Anyone developing a battery energy storage project should be
prepared to address two main issues.
The first, and the topic of an earlier article, is the general
contracting structure. Developers of battery energy storage system,
or BESS, projects are using a multi-contractor, split-scope
contracting structure instead of the more traditional
single-contractor, turnkey approach. (See “Battery
Purchase Contracts” in the December 2021
NewsWire.)
The second topic, and the focus of this article, is key pitfalls
to avoid when negotiating specific contracts.
There are three such pitfalls: failure to use the correct
structure for agreements, failure to secure warranties to maximize
protection for the project owner, and failure to negotiate a fair
price adjustment mechanism that protects the project owner while
minimizing contingency pricing by the equipment supplier.
Agreement Structure
How the procurement agreement is structured is important.
Suppliers will often attempt to structure agreements to pass
risk to the developer. Some suppliers may separate projects into
individual orders to limit liability with respect to individual
projects. Many suppliers propose shipment of equipment “ex
works” at the supplier’s factory, which places risk of
loss during shipment and import tariff risk on the developer.
This creates a heightened potential for disputes after warranty
claims, with suppliers claiming defects occurred after the
developer picked up the equipment at the factory.
Other suppliers have moved away from firm pricing and ask for
price adjustments, including for key material costs or shipping
costs.
While suppliers generally accept liquidated damages for delivery
delays, many resist liquidated damages tied to final completion of
the project and commissioning of the supplied equipment. This can
place the developer in a bind if the BESS arrives on site but is
not able to be appropriately commissioned, either due to warranty
claims or unresponsiveness of the supplier’s operations and
maintenance personnel.
For developers who are developing multiple projects, whether
simultaneously or sequentially, it can help to structure the
procurement agreement as a “master agreement” under which
individual purchase orders are issued. The master agreement has
general terms that apply to all of the purchase orders. More
tailored terms applying to specific projects go in the purchase
orders.
This structure helps minimize the risk of having to reopen
negotiations for each project and allows for a faster order
process. It is not unusual to see developers negotiate master
agreements with several potential battery suppliers, allowing them
to decide later how many orders to place with each. Any subsequent
request to suppliers for proposals will then be issued with the
expectation that the master agreement will govern for the purchase
orders.
This approach saves time later. The later negotiation of
purchase orders focuses on price and schedule rather than legal
boilerplate.
Developers using a master agreement structure should consider
which entities to use for contracting.
The master agreement is usually signed by a general procurement
or development company high up the ownership chain. Individual
purchase orders are then executed by special-purpose project
companies. These can take the form of “daughter
contracts” that are considered to incorporate the general
terms in the master agreement. Where shorter-form purchase
agreements are used, the master agreement should state clearly that
each purchase order is a “several” and separate agreement
that is considered to incorporate the terms of the master
agreement.
The master agreement should allow free assignment of both the
master agreement and purchase orders to allow the developer to
restructure, finance and sell projects later.
Anyone using a master agreement structure should consider
whether a default under one purchase order should be considered a
cross default of all the purchase orders.
For a developer, a material breach by a supplier under one
purchase order may be a sign of execution issues and a reason to
end the relationship with the supplier. While a full-scale
termination may seem drastic for a developer, a cross-default
provision gives the developer leverage to ensure smaller orders are
not dropped or de-prioritized by the supplier after an increase in
costs of raw materials, components or shipping. This helps ensure a
supplier maintains a “whole of relationship” approach to
project delivery.
Developers should expect suppliers to request a quid pro quo
cross-default termination right in exchange for giving the
developer such a right.
While some developers may be willing to accept this, given that
their primary obligation is merely to pay the undisputed contract
price, it is important to consider any financing of projects that
might occur. Lenders are usually reluctant to accept that a
developer default on a different project can cause a default on the
financed project. For portfolio financings this may be acceptable
where the master agreement and all projects for which purchase
orders were issued are covered under a single portfolio
financing.
