Battery Energy Storage Supply Service Agreements: Contractual and Regulatory Considerations
Battery energy storage has become a critical component of the U.S. electric power sector, supporting reliability, enabling renewable integration, and responding to growing load demands. As deployment accelerates, battery energy storage projects are increasingly shaped not only by technology and market forces, but by how commercial arrangements are structured and how regulatory requirements are addressed across jurisdictions.
This four-part series examines the contractual and regulatory considerations that commonly arise in the development and operation of standalone and hybrid battery energy storage projects. Drawing on current market trends and deal structures, the series is intended to provide a practical framework for understanding how storage projects are brought to market, how risk is allocated between developers and off-takers, and how performance and regulatory obligations are managed over the life of a project.
In this first article, we provide an overview of key market developments influencing battery energy storage deployment today, including growth trends, hybrid project models, cost trajectories, and emerging tax and supply chain considerations.
Rapid Growth in Utility-Scale and Hybrid Storage
As global energy demand continues to surge, with demand for electricity growing particularly rapidly, global demand for energy storage is expected to follow suit with a compound annual growth rate of 14.7% through 2035.
In the U.S., utility-scale battery storage capacity increased by 66% in 2024. Despite this growth, battery storage makes up only 2% of the 1,230 GW of total utility-scale generating capacity in the U.S.
Much of this growth is comprised of hybrid storage—usually, solar photovoltaic arrays paired with battery storage or wind turbines paired with the same—as opposed to standalone battery storage, in order to take advantage of economies of scale and mitigate the variability and intermittency in solar and wind installations, as documented by Lawrence Berkeley National Laboratory.
Hybrid battery storage development was also driven by U.S. energy policy that provided federal tax incentives for storage paired with solar or wind facilities, while standalone battery storage facilities were ineligible for federal tax credits until the enactment of the IRA.
Regional Deployment and Grid-Driven Demand
Texas, California, and Arizona lead the way in utility-scale battery storage installations in the U.S. The growth of hyperscale data centers and other large load installations has led to increased procurement of energy storage facilities by vertically-integrated utilities like Southern Company and Florida Power & Light, driving increased battery storage installation forecasts for states like Florida and Georgia.
Market reforms implemented by regional grid operators, such as the Southwest Power Pool (SPP), have provided enhanced interconnection queue processes, interconnection services, and market participation rules to facilitate the integration of energy storage resources.
Cost Trends, Incentives, and Supply Chain Constraints
In addition to positive development figures and regulatory reforms, the costs of battery energy storage technology continue to trend downward, and the industry expects to see positive market forces and regulatory reforms for the deployment of hybrid and standalone energy storage in the years to come.
Despite the positive outlook, growth may be tempered by uncertainty over the ability of U.S. developers to obtain the necessary parts and equipment to install battery facilities that comply with the new U.S. prohibited foreign entity rules (commonly referred to as the FEOC rules), which affect eligibility for the investment tax credit. For projects beginning construction in 2026 or later, battery storage projects seeking to qualify for the investment tax credit will need to comply with the FEOC ownership and "material assistance" sourcing requirements. These requirements could lead to shortages and supply chain bottlenecks, resulting in higher production costs.
DWT has previously described how FEOC considerations will limit tax credit eligibility relevant to battery energy storage projects. For additional background on these issues, please see the related articles regarding congressional action narrowing clean energy tax credits, executive actions affecting wind and solar project tax credit eligibility, and restrictions related to foreign entity ownership and sourcing requirements.
Implications for Contracting and Project Development
These market developments are shaping not only where and how battery energy storage projects are deployed, but also how equipment supply and construction contracts for those projects are structured. As storage continues to play a larger role in supporting reliability, managing load growth, and integrating renewable resources, project participants are increasingly focused on commercial models that allocate construction, operational, and market risk in ways that reflect these evolving dynamics.
In the next article in this series, we examine the primary contractual structures used to procure battery energy storage services, including power purchase agreements, tolling arrangements, and related construction and risk-allocation frameworks.
If you have questions about battery energy storage market trends or how these developments may affect current or proposed projects, please contact the authors of this series.