Background
As the goal to become carbon neutral picks up speed in the U.S. and across the world, new technologies are being explored to support this transition. One technology experiencing significant growth is battery energy storage systems (BESSs). The addition of a BESS to a renewable energy facility significantly increases the flexibility and reliability of the power generation delivery. In addition, it allows the facility to more closely align to traditional energy sources such as coal and gas generation facilities. While the addition of a BESS to a renewable generation facility can have multiple benefits, it is important for both the project owner and customer/off-taker to think through the accounting treatment under GAAP.
An energy off-take arrangement involving a BESS would generally be subject to the commodity contract accounting guidance for both parties to the contract (project owner and energy off-taker/customer). The commodity contract analysis starts with evaluating if the arrangement is or contains a lease, in accordance with Accounting Standards Codification (ASC) 842, Leases. If the lease guidance does not apply or does not apply to the whole contract, then the derivative guidance, in accordance with ASC 815, Derivatives and Hedging, would be evaluated next. If the derivative guidance does not apply or if there are still portions of the contract to which the lease and derivative guidance do not apply, then executory contract accounting applies which would typically be accounted for in accordance with ASC 606, Revenues from Contracts with Customers. Consolidation accounting, in accordance with ASC 810, Consolidation, also may apply in addition to lease, derivative, and executory contract accounting. The considerations around BESSs and lease accounting under ASC 842, Leases, can be complex and, therefore, require careful consideration as discussed below.
Lease Accounting Considerations
Identified Asset
The first step in determining if an arrangement is or contains a lease is to determine if there is an identified asset (or assets). In some arrangements, this determination can be straightforward as the asset is clearly identified. However, the determination can be more complicated when it comes to determining if the BESS is a standalone identified asset, or if it is part of the larger renewable energy facility. To be an identified asset as outlined in the lease guidance in ASC 842, the asset must be able to be used independently even if it is complementary to or can be used in combination with another asset. Below are factors to consider in determining if a BESS can be used independently and is, therefore, an identified asset.
Factors that could indicate the BESS is not an identified asset:
- The BESS is only charged from the renewable generation site.
- The BESS solely functions as part of the integrated system with the renewable energy generation facility and cannot be charged or discharged independently.
Factors that could indicate the BESS is an identified asset:
- The BESS can be charged from the electric grid or some other method outside of the renewable energy generation site.
- The BESS can be dispatched (used) independently of the operation of the renewable energy generation site.
- The BESS can be curtailed by the grid operating authority independently of curtailment orders with the renewable energy generation site.
The considerations above are not all-inclusive and there could be other factors that warrant consideration in determining if the BESS can be operated independently, even if that is not how it is generally functioning.
If the BESS is an identified asset, as outlined in ASC 842, then the next step is to determine whether the customer (energy off-taker in this case) has the right to control the use of the identified asset.
If the BESS is not an identified asset, due to its dependency on the renewable energy generation site, then the renewable energy generation site as a whole would likely be the identified asset and would need to be assessed in accordance with ASC 842.
Customer Right to Control the Asset
If the BESS is considered an identified asset, the next consideration in identifying if a lease is present, as outlined in ASC 842, is determining if the customer has (a) the right to receive substantially all of the economic benefits of the asset and (b) the customer has the right to direct the use of the identified asset for a period of time in exchange for payment.
Substantially All of the Economic Benefits
The right to obtain substantially all of the economic benefits from the use of the identified asset includes benefits from primary outputs, by-products, cash flows derived from primary outputs/by-products, and other economic benefits that could be realized from a transaction with a third party.
When determining if the customer/off-taker has the right to substantially all of the economic benefits of the BESS, it is important to carefully evaluate the terms of the contract. There could be instances where the project owner dispatches energy into the grid from the battery for general consumption when that energy is not needed by the off-taker. If any profits from this type of arrangement are shared or passed to the off-taker, the off-taker could still be receiving substantially all of the benefits of the system. An analysis would need to be done to determine how much, if any, benefits are being shared with another party and the significance of the shared benefits in relation to the total.
Right to Direct the Use of the Asset
To determine who controls the asset by directing its use, it is necessary to identify the decision-making rights that impact the economic benefits to be derived from the asset. Examples of decision-making rights that grant the right to direct how and for what purpose an asset is used and, therefore, impact the economic benefits derived from the asset include:
- The right to change the type of output that is produced by the asset.
- The right to change when the output is produced.
- The right to change where the output is produced.
- The right to change whether the output is produced and the quantity of that output.
In some arrangements, how and for what purpose the asset is used is explicitly outlined in the terms of the contract. In those arrangements, the decisions are predetermined and cannot be made during the use of the asset. Predetermined decisions are ignored in the control assessment as long as there are relevant decisions that could be made during the period of use. However, predetermined decisions are considered in the control assessment when there are no relevant decision-making rights that can be made during the period of use.
For BESSs, the arrangements may outline specific times or criteria under which the stored energy will be dispatched throughout the life of the contract and those decisions cannot be changed. That would be an instance in which there are no relevant decision-making rights to be made. In that situation, control over the asset rests with the party that has the right to operate or direct the operation of the asset or the party that designed the asset in a way that predetermined how and for what purpose it would be used throughout the period of use.
Taking into account the examples of decision-making rights that can most significantly impact control of an asset, the following factors should be considered when determining if the customer (energy off-taker) controls the BESS:
Factors that could indicate the customer controls the BESS:
- The customer has the sole right to determine the dispatch of the BESS.
- The customer determines when and how the BESS is charged.
- The customer designed the BESS in a way that predetermined how it would be charged and dispatched.
Factors that could indicate the customer does not control the BESS:
- The owner or another party determines when the BESS will be dispatched.
- The owner or another party determines when and how the BESS will be charged.
- The owner designed the system in a way that predetermined how it would be charged and/or dispatched.
- The owner can dispatch energy to the grid for general consumption when it is not needed by the off-taker and the owner does not share any of those profits with the customer.
Similar to the identified asset considerations, the considerations above are not all-inclusive and there could be other factors that warrant consideration in determining who controls the identified asset. Instances of protective rights by the owner/grid operator generally would not prevent the customer from ultimately controlling the asset. Protective rights are often in place for the safety and functionality of the asset and typically would not interfere with the safe operation of the asset within the parameters of the agreement.
If the customer controls the BESS, then the arrangement could contain a lease. If the customer does not control the BESS, then the contract would need to be further assessed under the commodity contract guidance.
Conclusion
Both parties in a customer off-take arrangement involving a BESS will need to carefully assess the agreement to determine the appropriate accounting and financial reporting elements. There will not be a one-size-fits-all approach to a BESS as the individual terms of each contract could significantly impact the accounting treatment. If you or your organization needs help evaluating the accounting for a BESS, please reach out to a renewable energy professional at FORVIS.