2025 Insights on Utility-Scale Energy Storage Developments and Challenges

A 2025 Update on Utility-Scale Energy Storage Procurements

As the energy storage market continues to grow rapidly, driven by record-low battery costs and strong policy support, several challenges remain on the horizon. Tariffs, shifting tax incentives, and supply chain uncertainties pose risks that could temper near-term growth. However, the increasing demand for grid reliability and the integration of renewable energy highlight the essential role of energy storage in the ongoing energy transition.

Market Overview

The utility-scale storage market experienced another year of growth, marking a second consecutive year of record-low installed costs for lithium-ion batteries. However, trade actions and tax policy changes could potentially increase costs and hinder short-term growth. Increased tariffs and the phase-out of tax credits may diminish the baseline for energy storage by 20% over the next five years, potentially slowing or even reversing growth in 2025 and 2026, though a rebound is anticipated thereafter. As the industry matures, growth rates may become harder to sustain due to the increasing size of the energy storage market itself.

The demand for storage capacity is expected to remain strong, driven by the rising integration of renewable energy and an acute need to enhance grid reliability, particularly as forecasted demand surges, partly due to the growth of artificial intelligence and data centers. In response to increased tariffs and trade actions, there may be a boost in domestic manufacturing capacity. State and market policies continue to propel growth, with California and Texas leading the market in the United States, while PJM Interconnection and other markets are also poised for expansion. Changes in interconnection policies and revenue models could further accelerate deployment, and state procurement mandates and incentives are likely to foster development nationwide. These shifts in federal and state policies will significantly affect the development, procurement, and financing of energy storage projects in the coming years.

Recent Growth

The utility-scale storage sector in the United States maintained its upward trajectory in 2024, deploying approximately 11.9 gigawatts (GW) of storage. Notably, in the third quarter of 2024, the US storage market added a remarkable 3.8 GW of energy storage—an 80% increase from the previous year. Growth is projected to continue, with more than 74 GW expected to be installed between 2024 and 2028. This surge has been fueled by the Inflation Reduction Act (IRA), which introduced significant incentives for storage, including the investment tax credit and new manufacturing credits. Continued reductions in the installed costs of lithium-ion battery packs also play a crucial role in this development, with prices falling to a record low of $115 per kilowatt-hour (kWh) in 2024, attributed to manufacturing overcapacity, economies of scale, and lower raw material costs. A further reduction of $3 per kWh is anticipated in 2025.

Potential Energy Storage Headwinds

Changes in trade and tax policies may increase costs and dampen the outlook for energy storage projects. An additional 10% tariff on goods imported from China took effect on February 4, 2025, with indications that the US administration may consider imposing higher tariffs on other foreign goods, which could further escalate energy storage costs. Additionally, an antidumping and countervailing duty (AD/CVD) petition filed with the US Department of Commerce and the US International Trade Commission alleges unfair imports of active anode material from China. If the investigation leads to the imposition of duties, it could significantly impact the costs of lithium-ion batteries and associated storage systems.

There is also concern over the potential rollback of some IRA incentives. While the specifics of any such changes remain uncertain, the risk of losing future incentives is a significant concern for project developers.

Contracting for Energy Storage

As the energy storage market grows, procurement contracts for energy storage systems must address longstanding issues. This section focuses on contracts for the sale of battery energy storage project output and the procurement of batteries for such projects. Most new energy storage installations over the past decade have occurred in front-of-the-meter utility-scale projects developed through procurement contracts between project developers and utilities. These contracts allocate risks associated with project development, construction, and performance, specifying the price the utility will pay for energy storage services.

Utilities with procurement mandates need to carefully evaluate these risks. Delays in battery procurement could result in non-compliance with regulatory mandates or hinder necessary system improvements. Developers also face risks associated with delays and price increases, which could jeopardize project timelines and costs, potentially leading to performance security losses and reputational damage.

In light of recent battery storage facility fires, developers should anticipate additional regulations related to safety, which must be factored into procurement contracts.

Key Types of Procurement Contracts

Three main types of procurement contracts are commonly utilized:

1. Power Purchase Agreements (PPAs) or Energy Storage Services Agreements
2. Engineering, Procurement, and Construction (EPC) Agreements
3. Build-Transfer Agreements (BTAs)

Developers and project owners considering self-procurement of batteries should evaluate options for contracting with manufacturers.

Power Purchase Agreements (PPAs)

PPAs for new resources typically grant the utility exclusive rights and obligations to purchase 100% of a project’s output, generally including all regulatory attributes such as resource adequacy and renewable energy credits. Many energy storage PPAs are structured as tolling arrangements, where utilities provide the necessary energy inputs. However, some PPAs for new energy storage resources have been developed as capacity contracts, holding the developer responsible for energy sales and associated costs.

This shift back to the developer requires a robust outlook on revenue generation, complicated by evolving market rules. Capacity contracts, increasingly common in states like California, necessitate project owners to consider multiple revenue streams, with associated uncertainties.

Engineering, Procurement, and Construction Agreements

Utilities may solicit bids for EPC contracts to develop new generation resources. Utilities typically prefer “full-wrap,” “turnkey,” or “fixed-price” contracts, where the developer assumes responsibility for performance and project completion. The EPC contract structure can allow utilities to leverage pre-existing sites for new generation, particularly for battery energy storage, which has a small footprint and can be developed near substations.

However, utilities may bear some risks, such as environmental conditions on utility-owned sites. Change orders may shift risks of incremental costs or delays back to the utility, necessitating careful consideration in contract negotiations.

Build-Transfer Agreements (BTAs)

BTAs combine features of PPAs and EPC contracts, holding the developer accountable for project risks during development and construction. Once a BTA project reaches commercial operation, the developer sells the project to the utility, providing long-term ownership without the risks associated with project development.

However, this typically incurs higher costs than an EPC arrangement, as the developer must account for all contingencies. Negotiating BTAs can be more complex than PPAs or EPC contracts, as they incorporate features from both types of agreements.

Key Terminology

Understanding key terminology is essential for negotiating energy storage procurement contracts, including:

• MW and MWh: A megawatt (MW) is a unit of power, while a megawatt-hour (MWh) measures energy delivered over time. For energy storage projects, both power ratings (MW) and storage capacity (MWh) must be specified.

• State of Charge (SOC): The SOC reflects the percentage of total storage capacity currently utilized. Battery performance can be affected by SOC levels.

• Cycles: A battery cycle involves charging and discharging the battery. Procurement contracts may limit the number of cycles to manage degradation.

• Round-Trip Efficiency (RTE): RTE measures the percentage of energy returned after accounting for losses during storage.

• Operating Limitations: Energy storage systems may be subject to unique operational constraints, such as SOC management.

Operational Considerations

Operational considerations are critical in negotiating contracts for energy storage resources. Degradation profiles for storage technologies can vary significantly from traditional generation, necessitating specific performance metrics. Energy storage projects may also face unique operating limitations that require careful management.

Performance measurement and testing may need to be tailored to energy storage resources, incorporating metrics like charging time and efficiency. Moreover, technology risks can vary, necessitating structural protections to safeguard utilities from potential issues.

Final Thoughts

As the energy storage landscape evolves, utilities and developers must navigate complex procurement processes while addressing the unique challenges and opportunities that arise from this dynamic market. The continued development of energy storage is crucial for enhancing grid reliability and facilitating the integration of renewable energy resources, making it a vital component of the future energy paradigm.