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The battery storage surge

Jul 23, 2021

Lucas Carpenter
Power & Utilities Technical Accounting Leader, PwC US
Morris Jones
Power & Utilities Deals Leader, PwC US
James Osborne
Power & Utilities Deals Director, PwC US

At a Glance

  • Energy storage solutions are experiencing rapid growth fueled by a desire for reliable green energy and declining battery production costs
  • Commercial arrangements for energy storage continue to evolve and have economic characteristics that fundamentally differ from traditional wind and solar power purchase agreements. These features may create accounting complexities in long-term offtake arrangements.
  • This document presents our observations on select questions arising from recent energy storage offtake arrangements under ASC Topic 842 - Leases



The commercial landscape for battery storage continues to evolve with technological advancement and continued investment in renewables. The energy storage market is currently greater than 10 GW and is expected to grow at a cumulative capacity of 30% annually through 2030. Expected growth is driven by a number of factors, including:

  • a significant increase in renewable energy which results in greater need for storage to alleviate intermittency issues and reduce curtailments, and declines in battery costs.

As the cost of battery storage continues to decrease, developers see greater financial incentive to build storage alongside renewables and also as standalone projects. Financial incentives and benefits through the use of battery storage includes the ability to better align renewable power generation with demand, and the ability to provide ancillary services through operational support to help maintain reliability, supporting smooth and coordinated operation of grid components.

Energy storage solutions are versatile. While deployment configurations and strategies are evolving, common commercial arrangements include:

  • Hybrid projects. Energy storage is paired with power generation assets such as wind or solar facilities, in a single project. The storage solution enables these intermittent generation sources to dispatch energy with greater predictability and control and reduces the need for curtailments. The storage solution draws power from the generation source and in some cases may also be charged directly from the energy grid, allowing the release of power when pricing is most favorable.

  • Standalone projects. Energy storage is deployed without dedicated generation assets and is charged directly from the electric grid. The storage solution may be dispatched back into the grid to address market volatility and “shift” energy from low-cost periods to high-cost periods, while also providing capacity and ancillary services.

Long-term power purchase agreements that incorporate energy storage have given rise to a variety of financial reporting considerations under U.S. GAAP. In general we would expect suppliers (project owners) and their customers (project offtakers) to evaluate these arrangements using the commodity contract framework detailed in Section 1 of PwC’s Power and Utilities Guide. This framework is broadly applicable to contracts that involve commodities (e.g., electricity) and requires project owners and offtakers to evaluate the contract and determine whether they are subject to leasing, derivative, revenue (or expense), and/or consolidation guidance in accordance with U.S. GAAP. This document will discuss recent questions that have arisen when evaluating whether certain energy storage offtake arrangements are, or contain, a lease under ASC Topic 842 - Leases.

What are the “identified assets” in an energy storage contract?

In evaluating whether battery storage contracts contain a lease under ASC 842, companies must first determine whether the contract contains one or more identified items of property, plant or equipment. This determination is critical in any arrangement but can be complex in “hybrid” projects where battery storage equipment is paired with power generation equipment (e.g., wind or solar) in a single arrangement. For a contract to contain a lease it must contain an identified asset. The assessment of whether an arrangement is, or contains a lease, is evaluated for assets that are physically distinct (e.g., mechanically / physically separable, and/or independently usable). A complementary relationship between two physically distinct assets does not preclude each asset from being a separate, identifiable asset under ASC 842.

To illustrate, assume a given hybrid project consists of battery storage equipment and power generation equipment. The equipment may be installed at the same site and configured to function as an integrated system that produces, stores, and dispatches electricity. Notwithstanding the configuration, the battery storage equipment may be considered physically distinct from the energy generation equipment when (a) the assets perform complementary but separate functions (storage vs. generation) and (b) can operate together or separately from one another.

If the project is designed to perform a combined function (generation and storage) and does not contain physically distinct and separable assets, the lease assessment will be conducted on that basis.

Finally, battery storage arrangements may also require an assessment of whether land usage rights exist which would result in another identified asset requiring lease evaluation. See PwC Leases Guide EXAMPLE LG 2-7.

Does the customer receive the right to control use?

Even if an identified asset is present, the customer must also control the asset for a lease to exist in the contract. A customer controls the asset when it has both of the following: 

  • Receipt of outputs. Substantially all of the economic benefits from use of the asset, and

  • Control over identified asset. Decision-making rights around how and for what purpose the asset is used

Receipt of Outputs Criterion

This criterion requires a careful identification of the types of benefits arising from use of the identified asset. The analysis would exclude benefits arising from legal ownership alone, such as certain tax attributes. Benefits related to battery storage arrangements may include:

  • Capacity. The stand-by availability of energy on demand

  • Dispatch. The actual delivery of electrons from the battery

  • Ancillary Services. Attributes of the battery that are beneficial to maintaining the stability and balance of the broader electricity grid (e.g., frequency regulation, demand response, congestion relief)

  • Other attributes. Environmental or tax benefits arising from the use (not ownership) of the battery.

