What Makes a BESS Project Bankable? Commercial Risks to Address Before Procurement

When considering the development of a battery energy storage system (BESS) project, it is critical to understand that the project may be technically viable yet still face issues with schedule, performance, and value that could affect the project’s bankability.

A bankable BESS project has a commercially enforceable contract structure that aligns equipment performance, sizing and duration requirements, offtake requirements, tax credit eligibility, and operating requirements. Being able to close financing depends on whether the project’s risks are clearly identified, allocated to the parties that are best able to manage them, and supported by appropriate contractual remedies.

Original equipment manufacturer (OEM) contracts, warranties, software rights, long-term service agreements (LTSAs), augmentation plans, supply-chain exposure, and evolving federal requirements can all affect project economics and, ergo, project financing.

By addressing all these issues, the negotiation of commercial contracts to procure your BESS equipment makes for a known set of risks upfront, with all financing risks addressed.

BESS commercial due diligence evaluates whether the project’s contracts, suppliers, performance obligations and asset management strategies support financing, construction and long-term operation.

For most utility-scale BESS projects, the review should focus on these questions:

1. What should be covered in a BESS supply contract?
2. How do FEOC restrictions affect BESS procurement and tax credit eligibility?
3. What software and service rights should BESS project owners protect?
4. How should augmentation be addressed in a BESS supply contract?

These questions must be evaluated together because a provision in one agreement can weaken a guarantee, remedy, or obligation in another. Effective due diligence identifies those gaps early enough to address them before procurement decisions are finalized.

Utility-scale BESS projects typically rely on multiple agreements governing equipment supply, engineering, procurement and construction (EPC), commissioning, warranties, and long-term service agreements (LTSAs).

Commercial and technical due diligence should evaluate how these agreements function together. While the actual list of questions examined is much longer, here is a sampling of the questions Invera Energy considers when performing due diligence for its clients’ BESS projects:

• Do performance guarantees align with the project’s operating strategy, offtake agreement, and interconnection agreement requirements?
• Are testing procedures and retesting rights clearly defined?
• Are availability, capacity (power and energy), round-trip efficiency, and any other requirements, such as fast frequency response and signal following accuracy, measured consistently across all agreements?Do the contractual remedies mitigate the damages the project owner will incur if guarantees are not met?
• Do warranty exclusions undermine the protection the owner expects?
• Who is responsible when failures involve multiple suppliers? “One throat to choke” is the most popular approach, with the BESS supplier often standing in front of inverter and transformer performance requirements.
• Are liquidated damages or performance remedies to mitigate damages the owner will incur if delays or performance shortfalls occur?
• Are warranty and LTSA obligations transferable to future asset owners? Many suppliers will prevent assignments or transfers to competitors. Depending on the definition of competitor, this can cause an issue with financiers.
• Do the supply agreement and EPC schedule use compatible milestone definitions?To mitigate mismatches here, the EPC contractor can be the initial purchaser of the BESS – but the project owner should stay fully involved during contract negotiations.
• Does the LTSA support—not conflict with—the warranty?Usually, the LTSA provider will be the OEM. When that is not true, the risk exists that the LTSA terms do not match the supply agreement warranty, which can cause gaps in performance shortfall coverage and liquidated damages. Also, limits of liability under the LTSA are usually based on service fees after the warranty period is over, and those limits are much lower than the contract price of the supply agreement.
• Are force majeure terms too one-sided? Force majeure terms should be market-based and protect both sides from extended events out of the parties’ control.
• Is there a tariff sharing mechanism? Many supply contracts now contain a tariff sharing mechanism. A collar around the starting tariff might be the OEM’s responsibility, with the buyer taking the risk outside of the collar, and if the tariff goes above a certain level, either party has the ability to terminate.

Ever uncertain FEOC restrictions have made BESS procurement and battery sourcing significantly more complex.