Just because a developer has multiple projects does not mean
that a master agreement structure is the right course. For example,
if a developer has a number of projects supplying battery storage
under a single offtake contract, then it might prefer a single
battery procurement contract aggregating liability in the
collective project, given that liability under the offtake contract
may be connected for failure to develop the collective project.
Alternatively, if a developer plans to finance projects
individually, then it would be best to avoid cross default
provisions.
Warranty
The supplier’s warranty is a key provision of any equipment
procurement agreement.
For BESS projects, battery cell degradation is inevitable, but a
proper warranty helps ensure that this can be modeled and
augmentations planned.
A BESS warranty should include performance testing as part of
the commissioning process.
It should include a capacity and degradation guarantee, a
round-trip efficiency guarantee and an availability guarantee.
Depending on the type of project and the business model it
supports, there may be other guarantees as well, such as for
response time, for ramp rate and settling time and for
signal-following accuracy.
Warranty testing should be performed as part of annual
maintenance, but developers often also ask for the flexibility to
require interim testing as necessary to troubleshoot the system. It
is a negotiated point whether developer or supplier is responsible
for performance of the annual warranty testing, generally dependent
on whether the supplier is also providing services under a
long-term services agreement or LTSA.
The supplier’s primary obligation for failure to meet any
warranty guarantees should be a make-whole payment or an obligation
to repair or replace the equipment so that it performs as
guaranteed. Developers can negotiate a liquidated damages amount
for underperformance or downtime. Some suppliers try to include a
buy-down right in place of a make-whole payment. Developers should
carefully consider the sizing and impact of any buy-down right on
the project model. A buy down will not fully compensate a developer
for lost revenue associated with the lost capacity.
Many suppliers try to put the BESS warranty terms in a separate
document or fold them into the LTSA between the project company and
the supplier’s operations affiliate. Neither approach is ideal.
A separate warranty may include different choice of law, assignment
or dispute resolution provisions from, or otherwise have
conflicting terms compared to, the master procurement agreement,
which can cause material issues with respect to enforcement or when
trying to finance the project.
A warranty under an LTSA may be subject to a lower liability cap
equal to the annual fee, rather than the actual purchase price of
the BESS equipment. The liability cap can be eroded by mixing
liabilities for equipment defects with liabilities for a services
warranty. Putting the warranty in the LTSA also ties the existence
of the warranty to the use of a single O&M provider. In the
event the supplier fails to provide an appropriate level of service
under the LTSA, a developer may be forced to choose between
continuing its warranty and continuing to accept substandard LTSA
performance.
Many suppliers attempt to structure procurement agreements so
that, following delivery and a short inspection period, any defects
in the BESS equipment will be considered automatically to have
triggered a warranty claim.
If batteries are shipping on a rolling basis, rather than in one
single shipment, this may leave a developer paying additional
milestone payments for equipment that it is unable to install due
to defects discovered after delivery. Developers should consider
tying a sizable milestone payment to commissioning completion and
requiring that any defects found before or during commissioning are
remedied expediently. This formulation motivates suppliers to test
BESS equipment at the factory prior to shipment and to address any
issues before shipping.
Liquidated damages may be tied to the commissioning completion
milestone to help offset costs incurred by the developer under its
construction or offtake agreements due to a delay in completing the
project.
Another item to consider is the use case for the BESS equipment.
Each developer has a different intended use for the batteries,
including charging and discharging frequency and whether batteries
will be part of a standalone storage project or a larger renewable
energy facility. Many suppliers offer a
“one-size-fits-all” warranty and testing regime that will
not take a developer’s use case into account.
In order to ensure a developer is purchasing equipment that will
function as modeled, the use case should be included in the
technical specifications in the procurement agreement. Developers
should carefully review the supplier’s testing and
commissioning regime to ensure it aligns with the use case. Long
rest periods between charges or reduced charging and discharging
rates are commonly included in a testing regime, which leaves the
developer with a BESS that passes commissioning and warranty
testing, but subsequently fails to perform in the field.
