Structuring Battery Energy Storage Agreements

As battery energy storage deployment accelerates, project participants are increasingly relying on a limited set of commercial and contractual structures to define how storage capacity is procured, how operational control is exercised, and how construction and operational risks are allocated among counterparties. While these structures share common features, their practical implications can vary significantly depending on project configuration, market participation, and performance expectations.

This second article in our four-part series examines the primary contractual models used to procure products and services from battery energy storage systems, focusing on how electric power purchase agreements, tolling arrangements, and construction contracts allocate risk among developers, off-takers, and third-party contractors.

For an overview of the market, cost, and policy trends driving the growth of battery energy storage deployment, see Part 1 of our series Market Developments Shaping Battery Energy Storage Projects.

Core Contract Models for Standalone Battery Storage

There are two principal agreement models for the procurement of storage products and services from a battery energy storage system (BESS): electric power purchase agreements and tolling agreements. Each model reflects a different approach to defining the products sold and allocating operational control, market exposure, and project risk.

Power Purchase Agreement

Under the power purchase agreement (PPA) model, the BESS developer and the off-taker enter into a PPA for the sale of one or more products and/or services produced by, or made available from, the BESS. The most common PPA construct involves the off-taker making a fixed monthly payment to the BESS developer in exchange for a designated menu of products (e.g., capacity value attributable to the BESS, plus environmental attributes).

In this structure, the risk of selling other products and services (e.g., electric energy) and deriving related revenue remains with the BESS developer.

A growing variation involves hybrid photovoltaic (PV)/BESS facilities, where the BESS developer has flexibility to manage the output of the hybrid facility to optimize its contribution to the off-taker's or the grid's load profile.

Tolling Agreement

Under a tolling agreement construct, the off-taker acquires rights to specified products produced by the BESS as well as the right to direct the charging and discharging of the BESS in accordance with defined operating parameters (e.g., daily cycling limits).

Both PPA and tolling agreement structures typically allocate significant construction and operational risks to the BESS developer. These agreements often include strict construction and commercial operation milestones along with specified liquidated damages (secured with collateral) if such milestones are not met.

Construction Agreements and Risk Allocation

Whenever possible, the project developer allocates construction risk to a third-party contractor through an engineering, procurement, and construction (EPC) agreement or a build transfer agreement. In most cases, the EPC contractor is best positioned to assume risks associated with construction delays, cost overruns, and workmanship-related performance issues.

This allocation of risk typically includes construction and procurement risks for equipment sourced by the EPC contractor. By contrast, procurement risk for equipment sourced directly by the project developer from the original equipment manufacturer (OEM) remains with the project developer. These risks may include requirements related to qualification for the investment tax credit, such as domestic sourcing of components, payment of prevailing wages, and use of qualified apprentices.

The OEM typically provides performance guarantees under the supply agreement and a long-term service agreement.

The following are common examples of EPC agreement structures for storage projects:

• Structure One: The project developer purchases the battery storage system directly from the OEM and hires an unrelated EPC contractor to install it, with the OEM commissioning the system during installation. In this scenario, the EPC contractor does not provide a full equipment wrap. The EPC contractor warrants installation and workmanship, while the battery supplier provides the equipment warranty directly. This is a common structure.
• Structure Two: The project developer enters into a turnkey, full-wrap EPC agreement with a battery storage integrator. This structure has become less common as OEMs increasingly provide integrated energy storage systems, reducing the need for separate storage integrators.
• Structure Three: The project developer enters into a turnkey, full-wrap EPC agreement directly with the battery storage OEM. This structure is less common, as most OEMs do not provide EPC services.

Implications for Project Structuring and Risk Allocation

The choice among PPA, tolling, and related construction structures plays a central role in determining how commercial and operational risk is allocated over the life of a battery energy storage project. While these models share common features, their implications can vary significantly depending on project configuration, market conditions, unanticipated events, and performance expectations.

In the next article in our four-part series, we examine performance-related contractual provisions governing how battery energy storage projects operate in practice, including key performance metrics, operating limitations, degradation management, and availability guarantees.

If you have questions about structuring battery energy storage agreements or how these contract models may apply to specific projects, please contact the authors of this series.