IRS Notice 2026-15 provides interim guidance for determining whether an energy storage project receives material assistance from a prohibited foreign entity (PFE) and may therefore become ineligible for the Clean Electricity Investment Credit under Section 48E. This and prior IRS notices provided guidance establishing a policy for safe harbor. Additional regulations and interpretations are expected to follow prior to the end of 2026, contributing to increased uncertainty for energy developers, data center developers, investors, and tax-credit stakeholders. Any changes may affect calculations under the material assistance cost ratio (MACR), which is problematic when developers have already made equipment supply choices that could be negatively affected.

Standalone battery storage projects are exposed because batteries and related equipment typically represent one of the largest components of total project cost. Significant portions of today’s battery supply chain are associated with countries and entities that may cause a project to lose the ability to claim the tax credit.

Project owners increasingly need visibility not only into where battery cells and components are manufactured, but also into supplier ownership structures, sourcing documentation, and the potential impact of future spares requirements and augmentation.

A well-structured BESS supply agreement should establish:

• Access to OEMsourcing and manufacturing information disclosures
• The owner’sapproval rights over future spares, augmentation, or manufacturing strategy changes
• The responsibleparty for redesign costs, delays, or the consequence of lost tax credit eligibility
• Access to supplier’s certifications and supporting documentation
• Access to supplier’s domestic content calculation methodologies
• How changes in law or future IRS guidance will be addressed

An OEM may understandably resist accepting unlimited responsibility for project-level tax-credit qualification. However, project owners should not bear the entire commercial risk while relying exclusively on supplier-controlled information.

Contracting expertise can deal with a lot of this uncertainty upfront, but it is always advisable to have tax counsel and FEOC (and domestic content) experts weigh in before a particular supply strategy is chosen.

The original equipment manufacturer (OEM) and the BESS owner enter a 20-year partnership upon signing a supply contract. If an OEM exits the market or becomes insolvent, the project owner may lose access to spare parts and source code, and may no longer able to effectively support the system. For this reason, an IP escrow is critical with automatic release mechanisms.

A supply contract should address the IP escrow having to contain access to source code, technical documentation, and spare parts; owner step-in rights, and the ability to engage qualified third-party service providers in case project abandonment should be used to define transitional support if the OEM or service provider defaults on or terminates its obligations.

Finally, owners should think about their own long-term asset management strategy. If that strategy is to self-perform with a certain amount of time, then building in training and the ability to terminate the LTSA early would be a good strategy to include in the LTSA.

Without thinking through these risks and how to mitigate them, an otherwise operational asset may become difficult to maintain, finance, or transfer to a future owner.

There are two approaches considered for future augmentation of a BESS project. Firstly, future augmentation can be incorporated into the initial BESS supply agreement, pushing the performance guarantees through the project life onto the OEM. If this approach is chosen (often a factor of timing when the agreement needs to be signed to achieve delivery schedules), then the contract needs to specify that the energy capacity guarantee at the point of measurement (POM) needs to be a certain MWh throughout the term of the contract. This means the OEM needs to forecast the volume of new BESS required at each augmentation throughout the life of the project, considering space required, availability of product 15 years out that is compatible with the existing product, and the pricing of that augmentation product. The OEM can either take the pricing risk up front or push the pricing risk onto the buyer with a cap on costs so that the risk is shared somewhat.

If the second option is chosen and the buyer takes 100% augmentation pricing risk, then the buyer needs to think about space being available, product (hardware and software compatibility), and future price effect on project returns. In either case, how the warranty mechanically works after each augmentation needs to be agreed upon in the initial BESS supply agreement. Addressing these issues during the initial procurement integration challenges years after commercial operation commences.

The LTSA provider is usually, at least initially, the OEM, so after the defect/workmanship warranty period (initial two years) the LTSA is the only remaining responding contract to performance issues with the BESS.
During the period that the warranty runs in parallel with the LTSA, most BESS OEMs offer a bumper-to-bumper type warranty where anything that breaks (and is not caused by the owner) is repaired or replaced by the OEM. On the plus side, the limit of liability is often as high as the contract price of the original BESS supply. On the flip side, there is often no response time or repair time commitment. Any performance shortfall below guaranteed performance during that response period would be covered by liquidated damages under the LTSA, which usually has a much lower limit of liability (one to three times the annual service fees is an appropriate estimate of the range).

