WFW has worked on a variety of BESS projects in recent years. This has involved supporting developers, lenders and investors in their analysis of the suite of key commercial contracts that are required to build, operate and generate revenue from BESS assets. We work with clients through the development phase of the applicable assets, and in processes involving the financing of, and/or M&A for, BESS assets.
There are topics that are consistent points of consideration that we come across when interpreting these BESS projects. Accordingly, we have set out below a short form summary of key questions we suggest any developer, lender or investor analyses in relation to any BESS asset. There is (of course) a much longer list of key points to diligence, but the below gives a flavour of the key analysis points.
The points below are tailored to UK BESS projects that we have worked on, though we are also active in BESS projects across Europe, Asia and beyond and consider this article instructive for all participants in the BESS market.
Offtake strategy
Core revenue structure
- Does the BESS project have an optimisation agreement, an optimisation agreement with a floor or a tolling agreement in place?
- Does the BESS project have a capacity market agreement in place?
Detailed structuring considerations
- Will the BESS project hold:
- one key revenue contract for the entire BESS asset capacity?; or
- multiple revenue contracts across sections of the BESS asset capacity? An example would be one BESS asset with revenue contracting split between:
- 40% of capacity being optimised with a floor;
- 40% of capacity being tolled; and
- 20% of capacity being fully merchant.
- If there is only one key revenue contract, will this be an internally split revenue contract (e.g. just one offtaker but 40% of capacity being tolled, 60% of capacity being optimised under the same agreement)?
- if split, how is the developer providing protection for a termination scenario for a failure of the offtaker to deliver on its optimisation obligations, given that this will also result in the toll falling away?; and
- if split, does the BMU structure of the BESS asset facilitate this?
- If an optimisation and revenue floor structure, has the developer considered splitting out the optimisation contract and the revenue floor contract between two different providers (i.e. one optimiser and one revenue floor provider)?
- Note that the revenue floor provider will need to be creditworthy.
- If this approach is taken, how will the interface risk between the optimiser and the revenue floor provider be managed (particularly in a scenario where the optimiser operates in a way that invalidates the revenue floor payment)?
- Has the developer considered whether the applicable optimiser/toller will insist on using its existing form of contract, or whether the developer can negotiate from its own form?
- Is the developer considering entering into day-ahead swaps/forwards as part of its revenue stack? How is the merchant exposure from this approach being backed off?
Detailed mechanical considerations
- What is the length of the revenue contract? If short term, will alternatives/replacements be readily available to cover the lifetime of the BESS asset? Is the developer building out its internal optimisation service capability?
- If an optimisation agreement, does the contract have robust benchmarking protections that allow the developer to terminate where there is a consistent underperformance by the optimiser against market? What is the benchmark against and is there a reasonable threshold for ‘market standard’ performance?
- If a floor agreement, how robust are the clawback protections for the floor provider (in scenarios where it is required to make floor payments)? Does the floor provider take any downside risk?
Operational Parameters
- Is there a clear requirement on the optimiser/toller to comply with specified Operational Parameters?
- Are the Operational Parameters aligned with the events that invalidate the BESS warranties/performance guarantees?
- What liabilities accrue to the optimiser/toller for breach of the Operational Parameters? Can the developer terminate if there is consistent breach?
- Is there misalignment between the optimiser or the toller/developer/lenders/a potential new investor in terms of short-term profit? If so, is there a risk of overcycling/degradation and how is the backed off?
- Has a technical advisor reviewed the Operational Parameters?
Construction contracting strategy
- Will a full wrap EPC contract be entered into? Or will the structure be multicontract?
- If multicontract, will it just be a BESS module supplier and a balance of plant contractor? Or will the balance of plant be broken down further into civils works, electrical works etc.?
- Will the construction contracts be based on an industry standard construction contract template? In its choice of BESS module supplier, has the developer considered that several BESS module suppliers will expect negotiation to be based on their standard form?
