Battery Energy Storage Systems (BESS) are a key technology, assisting the integration of renewable energy into the broader grid, smoothing out the variability of wind and solar energy, as well as alleviating peak demand periods with stored energy.
Around six years ago, Australia commissioned its first large scale battery. The industry has experienced accelerated growth ever since. Falling battery prices and technological advancements continue to fuel interest in grid-scale battery solutions, which has underpinned Australia’s move towards a low emission, decarbonised future.
At the time of writing this article, there are approximately 15 large scale BESS Projects under construction or about to commence, a further 30 announced, and another 50 + proposed.
Whilst battery storage will be key to deploying higher levels of green energy and reaching ambitious clean energy targets, several examples of BESS failures (particularly during testing, commissioning, and early operations) emphasise the need for project developers to continually monitor, learn and refine the way project risks are mitigated.
The case for battery systems
Project developers are looking to mitigate the variability of power production at the individual site level, by co-locating wind or solar power stations with batteries at the point of interconnection. Such hybrid wind-BESS or solar-BESS projects can improve delivery time and investment return of projects, making power purchase agreements (PPA) easier to secure in areas where intermittent renewable energy production is highly concentrated.
There is however some apprehension as the pace of technological innovation increases the risk of mechanical and electrical breakdown. The risk is acute with this technology due to the unique lithium-ion chemistry, which threatens the potential of catastrophic loss due to thermal runaway.
Mechanical and electrical breakdown can also hamper individual project profitability; any evidence of serial defects within the technology could test the insurability, and therefore the bankability, of the asset class.
The physical risks associated with BESS
Batteries have been a common component in power systems for many years, however BESS poses new risks due to the sheer size, complexity, and energy density of the systems.
Risk engineers from the insurance industry have identified the following key risks inherent to BESS:
Difficulty of fighting battery fires
Failure of control / battery management system
Sensitivity of lithium-ion batteries to mechanical damage and electrical transients
Insurance market appetite
The insurance market for BESS is evolving alongside the technology itself. The conventional power insurance market has been willing to follow their utility-scale clients into the sector, by insuring BESS assets as part of a broader portfolio of coal, combined cycle gas turbine plant (CCGT) and hydro power stations. These large conventional portfolios carry higher deductibles than renewable energy portfolios, and the BESS’ relatively small portion of the total insured value (TIV) often means that the assets could be covered within the portfolio with lesser scrutiny.
The past few years have seen a marked increase in the development of grid-scale BESS systems on a standalone basis, as independent developers and project financers underpin a large portion of projects currently in the pipeline.
Like so many renewable energy projects, the Australian environment pushes the boundaries for sheer size and scale of BESS projects on a world scale.
Locally, this has forced the hand of many traditional energy insurers to ‘get up to speed’ with this rapidly growing sector where, anecdotally five years ago, there were less than a handful of Australian domiciled insurers with the expertise or willingness to offer capacity for BESS projects.
Fast forward to today, nearly every energy insurer will consider deploying capacity during either construction and/or operations. They simply have no choice, the opportunity cost is too significant to let the majority of insurance premiums leave our shores, and most traditional energy underwriters are forced to find new avenues to grow as ESG guidelines (or mandates) dictate they ‘run off’ of their once (very) large thermal generation portfolio.
Unlike other territories, development of these projects hasn’t fallen to the same firms developing wind and solar power stations; many independent power producers, along with transmission and distribution firms, are too developing BESS projects.
A major portion of these investments utilise the same methods of non-recourse project financing common in the renewables sector, where a financial structure as such, requires standalone insurance policies with terms and conditions acceptable to lenders.
Wind and solar energy insurers have found many aspects of their existing product lines to be well suited to BESS applications. While many energy insurers are active in the BESS market and have developed underwriting guidelines to support the class (particularly in London), there are still many insurers globally whose appetite is very restricted due to technological concerns.
All in all, there is no doubt available capacity for grid-scale BESS projects, and this continues to increase year on year. Like any supply demand market, this is starting to push insurance pricing downwards on a ‘like for like basis’, however to date, this is being negated somewhat by the increasing size and efficiency (i.e. increasing revenue profiles) of the projects being commissioned, and therefore the need for increasing insurance capital to adequately deliver each project.
Risk management techniques
When bringing a new BESS project to the insurance market, insurers will seek responses to a variety of questions related to the project design and management.
Lockton specialists work closely with developers and asset managers to analyse a project’s specific risk management requirements, however there are certain underwriting guidelines enforced by insurers to all grid scale BESS which projects should adhere to, including:
Testing & Commissioning procedures and compliance
Regulatory compliance (UL 9540A - safety, fire detection, fire propagation and suppression, fire mitigations testing & systems)
Site layout and spacing between battery units/ containers to reduce the risk of fire spreading across multiple units.
Existing projects include both ‘containerised’ units located outdoors, and ‘building’ units, where battery banks are housed indoors. In both cases, fire separation protections and fire suppression techniques will be closely analysed.
Management of third-party risk is also crucial. A thermal runaway event has the potential to result in a large third-party liability (TPL) exposure if the local population has to be temporarily removed due to toxic smoke, or if damage to third party property is caused.
The need for prudent risk management of BESS facilities is brought into focus when viewing the recent history of fire losses (Note: these are not necessarily losses realised in the insurance market), including but not limited to:
Neoen - VBB Fire (AUS) - August 2021 - Fire at a Tesla Megapack installation, causing concerns around a battery system set for a rapid scale up in 2021 and beyond.
Orsted - Liverpool Fire (UK) - September 2020 - System built by now defunct NEC Energy Solutions, raising concerns about OEM support for BESS manufacturers who failed to commercialise.
Arizona Public Service - McMicken Fire (USA) - April 2019 - Incident injured several fire fighters and led to new standards in ventilation for explosive gases, more intense fire suppression, and better training for first responders.
Various ESS Fires - (South Korea) - 2017 to 2019 - Government subsidies encouraged a dash to build BESS in South Korea without adequate verification of the safety and stability of the proposed systems. This lead to 21 separate fire events, resulting in the temporary shutdown of 584 facilities.
Engie - Drogenbos Fire (Belgium) - November 2017 - Given the nascent state of this sector these incidents are monitored closely by insurers. All have resulted in significant insured loss, but it is hoped that in each loss valuable lessons are learned for the future advancement of the sector.
Differentiating the best projects from the rest is a key role for Lockton Australia. When presenting the project to the insurance market, it is worth highlighting the following:
Adherence to codes and standards.
Contractual risk transfer: Holding manufacturers/contractors to account and ensuring contractors bear the appropriate amount of risk for defects/faulty workmanship.
Management of external factors and their impact on the BESS including temperature/humidity, wildfire mitigation, flood/earthquake preparation.
Project sponsorship of local fire brigade training/equipment to support quick, effective response to fire event.
As lessons have been learnt from around the world, and battery technological continues to advance, BESS holds enormous promise in providing near term solutions for the great energy transition currently underway.
Lockton is leading the way in this space, working closely with insurers to help shape their view of BESS risks, and serving as an expert intermediary between the insurance market, project developers, and battery manufacturers/system integrators.
As the next generation of BESS project developers get ready to enter the market, Lockton stands ready to use their experience in the sector to achieve success for future projects.
A specialist insurance broker can also help project developers syndicate an insurance placement with policy terms and conditions tailored to the unique aspects of BESS projects, and meet bankability requirements where project finance is utilised.
Backed by global capabilities, Lockton Australia continues to assist clients in making prudent risk management decisions in their design, installation, and operation of battery facilities. Our focus is on keeping insurance costs manageable and ensuring the safe delivery of projects.