Managing Performance Risk in Battery Energy Storage Projects

Battery energy storage projects present performance considerations that differ materially from those associated with conventional electric power generation. Operating limitations, degradation profiles, and cycling constraints directly affect a project's ability to meet contractual commitments and maintain long-term economic value. As a result, performance-related provisions are often among the most heavily negotiated terms in battery energy storage agreements.

This third article in our four-part series examines the key performance-related contractual provisions commonly included in battery energy storage agreements, with a focus on how these provisions allocate operational risk and protect project value throughout the operating life of the facility.

Our prior articles explored market developments shaping battery energy storage deployment and the contractual models used to procure storage products and services.

Performance Metrics Unique to Battery Storage

While many of the key contractual considerations applicable to storage agreements resemble those used for more conventional generation technologies, there are nuances to storage (e.g., charging and discharging of energy) that create unique drafting and negotiation considerations. For purposes of this article, we have concentrated on key contractual provisions in agreements for standalone storage.

Storage Capacity

The term "capacity" refers to the ability of a generation unit to generate energy and is measured in megawatts (MWs). The term "energy" refers to the actual energy output of a generation facility and is measured in kilowatt hours (KWh) or megawatt hours (MWh). While traditional technology generation units are rated by their "nameplate" capacity, storage units are rated by their "storage capacity," which is defined as the amount of energy measured in MWh that the unit can store.

For example, a battery storage facility with a capacity of 5 MW can store 20 MWh if charged for four hours (which is the limited duration that the unit can charge or discharge). Storage agreements often contain provisions for the periodic testing of the battery energy storage system (BESS) capacity capability with related contractual remedies (e.g., pricing adjustments) for the developer's failure to satisfy testing thresholds.

State of Charge

State of charge (SOC), typically expressed as a percentage, refers to the percentage of the total storage capacity of the unit that is being used. A SOC of 50% during a charging phase of a unit indicates that 50% of the unit's storage capacity has been achieved, leaving another 50% of available charging capacity. The SOC of a unit can vary based on several variables, with charging times slowing as the unit moves to a SOC of 100%.

Round-Trip Efficiency

Round-trip efficiency (RTE) measures the percentage of energy discharged relative to the energy used to charge the unit. For example, a 5 MW unit with an RTE of 85% designates that the unit will return (discharge) 16 MWh for every 20 MWh of charging energy used. As with cycle parameters (see below), RTE will vary with several factors, including ambient temperature and battery chemistry. Storage agreements will typically establish RTE requirements at between 85% and 95%.

Cycle Limitations

A "cycle" refers to the full charge and discharge of a unit. Typically, storage agreements will establish a limit as to how many full cycles a unit can be directed to undertake in a single day and/or over longer durations (e.g., annually). For example, a storage unit with a capacity of 5 MW, a charge duration of four hours, and a cycle limitation of one per day, will be permitted (or required) to charge 20 MWh and discharge 20 MWh every day. It should be noted that battery life degrades with the number of cycles the unit is directed to perform. Degradation also will adversely affect the RTE over time.

Operating Limitations

Storage agreements customarily reflect an array of operating limitations and characteristics that both the developer and the off-taker need to consider and satisfy in order to preserve the life cycle of the facility. For example, a storage agreement will often reflect specifications and limitations regarding: (a) storage capacity specifications; (b) SOC limitations; (c) minimum and maximum daily cycle limitations; (d) rate of charge limits; and (e) RTE specifications. In certain circumstances (e.g., RTE), these operating limitations are specified for each year of the term of the storage agreement as they will vary over time.

Augmentation

As noted, storage facilities, like other batteries, degrade over time, thereby progressively depleting the facility's storage capacity. Developers typically adopt one of two methods to "augment" the facility's capacity: (a) over-building the facility's storage capacity to address degradation; or (b) periodically adding to the facility's storage capacity over the term of the storage agreement by adding batteries.

Key considerations in helping developers decide which approach to adopt include: (a) the current price of battery equipment versus the anticipated price over the term of the storage agreement; (b) the current cost of over-building versus adding battery units later, the latter of which is generally less expensive; (c) whether the added capacity will be treated as a modification of the original battery or a new retrofitted battery under the 80/20 rule for purposes of the investment tax credit; and (d) whether the storage agreement reflects capacity commitments by the seller that are applicable starting in year one of the agreement. On balance, developers will rely on future augmentation if equipment prices are forecast to decrease and capacity commitments are manageable over time.

Availability

Storage agreements usually reflect various tiers of performance guarantees that require the storage facility to achieve levels of availability over the course of various periods. As an example, a storage agreement could require both a monthly availability test and an availability "event of default" that is triggered by a prolonged period (e.g., consecutive months) during which the storage facility's availability is on average below a stated threshold.

With respect to monthly availability guarantees, the storage facility owner is often required to maintain a high percentage (e.g., 98%) of availability. The definition of "storage availability" could include the number of hours that the facility is either partially or fully available divided by the total number of hours in the billing period. Often, the denominator will not include "excused output" (e.g., those hours during which the storage unit was not available due to factors beyond the control of the storage unit owner) or periods in which the unit's unavailability is by mutual consent (e.g., scheduled outage).

Failure to meet monthly availability thresholds generally results in liability to the off-taker for liquidated damages, often calculated based on an energy rate or proxy rate multiplied by the number of hours of unavailable charging or discharging capacity. For the "event of default" availability trigger, a customary remedy available to the off-taker is the option, but not the obligation, to terminate the storage agreement and assert a claim for damages against the storage unit owners. Many storage agreements also contain a "termination payment" (either a stated amount or a formula) that is payable to the off-taker.

Implications for Risk Allocation and Long-Term Project Value

Performance-related assumptions and operating limitations play a central role in determining whether a battery energy storage project can satisfy its contractual commitments over time. Metrics such as capacity, SOC, RTE, and cycle limits, together with degradation management and availability guarantees, directly affect risk allocation and long-term project value if not carefully negotiated at the contracting stage.

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In the next article in our series, we examine the federal, regional, and state regulatory frameworks that govern the operation of battery energy storage projects, including market participation requirements, reliability obligations, and siting and permitting considerations. 

If you have questions about performance-related contractual provisions or how these issues are typically addressed in battery energy storage agreements, please contact the authors of this series.