The staged payment of purchase price is a near-universal feature of M&A in development-stage renewable energy and battery energy storage system (BESS) projects. In a typical sale, the buyer pays a comparatively small portion of the purchase price to the seller at closing (sometimes limited to expense reimbursement), with later tranches being paid when the project hits various milestones, such as the issuance of a notice to proceed (NTP) to the engineering, procurement and construction (EPC) contractor for the project, the substantial completion of construction of the project, and the project's commercial operation date (COD). Rather than defining a specific dollar amount for these payments, the parties will usually agree on a financial model for the project, pursuant to which the amount of the payments will be calculated. The financial model will account of a wide variety of variables impacting the project, such as the ultimate capacity of the project and the final costs of construction. It's against this backdrop that BESS developers are evaluating the Biden administration's recently announced increased tariffs on Chinese goods used in the clean energy sector.
Of particular import to BESS developers, the tariff hikes will increase the rate on lithium-ion non-EV 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 anticipated sourcing of materials for the project, the impact of these tariff rate increases as they come online may be to substantially increase construction prices on BESS projects. For BESS developers, these tariff increases will necessitate a review of their procurement plans for their projects to either secure alternative supplies of batteries and construction materials or otherwise ameliorate the impact of the increases.
An even more complicated evaluation awaits buyers and sellers of development-stage projects that are already under contract, but for which procurement has not yet been completed. In those cases, with the financial models already set, the tariff rate hikes may cause a significant change to the expected economics of the acquisition for either or both parties. These parties will need to carefully review the terms of the purchase and sale agreements with their counsel to determine the precise impact of the rate increases under the applicable model and what, if any, remedies they have in response.
The continued U.S. emphasis on encouraging a robust domestic manufacturing industry focused on batteries and the other materials and technologies crucial to clean energy industries will continue to provide both opportunities and challenges for market participants. As these parties evaluate new projects, whether for development or purchase, they will need to carefully test their assumptions to validate their ultimate financial viability in the face of a rapidly changing market.
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