A commonly-included, but under-negotiated, provision of any
warranty is the exclusion events where the warranty does not
apply.
Exclusion events include failure to comply with supplier
recommendations or documentation, including any updates issued
after the date of purchase. Developers must be able to plan for the
long-term operation of projects. Any parameters for storage,
installation, operation and maintenance of the equipment should be
attached to the procurement agreement. Later updates to the
operating parameters could allow a supplier to fix a defect by
limiting the operating parameters of the equipment and destroying
the developer’s use case and the project model.
Suppliers commonly attempt to limit the warranty to performance
of operations and maintenance services by a supplier affiliate.
This can handcuff the warranty to continued use of a specific
O&M provider. It is better to have the warranty continue after
a change in operator as long as developer complies with the
operations and maintenance manuals provided by supplier.
It is fair for suppliers to exclude any damage caused by a
developer’s improper installation or operation of the
equipment. However, a developer should ensure that these provisions
do not overly limit the developer’s ability to upgrade, assign
or move the equipment without permission from the supplier. The
developer should negotiate to ensure the agreement works for its
use case and allows flexibility to operate, maintain and finance
the project.
Price Adjustment
Developers should negotiate a fair price adjustment mechanism
that protects the owner while minimizing contingency pricing by the
equipment supplier.
Hard-nosed negotiation rejecting price change for low-risk or
reasonable requests by the supplier may offer limited protection
for developers while drastically increasing the initial price and
delivery schedule offered by suppliers.
The following mechanisms are key negotiation points for a
developer procuring a BESS.
The developer should retain flexibility to adjust the delivery
schedule for the procured equipment. Many procurement agreements
are signed more than a year in advance of anticipated delivery. In
the interim period, construction, interconnection or other
development issues may arise that require a developer to push back
the delivery date or to reallocate equipment to other projects. It
is best to negotiate an adjustment mechanism up front. This may
include a grace period for storage at the supplier’s factory
prior to shipment or storage at the port of entry without a price
adjustment.
Some developers offer to cover cost and expenses to use the
supplier’s third party storage after the grace period has run.
Developers should ensure that risk of loss and the warranty start
date are not affected by this storage, but should be prepared to
negotiate degradation for extended storage.
Over the past two years, force majeure definitions have
continued to evolve to account for both COVID and shipping
risks.
The arguments for not excusing COVID delays are that two years
into the pandemic, suppliers should have contingencies in place to
limit the impact of COVID that are priced into the initial order.
However, many suppliers are quick to point out that COVID continues
to evolve and the risks are ongoing. We also see suppliers have
begun to insert clauses into force majeure definitions allowing for
relief for delays in shipping, including port congestion or
closure.
A developer may placate suppliers by offering limited force
majeure relief for unforeseeable, direct impacts of COVID that
occur after signing the individual purchase order, subject always
to a supplier obligation to mitigate such impacts. This might
include relief in certain limited circumstances for port closures
or other shipment delays that meet the broad definition of force
majeure (events outside the control of both parties that occur
after the purchase order is placed).
Offering more limited COVID relief in an initial draft may be
the best way for a developer to streamline negotiation and avoid
overreaching by the supplier.
A key final category of cost relief is for developer-caused
delays.
Suppliers ask for price and schedule relief in the event a
developer acts in a manner that directly interferes with
performance of the supplier’s obligations under the contract.
However, developers should insist on certain carveouts.
A developer should always be able to exercise its rights under
the procurement agreement, including reviewing and commenting on
drawings and documents to ensure compliance with technical
specifications.
A supplier should not be granted relief for common-course
coordination with the developer’s other contractors, including
construction contractors and engineering specialists. Interfacing
during the design, delivery and commissioning of the project should
be priced into the purchase price for the BESS equipment, and
developers should avoid language allowing change for “any
impact by owner or its subcontractors” or similar
formulations. Even in the event a change is otherwise permitted, a
supplier should not be entitled to price or schedule relief if the
supplier’s actions contribute concurrently to the delay.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
