In addition, augmentation can also refer to the addition of storage capabilities to a generation resource, such as wind or solar, that did not previously have any storage capabilities.

DC vs AC Coupled: AC refers to alternating current and DC refers to direct current. The electric power grid transmits electric power using an alternating current, which means that the direction of the flow of electrons alternates. The rate of this change is known as frequency and is measured in hertz (Hz) to denote the number of times in each second that the frequency alternates. The US power grid operates on an AC current at 60 Hz.

Most renewable generation (wind and solar) and battery energy storage generate direct current, meaning that the flow of electrons is in only one direction. A transformer is required to transform this DC into AC so that it can be transmitted onto the power grid. The terms “AC coupled” and “DC coupled” are used in the context of a storage facility that is coupled with a renewable energy generator. An “AC coupled project” means that energy generated by the renewable facility is first converted by inverters into AC before being used to charge the battery. On the other hand, a “DC coupled project” means that energy is transmitted as DC into the battery.

There will be important implications for a combined renewables-plus-storage project depending upon whether the project is DC coupled or AC coupled. For example, AC coupled systems are generally viewed as being simpler since the renewable energy storage can be connected separately with AC power. However, DC coupled systems can be more efficient overall since they avoid energy losses that can occur when DC is converted to AC from the renewable generator and then AC back to DC when such energy is used to charge the battery.

Grid Charging: “Grid charging” refers to the charging of the energy storage system from energy on the power grid (as opposed to a paired energy generation resource, such as wind or solar). Prior to the passage of the Inflation Reduction Act (IRA), energy storage could be eligible for investment tax credits (ITCs) if it was paired with renewable generation and subject to certain restrictions around grid charging for the first five years of operation. After the passage of the IRA, energy storage is eligible for ITCs on a standalone basis and thus the delineation between grid charging and non–grid charging may become less relevant for these projects.

Station Use: “Station use” energy refers to energy that is required for the operation of an energy generation or storage resource in order for such resource to operate. For certain types of resources the station load can be significant. In the context of energy storage, station use oftentimes must be separated from charging energy for both legal and commercial reasons. However, in certain areas—such as integrated thermal management for batteries, i.e., temperature management—the line between station use and efficiency losses can become blurred. This may have important implications for projects since charging energy is typically procured at wholesale prices (since it is intended for resale), whereas station use may need to be procured at retail prices (since it is an end use in and of itself). This can have significant economic ramifications on the project.

Co-Located and Hybrid Resources: These terms are relevant in the context of storage resources that are paired with a separate generation resource. In that context, a co-located resource refers to a project in which the storage and generation resources both have separate resource IDs and are viewed as two separate resources by the system operator. A hybrid resource on the other hand has a single resource ID and is viewed as a single integrated resource by the system operator. The treatment of a system as a co-located or hybrid resource may have important implications for how such system is interconnected, how its capacity is valued, and how it will be dispatched in market operations. System operators are continuing to evaluate different approaches as these resources proliferate throughout the grid.

Operational Considerations

Several of the operational and related matters should be considered in negotiating contracts for energy storage resources.

Degradation: Storage technologies experience different types of degradation than traditional energy generation. Traditional generation resources experience degradation in only two dimensions—output and efficiency. However, storage projects may degrade based on three other performance metrics: First, a storage resource can degrade with respect to its charging speed (i.e., how quickly a battery can be fully charged). Second, a storage resource’s storage capacity may degrade over time. Third, a storage resource can lose energy over the life of the project. Each of these aspects of performance degradation may be impacted by a variety of factors.

In the case of batteries, this includes factors such as the current state of charge, number, and depth of the cycling of the battery; ancillary services provided by the battery; operational life of the battery; and ambient conditions. As a result, the primary use cases of the battery will have a significant impact on the life of the battery and developers will want to design a battery that is best suited for a given use case. If that use case changes or is not properly understood, the battery may degrade much more quickly than anticipated by the parties. Any procurement contract will need to take these characteristics into account. For many novel technologies or new battery chemistries, the degradation profiles have not yet been fully developed so there is some element of risk.

Operating Limitations: Energy storage resources may be subject to operational constraints that do not affect traditional generation projects. For example, certain battery technologies will degrade more quickly if the state of charge is not actively managed within a certain range. In addition, batteries may be subject to limitations on the number and depth of cycles and/or provision of ancillary services (such as frequency regulations). These operating limitations are often heavily negotiated because they impact the utility’s ability to use a project. It is critical that utilities and developers consider their specific use cases when contracting for energy storage resources.