The performance guarantee (degradation curve) runs for the entire contracted life of the BESS. This is usually 20 years, unless the BESS has been designed to run at a higher throughput. Some OEMs address performance shortfall damages for lost MWh under the supply agreement, while others address them under the LTSA. The buyer’s biggest concern should be access to a higher limitation of liability for performance shortfall damages. The aggregate limitation of liability under the LTSA may be reached after performance shortfall damages accrue over two or three consecutive years. Once the cap is reached, the contractual incentive to restore the BESS to its guaranteed performance may be significantly reduced. Negotiating an appropriate limitation of liability is a part of OEM selection, performance history in the field and so on.

A bankable BESS project is built through disciplined commercial decisions made well before construction begins.

Projects that integrate procurement strategy, contract negotiation, commercial due diligence, technical review, lifecycle planning and regulatory compliance early in development are better positioned to secure financing, avoid stranded assets and deliver reliable long-term performance.

As battery energy storage projects become larger and more complex, project success depends on more than selecting quality equipment. Owners, developers, and investors must ensure that contracts, warranties, software rights, service obligations, augmentation planning and supply-chain compliance all work together to support the project’s technical and financial objectives.

Commercial diligence performed before procurement remains one of the most effective ways to reduce project risk and strengthen long-term bankability.

This article is for general informational purposes and does not constitute legal or tax advice. 

Terri Denning is the President of Invera Energy and an expert in BESS procurement, contracting, and risk management. With over 25 years of experience in financing, deal structuring, and business development, Terri most recently ran the risk management and contracting department for a global battery energy storage manufacturer. 

• ☑ Confirm the operating strategy and guaranteed performance requirements.
• ☑ Review supplier ownership, sourcing documentation and PFE exposure.
• ☑ Align the supply agreement, warranty, software license and LTSA.
• ☑ Define delay, performance and warranty remedies.
• ☑ Protect data, software, documentation and third-party service rights.
• ☑ Establish the augmentation strategy and cost responsibility.
• ☑ Reconcile contract obligations with the financial model and project schedule.
• ☑ Identify gaps among the OEM, EPC contractor and balance-of-plant providers.

What makes a BESS project bankable?
A bankable BESS project combines technically sound design with commercially enforceable agreements that support financing, construction, and long-term operation. Performance guarantees, warranties, software rights, service obligations, augmentation planning, supply-chain compliance, and financial assumptions should all be aligned before procurement decisions are made. 

What does BESS commercial due diligence include?
BESS commercial due diligence evaluates whether the project’s commercial structure supports its financing and operating assumptions. The review typically includes the OEM, equipment proposal, supply agreement, performance guarantees, warranties, long-term service agreement (LTSA), software rights, augmentation obligations, project interfaces, supply-chain exposure, and contractual remedies. 

What should owners review in a BESS OEM contract?
Owners should carefully review performance definitions, testing procedures, warranty exclusions, delay damages, liability caps, software licenses, data ownership, service requirements, augmentation obligations, supplier substitution provisions, documentation requirements, and change-in-law clauses. The OEM supply agreement should also align with the EPC agreement, financial model, operating strategy, and financing requirements. 

How do prohibited foreign entity rules affect BESS procurement?
PFE requirements may affect eligibility for certain federal energy tax credits if energy storage technology receives material assistance from a PFE. Project owners should understand supplier ownership, manufacturing locations, sourcing documentation, and component substitutions, while coordinating procurement decisions with qualified legal and tax advisors to evaluate project-level compliance.

Why should warranties and long-term service agreements be reviewed together?
Although warranties and LTSAs are often negotiated separately, they function together throughout the life of a project. Maintenance obligations, response times, spare-parts requirements, monitoring obligations, and service procedures established in an LTSA may directly affect warranty eligibility. Reviewing both agreements together helps ensure owners receive the level of protection they expect.

When should a BESS owner engage an owner’s representative?
An owner’s representative provides the greatest value before OEM selection and contract execution, when project owners still have the ability to influence procurement strategy, contract terms, risk allocation, schedule, performance requirements, and commercial interfaces. The role often continues through construction, commissioning, and project turnover to help ensure contractual obligations are successfully delivered.