Key Risk Factors in Long-Term Energy Storage Contracts
- Delays and price increases can jeopardize project delivery timelines and budgets.
- Safety risks, including fire hazards at battery storage facilities, are attracting increased regulatory scrutiny.
- Supply chain and logistics complexities introduce cost and schedule uncertainties.
- Tariff and trade issues can impact equipment costs and availability.
- Technology and operational performance risks over the contractual lifespan.
Contractual Strategies to Mitigate Risks
1. Power Purchase Agreements (PPAs) and Energy Storage Services Agreements
- Many energy storage PPAs are structured as “tolling” agreements, where the utility supplies the electrical energy input, shifting input cost risk away from developers who prefer to avoid this variable expense.
- PPAs often grant utilities exclusive purchase rights to project output, aligning revenue certainty with long-term contracts, which can reduce revenue risk for project owners.
2. Engineering, Procurement, and Construction (EPC) Agreements and Build-Transfer Agreements (BTAs)
- These contracts delineate responsibilities and risks around project delivery, with careful allocation of risks for delays, cost overruns, and compliance with evolving safety regulations.
3. Battery Procurement Contracts
- Choosing the correct contractual structure is critical to protect against default, underperformance, and warranty issues.
- Equipment manufacturers increasingly modify contract terms to shift logistics risk onto developers via variable pricing arrangements, addressing supply chain volatility.
Additional Risk Management Approaches
- Insurance and Warranties: Equipment manufacturers use insurance-backed warranties to limit technology and operational risks over the long term.
- Safety Compliance: Developers and project owners anticipate additional rules from regulators concerning safety, incorporating risk allocation for costs and delays related to these requirements into contracts.
- Reducing Ambiguity: Developers aim to minimize ambiguity and subjectivity in contract terms to better control construction and performance risks.
- Tariff Mitigation Strategies: Developers, suppliers, and contractors employ strategies to reduce exposure to tariff-related risks specific to battery storage equipment imports.
Summary
Companies manage the risks inherent in long-term energy storage contracts by structuring power purchase and procurement agreements to allocate cost, delivery, and operational risks appropriately; focusing on long-term contracts that guarantee revenue streams; employing warranties and insurance to cover technology risks; addressing evolving safety regulations contractually; and dynamically managing logistics and tariff-induced uncertainties.
This multi-pronged approach reflects the complexity of energy storage projects and the sector’s evolving regulatory and market landscape.
Original article by NenPower, If reposted, please credit the source: https://nenpower.com/blog/how-are-companies-addressing-the-risks-of-long-term-energy-storage-contracts/
