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.
This two-part article will touch on common areas of concern for first-time negotiations with BESS suppliers. Part 1 of this article focuses on certain core structural provisions that shape the project’s risk architecture from the outset. Part 2 will focus on ongoing risk mitigation related to project performance and critical tax credit compliance.
Supply Agreements and Alignment of Offtake Obligations
Because offtake agreements typically set a project’s core performance and timing obligations, BESS supply contracts often inherit those assumptions, along with related EPC and long‑term service expectations. In many BESS projects, the commercial terms of the supply agreement take shape after the offtake structure and revenue requirements are solidified or sufficiently developed in terms of performance expectations, milestone dates, and reporting obligations. In other cases, all of these contracts may be under active negotiation simultaneously.
If an offtake agreement is still in active negotiation, it becomes more important to track changes closely: shifts to performance thresholds and guarantees (e.g., minimum capacity, availability metrics), guaranteed schedule dates (e.g., guaranteed commercial operation date), and liquidated damages. Aligning these obligations with parallel obligations from the BESS supplier for performance requirements, guaranteed delivery and commissioning dates, and delay or performance liquidated damages provide the sponsor an opportunity to mitigate these risks. Counsel and commercial parties will need to closely track liquidated damages structures across the offtake, supply, and EPC contracts to ensure the individual requirements serve the overall schedule and goals for the completion of the project. For example, acts or omissions of the BESS supplier may constitute an ‘owner‑caused delay’ under an EPC contract, opening the door to EPC change orders that add time and cost to the project. Sponsors will need to closely track BESS supply agreement’s performance guarantees, LD schedules and rates, and testing requirements to track capture any live offtake and EPC negotiations and EPC and avoid stale terms.
National Security Considerations
Starting in 2024 with the One Big Beautiful Bill’s tax credit restrictions around certain prohibited foreign entities and continuing with recent orders by the FCC regarding foreign inverters and the Trump Administration’s executive order on bulk-power system electrical equipment, project developers will need to conduct more extensive reviews of their counterparties and their organizational structure as well as the traceability of their supply chain to ensure compliance with evolving federal restrictions on energy projects on the basis of national security. Financing parties are generally looking to sponsors to shoulder these liabilities, which makes it incumbent on sponsors to push for robust representations, warranties, covenants, and reporting requirements from suppliers. Agreements will also need to contemplate flexibility to adjust to additional requirements that may be on the horizon from open rulemakings and other regulatory proceedings.
Payment & Performance Security
One additional dynamic for counterparty due diligence is payment and performance security, which is an important tool for both parties to mitigate the risk of non-performance. Parties should consider whether a parent guarantee, letter of credit, or bond is appropriate. The creditworthiness of a proposed parent guarantor could be a leverage point for negotiations of other terms, such as the sequencing of payment milestones.
From a sponsor’s perspective, it is necessary to confirm that any payment security in favor of the supplier is compatible with the lender’s collateral rights. A sponsor may also need to consider a future project sale and incorporate sufficient flexibility for security to be replaced or substituted on reasonable terms in connection with a sale, refinancing, or other change in the project ownership structure. Suppliers, by contrast, will want to clearly define their obligations with respect to replenishment terms and draw conditions. They may also push for a step-down in performance security as milestones are achieved.
Guaranteed Milestones and Schedule
It is important for sponsors to understand their overall project schedule and critical commercial deadlines, as they should inform interim supplier and EPC milestones. Sponsors should closely evaluate the firmness of the proposed project schedule and supplier manufacturing assumptions. For example, suppliers may seek to lock in contract execution quickly with the promise of preserving manufacturing slots from which contract milestones like equipment deliveries are calculated. Parties should ensure that the proposed timelines for contract negotiation and performance are reasonable and accurate. Particular attention should be paid to sponsor milestones in the supply agreement, such as a “Ready for Delivery” when the project owner is required to have the site prepared and ready to take delivery of BESS units. These owner milestones require close coordination among the project owner, EPC contractor, and supplier, to confirm technical specifications for the site preparation, including things like road requirements, crane scheduling, and offloading responsibilities.
Suppliers will typically seek carveouts from schedule-related obligations, and associated liquidated damages, where delays are attributable to the sponsor or the sponsor’s EPC contractor. This could be memorialized in the supply agreement through specified milestones dates for owner obligations to be completed or through more general carveouts tied to qualifying delay events. Parties should take note whether milestone dates are structured as fixed calendar dates or specified as a particular timeframe following the occurrence of a prior milestone (e.g., commissioning required within x days of delivery). If the overall project schedule is subject to change, to what extent does the supply agreement provide the sponsor flexibility to adjust the delivery schedule? Where schedule flexibility is needed, parties may need to further define concepts such as the acceptable range of schedule changes and associated compensation to the supplier, or interim storage and transportation arrangements for early deliveries, or deliveries that need to be temporarily diverted from delivery to the project site.
Delay Liquidated Damages
Sponsors should consider financial exposure under an offtake agreement for project and construction delays when sizing and sequencing delay liquidated damages with the BESS supplier (in addition to the EPC contractor). Key categories of delay liquidated damages include (1) delays in the supplier delivering equipment to a project site by a particular date and/or at a particular cadence and (2) delays in the supplier’s commissioning of the BESS equipment. A common pitfall can arise when milestone dates are misaligned among offtake, EPC, and supplier schedules, or when the supplier and/or contractor liquidated damages do not sufficiently backstop corresponding liquidated damages that the sponsor owes to an offtaker. For example, if a project is on a tight schedule, does the EPC contractor have well-defined deadlines by which the project site must be ready to receive BESS deliveries from the supplier (and corresponding delay liquidated damages)? Does the BESS supplier’s contract have well-defined delivery obligations and liquidated damages to compensate the sponsor in the event that delivery delays cut into the EPC contractor’s minimum installation time (leading to EPC claims of owner-caused delay)? Liability caps for each category of delay liquidated damages should be carefully reviewed, including whether exceeding an such cap triggers a supplier default or other sponsor rights and remedies. Caps are typically stated as a percentage of the purchase price in a supply agreement. Parties may have less uniform expectations in the context of caps under a long-term services agreement where annual service fees are much lower than the price to purchase the BESS equipment.
Indemnities
Project Owners should confirm that supplier indemnity obligations appropriately address both traditional construction and operational risks, such as third-party claims arising from negligence, property damage or personal injury, liens, and environmental liabilities, as well as technology‑ and product-specific risks like intellectual property infringement. Depending on the project and applicable regulatory regime, provisions should also account for PWA non-compliance and failure to satisfy certain tax credit requirements, such as foreign entity restrictions and the domestic content ITC adder. Finally, indemnity obligations should be evaluated in conjunction with the agreement’s limitation of liability provisions to ensure that critical indemnities are not inadvertently capped or excluded.
Conclusion
BESS supply agreements must be developed in close coordination with evolving offtake and EPC arrangements to ensure that performance standards, schedule milestones, and contractual protections meaningfully mitigate the risks of the sponsor’s upstream obligations and financing party expectations.
