As the energy storage industry continues on its trajectory of near-exponential growth, in the course of assisting our clients we are seeing a wide variety of battery energy storage system (BESS) offerings in the market, and we don’t always like what we see from a project finance and risk perspective.
Battery system offerings are all over the board, particularly when it comes to the suite of warranties and performance guarantees available. This is not unexpected for a relatively new technology or industry. However, there are some basic minimum expectations that have been set over the last few years, mainly by large utilities and owners of transmission globally. These standard offerings include power and energy capacity and round-trip efficiency (RTE) guarantees upon commissioning, as well as long-term system warranties that include energy retention. Most battery integrators will also offer long-term service agreements (LTSA) that include options for both traditional availability guarantees and capacity maintenance (also known as “battery augmentation” or an ”energy guarantee”).
The top-tier BESS suppliers are mostly large, vertically integrated multinationals with manufacturing capability within their corporate group and solid balance sheets. They are willing and able to provide the “standard offerings” noted above. Control of battery production allocation also gives them a big advantage in bidding for larger projects. Many of the second-tier suppliers are now starting to up their game and are providing fully bankable system offerings, albeit with a lot of variability.
Where we are seeing the most variability (and frankly, sometimes non-financeable product offerings) is with the growing number of small and mid-sized battery integrators bidding to procure and install smaller systems (e.g., 20 MWh and under). Some BESS integrators do not offer system warranties and will only provide material and workmanship warranties that exclude the batteries and other third-party components. Others may provide more robust warranties or guarantees, but only as part of an LTSA.
The reluctance of some integrators and EPC contractors to take technology risk is understandable, but at times it is necessary, not only from a financeability standpoint, but also to protect battery revenues. Since most batteries are manufactured overseas, from the owner’s perspective, warranty enforcement against the battery OEM (e.g., enforcement of long-term energy retention warranties) may be difficult or impractical. Also, the lead times to replace battery pods or other components may be extremely long, particularly now, given COVID-19-related shipping delays worldwide. Finally, the capabilities and reliability of the battery control system are extremely important. Battery control systems are typically updated by firmware. But what happens if that software developer goes bankrupt? Who controls the source code? These are the kinds of considerations that project financiers take into account.
In short, the BESS product offerings currently on the market are not uniform and may not always be financeable. Companies seeking to procure a battery system should treat it as a significant technology acquisition rather than a commodity, and BESS suppliers and integrators may need to adjust their product and service offerings to accommodate project finance, tax equity, owner and offtaker requirements.