Energy Transition – An evolving journey

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Read time: 9.3 minutes

One of the main challenges with wind and solar projects has been that energy production is intermittent. The fuel is free, but only available when the wind blows or the sun shines. In addition, wind and solar projects often produce electricity during periods when the market demand is not at its peak. Perhaps the most dramatic example of this issue occurs in the Texas market where wind projects generate during low-peak nighttime hours and are able to sell their output at negative prices because they continue to generate production tax credits.

Energy storage technology is poised to make a significant change in the economics of the electricity market, especially in markets where numerous wind and solar projects exist. As noted in National Renewable Energy Laboratory reports, the cost of battery technology continues to decrease and deployment is projected to grow by more than 500 percent by 2050 with over 125 GW of installed capacity.

The legal and contractual issues associated with development, construction, and operation of a battery storage project are similar to those of other power projects, but owners/developers should keep in mind some key issues, particularly around equipment supply contracts, real estate, and shared facilities.

Battery project developers should take into account the constantly evolving economic and political environments that impact procurement of energy storage equipment. For example, while the cost of battery technology may be decreasing in the long run, the rapid increase in demand for lithium, a key material in both utility-scale batteries and electric vehicle batteries, resulted in significant cost increases for battery storage equipment in 2021. Developers should consider how the risk of price increases or decreases should be allocated, particularly where there is a long period of time between execution of a contract and delivery of equipment under the contract. In addition, while the Biden administration revoked an executive order put in place by the Trump administration that would have prohibited the acquisition of certain equipment from foreign adversaries of the United States, it has maintained import tariffs established against China and could increase the tariffs as part of the ongoing trade war with China. At the same time, additional legislation may be developed as advocacy groups push governments to address human rights abuses associated with the extraction of minerals used in batteries. Since many battery manufacturers have operations located in Asia or other countries outside of the United States, developers should anticipate political uncertainty that could impact the cost of the equipment being supplied or the ability to source equipment or materials from certain countries.

Supply chain problems due to COVID-19 have impacted the ability of suppliers to timely deliver goods, including battery storage equipment. Although it has been nearly two years since COVID-19 broke out, new variants and surges in infection rates still threaten to disrupt global supply chains and logistics. Developers should ensure that each supply contract establishes a project schedule that takes into account the likelihood of such delays, allocates risk appropriately between disruptions that can be foreseen at contract execution and those that cannot, and provides for remedies that adequately compensate the developers for the impact of delays.

Key takeaways
  • Battery storage enhances integration of intermittent renewable energy
  • Project leaders should track lithium prices, effects of trade wars, COVID disruptions
  • Contract and zoning rules could force storage projects to partner with power generators