Performance Measurement and Testing: Due to the unique characteristics of energy storage resources discussed above, additional performance measurements may be required to adequately judge a project. For example, in addition to the metrics that are typically applied to generation, the performance of energy storage resources also may need to be measured for charging time, charging rate, round-trip efficiency, and self-discharge.

Each of these various performance measurements may need to be separately tested. Such testing may need to occur on a periodic basis or solely in connection with the commissioning of a project. The scope and level of performance testing will have important implications through the procurement contracts, including as conditions to substantial completion for BTA and EPC agreements and as events of default under PPAs. If a long-term services agreement (LTSA) is entered into in connection with a BTA or EPC (some owners may require that the parties enter into an LTSA as a condition of the underlying BTA or EPC), the performance requirements may also be incorporated therein.

Technology Risk: Certain types of energy storage technology are well developed (such as pumped hydro storage, which basically involves pumping water up a hill), while others are on the cutting edge (many types of batteries and flywheels). For any project that involves technology risk, utilities will need to consider what structural protections are available and can be implemented in an economically feasible manner to protect the utility from such risk. These structural protections can include anything from traditional credit support from the developer (letter of credit and guaranties) to back-to-back warranties from key vendors (such as battery and inverter manufacturers). In addition, contracting parties may negotiate long-term service arrangements up front to shift operational risks back to the developer.

Safety: Minimum safety and operating requirements are common considerations for energy projects. Energy storage resources present additional safety concerns given their unique technological profiles. For battery storage technologies in particular, safety requirements should adequately address fire risks. Battery fires for utility-scale systems can be especially dangerous, and those concerns are only compounded as battery chemistries evolve to incorporate higher energy densities and operate at higher temperatures. Several private organizations offer codes and minimum standards for various energy storage technologies that address installation, fire hazards, emergency response, and other safety-related factors. Some states, such as New York, have developed safety guidelines and checklists for battery storage project installations (commercial and residential). Periodic testing and safety compliance inspections may be prudent depending on the project’s technology, use profile, and ambient surroundings.

Combined Storage Projects: Projects that combine an energy storage resource (oftentimes a battery) with another energy resource (oftentimes wind or solar) present unique challenges. Energy storage can serve a myriad of functions when paired with another resource, including energy storage combined with natural gas resources to provide “spinning reserve” ancillary services, energy storage that is paired with a large solar project on an island to provide ramping capabilities, and large energy storage resources that are paired with renewable energy to provide load shifting and “peak” energy, to name a few. Each of these functions will require a customized procurement. In addition, the parties will need to consider how the solar and battery are coupled (on either a DC or an AC basis), which will affect round-trip efficiency losses as the energy is transmitted across various inverters. Finally, the parties will need to consider how to allocate value as between the solar array and battery energy storage system.

Key Finance-ability Provisions: Energy storage resources may also be financed on a nonrecourse basis and, like any other project financed in such manner, will need to address issues upon which nonrecourse lenders will focus, including assignment, events of default, performance requirements, key dates, and collateral. We discuss these in detail in Project Financing and Energy Storage: Risks and Revenue.

IRA and ITCs for Standalone Energy Storage: The Inflation Reduction Act makes standalone energy resources eligible for investment tax credits, subject to compliance with certain requirements. In addition, the IRA contains a number of incentives or “adders” based on various criteria, including for projects that use prevailing wage and certain apprenticeship standards, are constructing or using materials that meet domestic content rules, and are located in disadvantaged communities, among other standards. We discuss these in more detail in New Tax Credits and Monetization Opportunities for Energy Storage Have the Chance to Revolutionize the Industry.

Changes in Law: Energy storage procurement contracts must also take into account the ever-evolving suite of laws and regulations applicable to energy storage projects. On the supply side, as noted above, the Uyghur Forced Labor Prevention Act may limit the ability to import equipment required for battery energy storage projects and the risks of any such limitations should be considered in any procurement contract. In addition, the value of energy storage resources to off-takers can be based on the ability of the energy storage resource to provide certain products to the grid, such as energy, capacity, and ancillary services.

If the rules around the requirements to provide these products changes, then the ability of energy storage to deliver these products, and hence the value of the energy storage resource, may also change, and the risks of these changes should be properly allocated by the parties. By way of example, certain transmission tariffs provide that the maximum capacity of a resource is capped by the amount that such resource can discharge on a continuous basis for four hours. However, if the rule changes and the time requirement is increased to eight hours, then this will effectively halve the amount of capacity that such resource can provide. Many procurement contracts will cap the costs that the project developer is required to bear as a result of a change in law.

How each of these issues is addressed will vary depending on the structure of the procurement (i.e., PPA, EPC, or BOT). In each case, there are a number of different options and alternatives.

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