In terms of energy project development, financeable project-level agreements were historically an important diligence item, but today, these contracts have effectively evolved into major transaction documents. Recent tax regulations and shifting federal priorities have increased the commercial significance of development鈥憇tage agreements, pushing key terms into the spotlight and intensifying negotiations. Below, we briefly outline key provisions that both sponsors and financing parties are increasingly scrutinizing, as well as a few cautionary tales.
Key Takeaways
- Tariff risk allocation requires a deliberate commercial strategy at the outset.
Because tariff exposure can materially alter project economics, tariff risk allocation can, and should, be heavily negotiated in project-level agreements, and there are a number of mechanisms at play in the market. Developers should enter negotiations with a clear sense of their risk tolerance and the impact various tariff scenarios may have on their financial model. - FEOC compliance is now a core development鈥憇tage issue.
As FEOC rules remain ambiguous and continue to evolve, developers should proactively negotiate compliance obligations and ensure that all FEOC-related representations made to buyers or financing parties flow down to suppliers and contractors through robust representations, warranties, and/or certifications, despite how reluctant these latter parties may be to assist owners in the tax credit qualification. - Properly documenting 鈥渂eginning of construction鈥 is imperative.
Project documents should include clear requirements for BOC evidence, tracking, and delivery to ensure developers receive the documentation necessary to support their tax credit strategy.
- Tariff Risk Allocation
Because tariff exposure can materially affect project economics, parties are negotiating allocation structures with much greater nuance. Contractors may refuse to price in base tariffs, and thus may seek to pass through any tariffs assessed at the time of executing purchase orders while developers may want to push Contractors to bear an initial increase in costs due to tariff increases. Early discussions help avoid execution delays and allow developers to align tariff risk with their financial model. Developers should evaluate each approach and the applicable tariff risk exposure against modeled project economics and ensure consistency across supply, EPC, offtake and financing documents.[1] Some approaches we鈥檝e negotiated include:
- A 50/50 tariff鈥慽ncrease sharing mechanism, with a developer termination right if the increase is not commercially acceptable.
- Contractor responsibility for tariff increases up to a negotiated cap; amounts above the cap shared 50/50. Developer may terminate if the cap is exceeded.
- Contractor responsibility up to a cap, with additional increases allocated by mutual agreement using commercially reasonable efforts. Developer may terminate if the parties cannot agree.
- A negotiated portion of the EPC contract price earmarked for tariffs, with any unused amount returned to the developer.
- Narrow change in law provisions in a VPPA permitting an increase in the fixed price paid to a project up to a cap due to post-execution tariff-related cost increases.
- FEOC Compliance
Despite continued uncertainty around 鈥渇oreign entity of concern鈥 (FEOC) rules,[2] developers should proactively negotiate FEOC compliance provisions and ensure that representations made to buyers and financing parties are supported by corresponding flow鈥慸own obligations in supplier and contractor agreements. Investors and lenders now routinely diligence FEOC allocation and seek clarity on how noncompliance could affect tax鈥慶redit eligibility. While the latest guidance does not elaborate on the 10-year recapture period for certain investment tax credit eligible facilities, we have negotiated provisions wherein a supplier covenants to remain in FEOC compliance for a period of 10 years from the date that the project is placed in service.
Ultimately, the key question is how FEOC compliance risk is allocated. Financing parties and project buyers will closely review project documents to confirm that FEOC risk is clearly assigned and to evaluate the developer鈥檚 residual exposure. As a result, we regularly see our developer clients push suppliers to conduct their own independent FEOC analyses, and many suppliers are actively assessing their ownership structures and supply chains to provide the representations required by investors and financing partners. For example, certain suppliers are willing to provide certifications with respect to FEOC compliance in their supply chain, while others are only willing to provide representations with respect to their ownership structure.
This is especially significant for BESS projects, where some battery suppliers inherently present potential FEOC concerns due to their country of origin. We recently experienced push back from a supplier with potential FEOC concerns that was only willing to agree to use commercially reasonable efforts to comply with FEOC provisions. We believe this may be more common when suppliers have been engaged prior to FEOC rules being a concern, for example, under a master supply agreement during the pre-FEOC era. The commercially reasonable efforts qualifier creates a risk tolerance issue for potential buyers and financing parties. Ultimately, the developer/owner may have to wear the risk of loss of the applicable tax credit in that scenario, such as if a future buyer of the project requests a special indemnity for that purpose.
- Beginning of Construction
Despite the critical importance of beginning of construction (BOC) documentation, we continue to observe flaws and omissions within major equipment supply agreements and other key documents, particularly as it relates to properly documenting official BOC dates by requiring certification and documentation related to commencement of work from the applicable supplier or contractor. Relatedly, we highlight the practical reality of ensuring these provisions are included during active negotiations鈥攐therwise, it can become increasingly difficult to corral suppliers and other counterparties to agree to amendments after execution: many of these counterparties are foreign entities with little incentive to further enhance a developer鈥檚 tax credit eligibility. For example, in a recent negotiation, the parties entered into a purchase agreement in 2024 which included a guaranteed work completion date for purposes of liquidated damages and an expected start of manufacture date. However, the certificate provided by the supplier did not state the exact date when manufacturing started, it only stated that it was prior to the expected date, which had subsequently been amended. The date on which manufacturing started affected whether the project was under Section 48E or Section 48.
This distinction, in turn, affected how prevailing wage and apprenticeship should be tracked. The developer ultimately obtained an amended certificate from the supplier that stated the exact date of the start of manufacturing. The supplier was not as engaged since they were already well into performing the agreement and supplier delays in engagement to provide this certification caused delays in the financing for the project. This is one example of how, without clear contractual obligations, developers may lack the documentation needed when buyers or lenders diligence the project.
- Other IRA Tax Credit Compliance
While the majority of EPC contractors and suppliers have become comfortable with prevailing wage and apprenticeship (PWA) and domestic content obligations, generic form language may fail to protect the project鈥檚 tax credit strategy. PWA tracking may vary depending on the BOC status and the specific credit sought. While the underlying rule is that the PWA requirements need to be satisfied on an 鈥淓ST鈥 basis, which would include all functionally interdependent components, components are 鈥渇unctionally interdependent鈥 if the placing in service of each of the components is dependent upon the placing in service of each of the other components to perform the intended function of the EST. The developer will ultimately have to work with the contractors and suppliers to ensure tracking requirements align. For example, if PWA is tracked on a project-wide basis but should have been tracked on a breaker basis it may cause issues if the IRS audits the project. While we have seen taxpayers take the position that a project should be considered a single, aggregated project, in that transaction, there were no third party financing parties that needed to get on board, so the developer was not under pressure to explain the determination to other parties. Tailored compliance provisions aligned with the project鈥檚 tax strategy are therefore essential for developers looking to sell or finance their projects.
Domestic content requires even earlier alignment. Developers and sponsors are obliged to engage with their suppliers and tax counsel at the outset of equipment supply negotiations to level-set on operational expectations and thus overall tax strategy. In a recent financing, we discovered that lender鈥檚 counsel had a drastically different perspective on domestic content eligibility as it related to BESS cells that were manufactured abroad but assembled in the US, which ultimately resulted in the need for a sponsor-side tax opinion at the 11th hour. We again emphasize that suppliers and contractors often remain reluctant to meaningfully validate tax credit qualification, and thus active assessment of these risks is encouraged, not just when lenders ask (or disagree).
