Recently announced tariff increases highlight the risks and opportunities for mergers and acquisitions in the BESS | market Foley Hoag LLP – energy and climate advisor

Staged payment of the purchase price is an almost universal feature of mergers and acquisitions in development-stage renewable energy and battery energy storage systems (BESS) projects. In a typical sale, the buyer pays the seller a relatively small portion of the purchase price at closing (sometimes limited to reimbursement of expenses), and later installments are paid when the project reaches various milestones, such as the issuance of a Notice of Proceeding (NTP) to the project contractor for engineering, procurement and construction (EPC), significant completion of project construction, and project commercial launch date (COD). Rather than defining a specific dollar amount for these payments, the parties typically agree on a project financial model according to which the payment amount will be calculated. The financial model will take into account a wide range of variables affecting the project, such as final project performance and final construction costs. In this context, BESS developers are assessing the Biden administration’s recently announced increased tariffs on Chinese goods used in the clean energy sector.

Of particular importance to BESS developers, tariff increases will increase the rate on non-EV lithium-ion batteries from the current 7.5% to 25% in 2026 and on steel and aluminum from the current 0-7.5% to 25% in 2024 Depending on the expected source of materials for the project, the impact of tariff rate increases as they come online could mean a significant increase in construction prices for BESS projects. For BESS developers, these tariff increases will require a review of procurement plans for their projects to either secure alternative supplies of batteries and construction materials or otherwise mitigate the impact of the increases.

An even more complicated assessment awaits buyers and sellers of projects in the development phase that are already covered by contracts, but for which purchases have not yet been completed. In such cases, with financial models already established, increases in tariff rates could result in a material change to the expected economics of the acquisition for one or both parties. These parties will need to carefully review the terms of the purchase and sale agreements with their legal counsel to determine the exact impact of rate increases under the current model and any remedies they have in response.

The United States’ continued emphasis on supporting a strong domestic manufacturing industry focused on batteries and other materials and technologies key to the clean energy industry will continue to provide both opportunities and challenges for market participants. As these parties evaluate new projects for development or purchase, they will need to thoroughly test their assumptions to confirm their ultimate financial viability in the face of a rapidly changing market.