Read Part 1 here.
As utility-scale and commercial energy storage deployments continue to grow in record numbers and the universe of technology providers has expanded, more sponsors are finding themselves negotiating first-time Battery Energy Storage System (“BESS”) supply contracts and long-term services agreements with new counterparties. These negotiations do not occur in a vacuum, but rather in parallel with offtake agreements, engineering, procurement, and construction (“EPC”) contracts, financing goals, and evolving tax credit compliance requirements. Each parallel agreement presents assumptions and obligations concerning project performance, schedule, remedies, and liability. It is important to ensure these contractual structures remain aligned during live negotiations as project documents evolve, since misalignment can create gaps in risk for project sponsors. Once pricing is fixed and manufacturing slots are secured, addressing those gaps can be difficult, costly, or threaten to delay a project schedule.
In this two-part article, Part 1 focused on certain core structural provisions that shape the project’s risk architecture from the outset. This Part 2 will focus on ongoing risk mitigation related to construction and operations, including key tax compliance, which requires a coordinated commercial and legal approach across tax, engineering, and operational disciplines that can be particularly challenging for first‑time parties navigating evolving regulatory guidance and market practices.
Performance Guarantees and Capacity Buydown
Sponsors will typically structure EPC and BESS contracts to require minimum performance standards at commissioning and during operations that match corresponding sponsor performance obligations under offtake contracts. In the BESS supply agreement, these performance requirements will include things like guaranteed BESS capacity (in megawatt-hours), power (in megawatts), and round-trip efficiency, but may also include technical specifications for ramp rate, response time, and other specific operational expectations. These are incorporated into the commissioning and testing requirements in the supply agreement, and are typically continued in BESS service contracts as recurring performance requirements. Sponsors should consider the extent to which the supplier will have any ‘buydown’ rights to permit adjustments to its guaranteed performance values in order to achieve commissioning or later supplier milestones. For example, it is not uncommon for a supplier to propose a capacity buydown right that permits the supplier to achieve its commissioning milestone when testing shows the BESS failing to achieve the agreed target capacity but still achieving a lower minimum capacity level. Any supplier buydown rights in connection with its performance obligations under the supply agreement and/or services agreement should be carefully assessed on a cumulative basis and compared against ongoing offtake requirements to ensure a sufficient cushion in performance. This also includes confirming that, under any BESS services contract, any adjusted performance guarantees during operations are paired with sufficient performance liquidated damages.
Ambiguity in Commissioning and Testing Documentation
Generally, equipment documentation will include both detailed, product-level engineering documentation for the BESS equipment, plus project-specific documentation tied to construction, commissioning, testing, and operations. To the extent practicable, parties should seek to finalize as much project, commissioning and testing documentation at contract execution. Ambiguity around scope and responsibilities frequently emerges, particularly among the Owner, EPC contractor, and BESS Supplier during commissioning. Similar attention should be paid to operations and maintenance documentation, which will typically condition warranty coverage and performance guarantees on ongoing compliance with supplier technical and operational manuals. To the extent project timing considerations require that additional design or engineering work follow contract execution, the contract should establish a clear framework for the supplier to propose updates and for the project Owner to have a meaningful process to review and approve deliverables within well-established timelines. Earlier resolution of these materials will also be preferred by financing parties conducting due diligence.
Warranties and Performance Carveouts
Warranty and performance guarantee frameworks are most effective when any carveouts or exceptions are clearly stated and set forth the consequences for a project operating outside of warranted values. In practice, misalignment can arise from slightly different exclusions or terms among general equipment warranty provisions, supply agreement performance guarantees, and long‑term services agreement guarantees, especially if a counterparty’s form has gone through various iterations over time without a comprehensive update. Counsel will need to work closely with technical leads to ensure that terms are applied uniformly across the documentation.
Serial Defects
In addition to confirming whether a supply agreement includes a serial defect provision, parties should carefully consider the details of how the provision is structured and the overall sequence of events under which it can be invoked. Key questions include what portion of the project – and what specific components – must be affected before a suspected defect is deemed “serial,” as well as the process and timing for conducting a root cause analysis. While agreements less frequently specify a fixed timeframe for full remediation given the potential wide scope and impact of a serial defect, project owners should pay close attention to their review and approval rights over any root cause analysis, remedial action plan, and remediation schedule. Approval rights are particularly important where extended or uncertain corrective measures could affect construction sequencing, financing, or project operations.
Tariffs and Price Adjustment Mechanisms
Trade policy volatility has required parties to adopt more creative approaches to allocate tariff-related risk in supply agreements. Approaches may include the use of an assumed tariff rate as of a specified point in time coupled with defined mechanisms to adjust pricing for subsequent tariff increases or decreases. While the allocation of incremental tariff risk is ultimately a matter of commercial negotiation, parties should pay close attention to how much exposure the supplier retains above any specified assumed tariff rate, when and how the owner begins to share in that exposure, and whether larger specified thresholds trigger a re-evaluation of the underlying pricing.
From a financing perspective, flexible mechanisms are not necessarily problematic, but it is generally preferable for any adjustment mechanics to be clearly memorialized up front and any ultimate adjustments to be memorialized before key debt and tax equity milestones to provide lenders and tax equity investors with greater visibility and mitigate the risk of late-stage contract price increases. A related consideration is whether the contract also permits contract price adjustment provisions tied to changes in critical BESS raw materials, such as lithium. In many cases, those raw material price indexes reflect the impact of tariff increases, so parties should take note of whether the indices referenced in raw materials price adjustments could have the effect of double-counting tariff impacts for purposes of the overall contract price.
To the extent offtake agreements include price adjustment mechanisms, information requirements and adjustment deadlines should be aligned with the supply agreement to mitigate any documentation and/or timing gap and ensure the sponsor has the necessary information for the offtaker when needed.
PWA Reporting and Compliance
Parties should carefully assess the supplier’s understanding of, and contractual obligations with respect to, prevailing wage and apprenticeship (“PWA”) requirements, particularly where the new supplier or its counsel has limited experience with U.S. projects and/or federal tax credit requirements. Generally, Foley has routine PWA reporting exhibits specific to supplier and EPC contracts, which allocate responsibility to each counterparty for its own and its subcontractors’ PWA compliance, with corresponding obligations to cure non‑compliance and cover associated penalties where failures occur. Common points for extended negotiation include the cadence and level of detail required for recurring PWA reporting, as well as the overall breadth of related indemnity coverages. From a risk‑management perspective, clarity around these mechanics at the outset can help mitigate uncertainty for sponsors and financing parties and reduce the potential for late‑stage disputes around tax credit eligibility.
Domestic Content – Reporting and Risk Allocation
Unlike PWA rules, the 10% ITC domestic content adder does not provide cure opportunities for non-compliance once a project is placed in service. Parties should pay close attention to how much liability is allocated to the BESS supplier and EPC contractor, particularly given that the full value of the domestic content adder is likely to represent a significant percentage of overall project economics. As a result, it is often an open commercial point for parties to determine any one particular party’s overall liability if their non-compliance threatens the entire adder amount.
Conclusion
For first‑time counterparties, a deliberate, cross‑disciplinary approach to these issues is critical as BESS projects move from contract execution into manufacturing, construction, and operations.