Hybrid projects. In hybrid projects that include energy storage and generation, the nature and consumption of economic benefits from the battery storage equipment may differ from the generation equipment. For example, solar power generation equipment may be eligible for renewable energy credits (“RECs”) in a particular jurisdiction. The RECs are considered an output from use of the solar equipment under ASC 842. As a result when a single customer agrees to purchase all of the electricity produced by the solar panels but the supplier retains the associated RECs, the relative value of each will determine whether the customer takes substantially all of the benefit. Where the RECs are significant the contract would not contain a lease of the solar equipment. However, if the battery equipment constitutes a separate identifiable asset, evaluation of control is likely to depend on rights to dispatch stored energy from the battery. Stored energy does not produce RECs so it would not be a factor in assessing control over the battery.

Priority use. In certain battery storage projects, the customer obtains a priority right to dispatch from the battery based on its energy consumption requirements. When the customer does not require dispatch from the battery, the contract may allow the supplier to dispatch the battery into the local energy grid and generate revenues from this activity. For example, the supplier might routinely charge the battery from the grid during off-peak hours when energy prices are low, and dispatch the battery into the grid during peak hours when prices are high. The contract may or may not require the supplier to share a portion of these profits with the customer.

The economic benefits criterion in ASC 842 focuses on which party holds contractual rights to the output from the asset. Rather than considering the probability of which party is likely to receive the economic outputs, the assessment should consider whether a customer receives the contractual right to obtain substantially all of the asset’s economic outputs during the period of use. In the battery storage arrangement described above, if the customer has the contractual right to consume substantially all of the output from the battery this criterion may be met — notwithstanding the fact that the supplier is expected to dispatch the battery into the grid periodically. Alternatively, if the customer does not have the contractual right to substantially all the benefits from the use of the asset the criterion may not be met.

Control Over Asset Criterion

This criterion focuses on control over how and for what purpose the asset is used. It considers whether the customer obtains the right to make decisions that most significantly impact the asset’s economic outputs during the period of use, such as:

  • Where outputs are produced (geographic location)

  • When outputs are produced (timing)

  • Type of outputs are produced (nature)

  • Whether (or not) outputs are produced (occurrence)

  • Quantity of outputs produced (extent)

Operation of the asset does not generally constitute a ‘relevant decision’ under ASC 842 as it typically relates to implementing (rather than directing) decisions that impact the asset’s economic productivity.

In situations where all relevant decisions around the asset’s use are predetermined (such that no decisions will be made during the period of use), control over the asset rests with the party that (a) holds the right to direct the operation of the asset during the period of use (and the supplier has no ability to change those operating instructions), or (b) designed the asset in a manner that predetermined its purpose and outputs during the period of use.

Relevant decisions for storage assets. Storage arrangements frequently involve decisions that impact the asset’s economic output and are made throughout the period of use. For example, a customer may contract for space in a warehouse and obtain the right to decide the type, quantity, and timing of items to be stored from time to time. Many battery storage arrangements will have similar features as decisions around charging (if available from a source other than renewable generation) and dispatching the battery that directly impact the timing, occurrence, and quantity of economic outputs produced by the equipment, and these decisions may not be predetermined.

Control over relevant decisions. Battery storage agreements may provide for the supplier to execute charging and dispatch orders throughout the term of the contract. The supplier may automate these activities using software. In these situations, companies must carefully distinguish relevant decisions such as directing the timing, occurrence, and amount of economic outputs produced by the battery from operational activities to implement those decisions. As an example, if the supplier is contractually required to dispatch the battery in response to the customer’s demand, the customer may be exercising control over this relevant decision as the customer (not the supplier) controls its level of demand. Alternatively, if the supplier can make dispatch decisions, the customer may not be exercising control over this relevant decision.

In Closing

Energy storage offtake arrangements will likely require careful consideration to help determine whether they contain a lease under ASC Topic 842, and this analysis can impact both the supplier and the customer. Other US GAAP considerations arising from energy storage offtake arrangements include the remaining elements in the commodity contract framework noted above (e.g., embedded derivative assessment), accounting for the stored energy, and depreciation methodology for the storage assets. These issues can continue to evolve as commercial arrangements and underlying technology advance.

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