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Reducing risk in battery procurement for large energy storage projects in the US

By Jared Spence, director of product management, IHI Terrasun
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In the rapidly growing but still relatively new battery energy storage sector, equipment procurement and integration for large projects presents numerous risks. Jared Spence of IHI Terrasun explores some steps developers should follow to reduce exposure.

This is an extract of a feature article that originally appeared in Vol.40 of PV Tech Power, Solar Media’s quarterly journal covering the solar and storage industries. Every edition includes ‘Storage & Smart Power’, a dedicated section contributed by the Energy-Storage.news team, and full access to upcoming issues as well as the nine-year back catalogue are included as part of a subscription to Energy-Storage.news Premium.

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Battery energy storage has been on a steady upward trajectory for the last decade. Thanks in part to the Inflation Reduction Act in the US, a sharp incline in the speed of growth is expected over the next ten years. While this is great news for industry and our progress towards a greener, more sustainable energy future, it does not come without risk.

The supply chain expansion required to feed this growth, along with many external factors, will place tremendous pressure on the procurement system for energy storage projects. That rapid expansion holds risk. Batteries are complex electrochemical devices, and both the procurement and integration of batteries for large-scale projects require extensive evaluation and coordination to ensure the project remains economically viable.

The optimal procurement of equipment involves not only consideration of the technically complex project sizing and electrical efficiency trade-offs inherent in a battery energy storage system (BESS) project but also the heavy influence external factors such as volatile commodity markets and government policy have on battery selection decisions.

Compounding those considerations is the ever-expanding set of new entrants in the battery cell and containerised storage system supply base which further increases the importance of making measured, risk-balanced product selection and supply chain decisions.

To avoid major setbacks to the timeline and budget of a BESS project, it is important to recognise and plan for potential procurement risks. Prior to executing a battery procurement contract, developers and integrators must identify, assess and implement plans to minimise risks inherent in today’s procurement environment.

Markets & future dynamics

Like many commodities, the price of lithium carbonate futures saw dramatic swings from 2022 to 2024. This was driven by the COVID-19 pandemic, resulting in significant post-contract price changes to purchases or in some cases, complete cancellation of the order by the original equipment manufacturer (OEM). Many OEMs are still only willing to provide long-term pricing if the price is allowed to fluctuate with commodity indexes, leaving the purchaser to carry the risk of commodity volatility.

While another COVID-level impact on the supply chain is unlikely, keeping an ever-watchful eye on the commodity indexes is warranted. Driven by a surplus of raw materials, producers continue to expand capacity by seeking new reserves and as of July 2024, lithium carbonate prices had returned to 2021 levels (Figure 1).

Figure 1. Lithium carbonate pricing over the last five years. Source: tradingeconomics.com/commodity/ lithium

Inflation Reduction Act domestic content bonus impact on procurement

The passing of the Inflation Reduction Act in August of 2022 included provisions that are significantly impacting the utility-scale battery storage industry. This includes the decoupling of storage from solar projects, allowing for standalone energy storage projects to qualify for Investment Tax Credits (ITC) up to 30%.

It also provides incentives to source US-based domestic manufacturing for an additional 10% bonus credit provided that the developer can, with support from their supply base, meet through one of two methods – the Cost Basis Method or the Safe Harbor Method – as identified in the IRS guidance.

The developer must prove that over 40% of the manufactured products used in the project are domestically manufactured. This minimum percentage threshold increases to 55% for projects that start construction after 2026.

The approach that works best for each project may be different. Which approach to use and which approach will be supported by the selected supply base has a sizeable impact on the economic viability of a project.

UFLPA

Approximately 80% of the world’s LFP (lithium iron phosphate) cells are still made in China. The Uyghur Forced Labor Prevention Act (UFLPA) was signed into law on 23 December 2021 and has been in effect since 21 June 2022.

This US law was put in place to address reports and concerns of human rights abuses against Uyghur Muslims and other ethnic minorities in Xinjiang including forced labour and mass detentions. The act includes penalties, seizure of goods, fines and other potential criminal charges.

