Five Legal Issues To Consider When Contracting For Utility-Scale Energy Storage

During the past couple of years at renewable energy conferences and industry events, the conversation regarding battery energy storage systems has focused on the prevailing notion that energy storage, from an emerging technology standpoint, is where traditional solar was roughly eight to 10 years ago.

In the utility-scale context, despite the increasing deployment of battery energy storage systems, some utilities are still hesitant to purchase energy storage systems because the costs and technology are still evolving. From a contractual standpoint, utility-scale battery energy storage system transactions present unique legal issues and require special analysis of traditional contract provisions.

Here are the top five legal issues to consider when contracting for utility-scale energy storage:

1. Uptime Guarantee
2. Intellectual Property
3. Security for Payment and Performance
4. Force Majeure and Changes in Law
5. Indemnity and Insurance

Uptime Guarantee

A critical performance component of a battery energy storage system is the guarantee the vendor and/or manufacturer is willing to provide the purchasing utility regarding the amount of time (usually reflected as a percentage and calculated monthly or annually) the system will be fully operational (i.e., the system’s “uptime” or performance assurance).

From a contractual standpoint, several critical issues regarding uptime guarantees must be considered and negotiated:

•     How to define uptime, which requires, among other things, the parties’ agreement on
•     the scheduled maintenance parameters for the system because scheduled maintenance
•     is not counted as downtime for purposes of calculating the system’s uptime;
•     How to define and quantify damages from a breach of the system’s uptime guarantee.
•     In states such as Texas, where utilities can generate significant revenue from energy
•     storage systems by performing frequency regulation, damages from a breach of the
•     uptime guarantee are typically tied to the revenue lost by the utility during the time
•     the system was down beyond the uptime guarantee;
•     The vendor’s and/or manufacturer’s monetary liability caps as a result of revenue lost
•     by the purchasing utility due to breaches of the uptime guarantee; and
•     Contingencies of the uptime guarantee, such as the requirement that the vendor and/or manufacturer perform operation and maintenance services on the system.

Intellectual Property

Because the technology for battery energy storage systems is rapidly evolving, manufacturers and vendors are understandably very protective of the software and intellectual property necessary to operate energy storage systems. Utilities, on the other hand, know that such software and intellectual property are critical to operate the energy storage systems they are purchasing.

Typically in utility-scale energy storage transactions, vendors serve as the middle party: Utilities contract with vendors for the purchase and installation of battery energy storage systems, and vendors contract with battery manufacturers for the purchase of batteries and other components of the battery energy storage systems.

Given the various parties involved and the fact that contractual privity does not exist among all parties, battery energy storage system transactions require a careful analysis of the necessary intellectual property rights, the identification of the appropriate party to license or sub-license such intellectual property to the purchasing utility, and analysis of appropriate measures to ensure that the utility will have access to such intellectual property at all times during the life of the system (including in the event of a bankruptcy by the vendor or manufacturer).

Security for Payment and Performance

Currently, there are limited vendors of utility-scale battery energy storage systems and battery manufacturers, and most of them are foreign companies or are owned by foreign companies. Utilities purchasing energy storage systems often deal with the U.S. operating subsidiary or affiliate of a foreign company or a special purpose entity formed solely to hold the specific contract with the utility for the energy storage system.

Depending on the size of the project and risk tolerance of the purchasing utility, consideration should be given to the requirement of some form of security (such as a bond, a parent company guarantee or letter of credit) to ensure that the vendor’s and/or manufacturer’s payment and performance obligations (which can include indemnity obligations and damages from breaches of uptime guarantee) have financially viable backing.

Force Majeure and Changes in Law

As noted above, most utility-scale battery manufacturers are foreign companies. Naturally, vendors who are contractually obligated to deliver and install the battery energy storage systems to utilities within certain time frames will typically request that force majeure events (i.e., unforeseeable events outside of the vendor’s control that extend the vendor’s contractual deadlines) include potential issues that can arise during the shipping of such equipment, including perils at sea and substantial delays in shipping “long lead” items of equipment.

Similarly, given the unpredictable current political climate, vendors are increasingly requesting that utilities take the economic risk of a law changing or a new tariff being imposed between execution of the purchase contract and the date the battery energy storage system is installed.

Indemnity and Insurance

The batteries used in most utility-scale battery energy storage systems are now lithium-ion batteries (rather than lead-acid batteries). Although lithium-ion batteries present less of a fire hazard, because of the relatively short operational history of most energy storage systems and the lack of historical information on worst-case scenarios relating to such systems, careful analysis and negotiation of appropriate indemnity and insurance provisions in the event of a possible battery fire or other worst-case events are critical components of any energy storage system procurement.

In addition to the legal issues, utility-scale energy storage procurements also raise unique technical issues. Parties involved in utility-scale energy storage procurements should consult attorneys and consultants familiar with the legal and technical issues implicated by such procurements to assist in identifying, evaluating and negotiating the various issues.