Chinese supply chain
- If a multicontract structure, is the BESS module supplier a Chinese counterparty (as is typical in BESS, in line with solar PV)?
- How much of the contract price does the Chinese BESS module supplier expect to be paid up front? Is the Chinese BESS module supplier seeking payment by way of letter of credit?
- What performance security is being provided:
- are the bonds being issued by international banks? What branch in the relevant bank is issuing the bond?;
- will a parent company guarantee be provided? If so, has a legal opinion been delivered in relation to this? Or, as a separate construct, will the Topco enter into the BESS module supply contract as a party on a joint and several basis to backstop the obligations?; and
- are there protections to allow the developer/lenders to diligence the BESS module manufacturing facility? Are there protections on forced labour, the supply chain and traceability?
BESS Warranties
- How long do the BESS warranties being provided by the BESS module supplier survive for? Are these BESS warranties extendable? If a project financing, will the BESS warranties cover the tenor of the debt?
- Do the BESS warranties cover roundtrip efficiency, useable energy and availability of the BESS asset?
- What are the scenarios that invalidate, or provided an ‘excuse event’ in respect of, the warranty and performance guarantee protections? Are these aligned with the scenarios in which the developer is protected from performance in the revenue contracts?
- What liability caps apply to the BESS warranties?
- On termination of the BESS module supply contract/long-term service contract:
- if the contract is with the original BESS module supplier, will the BESS warranties be provided to the developer on termination; or
- if the contract is with an EPC Contractor, will the BESS warranties from the original equipment manufacturer (i.e. the BESS module supplier) be assigned to the developer on termination?
- If not, will an EPC contractor (or similar) provide separate long-term warranties on termination that the EPC contractor will stand behind?
- If a project financing, are the BESS warranties assignable to lenders? There are certain battery suppliers who refuse such assignment language, so protections will be required on this point.
- Has a technical advisor reviewed the BESS warranties?
Operational contracting strategy
- Has the developer considered its operational contracting strategy? Will it seek a full wrap O&M? Or a mixture of long-term services from the BESS supplier and balance of plant O&M? Will the developer cover any of the O&M services itself in-house?
- See above on the BESS warranties that will be an important part of the analysis in respect of protections that survive through the operational phase of the asset.
Performance security
Offtake Performance Security
- What credit support is provided by the offtaker? What is the creditworthiness of the contracting entity? Is the credit support in the form of a parent company guarantee or a letter of credit, and is the applicable issuer creditworthy? Will the parent company guarantee/letter of credit be capped? In what scenarios can the credit support be called on?
- What credit support is provided by the developer? Is this in the form of a letter of credit? Will the letter of credit be capped?
- What is the overall limit on liability for both offtaker and developer under the offtake contract? Is this liability cap different for loss or damage to physical property and other circumstances?
Construction and Operational Performance Security
- What are the levels of performance security being provided by the construction and operational supply chain?
- Are any bonds being offered on-demand or subject to conditions? Who is the proposed bond issuer and are they creditworthy?
- What is the creditworthiness of the contracting entity? If insufficient, will a parent company guarantee be provided by a creditworthy entity higher up the chain in the applicable group?
- What is the overall liability cap in the construction and operational contracts?
- See above in relation to specific queries in relation to the performance security delivered by a Chinese supplier.
Other current considerations
- Change in law: how is a change in law risk managed in the contracting structure? Does a change in law reopen offtake pricing, and what are the thresholds for this?
- Change in tariffs: has the developer accepted a level of tariff risk in its supply chain? If so, does the developer have protection for a scenario where tariffs escalate to a level where the project becomes uneconomical?
- Change in raw materials pricing: does the contracting structure contain price reopeners or indexation in relation to pricing of materials (for example, lithium pricing)? Is the proposal from the developer to enter into arrangements to hedge this risk?
Discuss with the team
The BESS market is active and rapidly changing.
If you would like to discuss any of these queries and relevant mitigants further, please do reach out to the co-authors of this article, or your regular contact at WFW.