To carry out the provisions of UFLPA, US Customs and Border Protection (CBP) has increased its enforcement and investigation efforts to prevent the importation of any items with suspected forced labour. If a suspected item is seized, the importer (OEM) has 30 days to provide evidence, via supply chain traceability, that no part of their import has any ties to the Xinjiang Uyghur Autonomous Region of China. This is no simple task for OEMs.

A complete battery block has thousands of components and cells with materials potentially sourced from all around the world. If the documentation provided to CBP does not clear up the CBP concerns, the delays could be indefinite, or worse, the goods could be rejected and sent back to the port of origin.

Self-procurement

In the never-ending search for cost savings, some developers are attempting to implement what I like to call the “solar model” in their approach to purchasing DC-battery blocks (which isn’t surprising as many BESS developers started as solar developers).

In the “solar model” of procurement, solar project developers have moved to a state of maturity when they are purchasing the individual project equipment (cells, trackers, inverters) directly from OEMs and then separately purchasing the services (labour) needed to integrate, install and test the site.

This transition of the solar industry to self-procurement developed over time for two reasons: First, the technology, quality and reputation of solar cell, panel and tracker manufacturers began to stabilise, reducing the risk of direct procurement. Second, developers across the industry began to establish experience and strong backgrounds with solar technology. Key industry-leading manufacturers emerged.

Unlike the current state of the solar industry, grid-scale battery equipment is still quite young in its technological evolution. With a diverse and rapidly changing set of available suppliers, cell chemistries, and configurations that require thorough evaluation and extremely precise integration expertise and controls software to safety operate, it is still too early for most developers to view batteries through the same lens as solar equipment or as though they are a plug-and-play, off-the-shelf purchase.

For some of the larger developers of BESS projects, who have gigawatts of storage projects online and a deep supply chain, with legal and technical expertise at their disposal, going with the solar model and performing self-integration isn’t necessarily a hardship.

However, across the industry, there are many more developers who do not have the resources or understanding of the nuances and risks associated with grid-scale BESS equipment to safely execute an adequate piecemeal procurement strategy.

By taking on a solar model approach, the project developer is also taking on the full risk of each piece of equipment, including the technical evaluation and quality assessment of the OEMs, the monitoring of manufacturing and factory testing and the management of logistics, installation and commissioning.

They also take on greater financial risk and costs for change orders in the event of an issue, as each individual OEM or service provider will only be concerned with the performance of their individual product or service and not the overall system.

Likewise, without any margin to cover the equipment, the engineering, procurement, construction (EPC) and integrators have little to no incentive to take on overweighted penalties or liquidated damages in the event of system issues due to the hardware or software provided by the OEMs.

Installing and commissioning

Ramifications of your procurement decisions will manifest during installation and commissioning. There are a few final preventative measures required to ensure that the products and project are going to perform as expected.

Developers need to maintain their vigilance to mitigate risk at all stages of the procurement process. Image: IHI Terrasun

This includes delivery inspections, comprehensive management and oversight of the installation, monitoring and reporting cold and hot commissioning processes and tests, and rigorous site acceptance testing (SAT).

Rigorous installation and commissioning planning and procedures will ensure the system is operational on time and with the expected performance needed to meet the demand. If a developer does not have the internal capabilities to handle each of these areas, they risk buying equipment that does not match the site’s form factor, contracted energy needs or performance requirements.

As the BESS industry evolves, so will battery technology and the experiences gained with application of the technology, but as we move forward in our journey to a greener, more sustainable energy future, it is important to always be aware that these risks will always exist in some form or another.

Developers will need to maintain their vigilance and be proactive in their implementation of measures to mitigate or eliminate these risks whenever possible.

This is an extract of a feature article that originally appeared in Vol.40 of PV Tech Power, Solar Media’s quarterly journal covering the solar and storage industries. Every edition includes ‘Storage & Smart Power’, a dedicated section contributed by the Energy-Storage.news team, and full access to upcoming issues as well as the nine-year back catalogue are included as part of a subscription to Energy-Storage.news Premium.

About the Author

Jared Spence is the director of product management at IHI Terrasun. He has worked extensively on new product development, strategic partnerships, business development, business execution, competitive analysis and customer value creation across the renewable energy industry.

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