Falling battery prices and the growth of variable electricity generation are fuelling an interest in the development of Battery Energy Storage Systems (BESS), but project developers need to manage the potential fire risk.
Lithium-ion battery perkWh costs dropped 85% in the period 2010-2018 and are expected to further halve in cost by 2030, according to Bloomberg NEF. Infrastructure project developers and investors are optimistic about the application of this technology throughout the electricity grid as it is a near term, scalable way to ‘flatten the curve’ of intermittent electricity generation, allowing for a cleaner energy future. The US Energy Information Administration notes that in the United States alone, large scale battery storage projects will contribute 10,000 MW to the grid between 2021 and 2023, ten times the capacity installed in 2019.
The case for battery systems
The value that BESS can provide to the power grid is well established. BESS facilities sited independently provide frequency regulation, demand response, and other ancillary services that are key to keeping the electricity network running smoothly as the traditional forms of base load power (coal, nuclear) are decommissioned and increasingly replaced with variable power production via solar and wind energy systems. Wind and solar power project developers are also looking to mitigate the variability of power production at the individual site level by co-locating wind and solar power stations with batteries at the point of interconnection. Such hybrid wind-BESS or solar-BESS projects can improve project economics and make securing of a power purchase agreement (PPA) easier in areas where intermittent renewable energy production is highly concentrated. However, there is some trepidation as technological innovation increases risk of mechanical and electrical breakdown. The risk is acute with this technology due to the unique chemistry of current battery systems, Lithium Ion being the most prevalent currently, and the potential of catastrophic loss due to thermal runaway. Mechanical and electrical breakdown can hamper individual project profitability, and any evidence of serial defects within the technology could test the insurability, and therefore the bankability, of the asset class. Falling battery prices and the growth of variable electricity generation is fuelling an interest in the development of BESS.
The physical risks associated with BESS
Batteries have been a common component in power systems for many years. But 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 four risks inherent to BESS.
Thermal runaway
Difficulty of fighting battery fires
Failure of control systems
Sensitivity of Lithium-Ion batteries to mechanical damage and electrical transients
The insurance market is still finding its feet when it comes to insuring BESS as a standalone asset or as part of a broader renewable energy portfolio.
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 portfolio’s total insured value (TIV) often meant that the assets could be covered within the portfolio with lesser scrutiny. The past five years has seen a marked increase in the development of BESS systems on a standalone basis.
Development of these projects has fallen largely to the same firms which develop wind and solar power stations, utilising the same methods of non-recourse financing common in the renewables sector. Such a financial structure 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 wind and solar insurers are active in the BESS market and have developed underwriting guidelines to support the class, there are still others whose appetite is very restricted due to technological concerns.
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 standards that apply to all utility scale BESS which projects should adhere to or be prepared to discuss why/how a specific standard may not be applicable, including:
NFPA 855 – Fire safety standard for design, installation, and deployment for a successful emergency response in the event of a fire.
UL 9540a – Test for evaluating thermal runaway fire propagation in BESS.
Additional National Fire Protection Association (NFPA) and UL standards are also applicable, as are various shipping (IEC, IATA, ICAO, IMO), fire and building codes. Site layout and spacing between battery units/ containers is a key consideration 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, along with damage to third party property left behind. The need for prudent risk management of physical risks at BESS facilities is brought into focus when viewing the recent history of utility scale BESS fire losses, 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 – (Korea) – 2017 to 2019 - Government subsidies encouraged a dash to build BESS in 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 Global Energy. 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.
BESS holds enormous promise in providing near term solutions for the great energy transition currently underway, but the technology is still a work in progress, with lessons being learned and improvements implemented. Lockton Global Energy is close to the leading insurers in this space and is helping to shape their view of BESS risk by serving as a trusted intermediary between the insurance market, project owners, and battery manufacturers/system integrators. As the next generation of BESS project developers get ready to enter the market Lockton Global Energy’s advisors stand ready to use their experience in the sector to achieve success for future projects.
A specialist insurance broker can help project developers to syndicate an insurance placement utilising the best of the renewable energy and conventional power insurance market, while ensuring that the policy terms and conditions are tailored to the unique aspects of BESS projects. Since 2015, the insurance advisors at Lockton Global Energy have guided clients to make prudent risk management decisions in their design, installation, and operation of battery facilities based on the best practices advocated for by the leading insurers in this space. We are happy to share our experience with you to help keep insurance costs manageable and to contribute to overall project success.
For further information, please contact:
Michael Bogdan, Senior Vice President Lockton Global Energy (LGE)
T. +44 (0) 20 7933 2301
M. +44 (0) 79 2075 6815
E. michael.bogdan@uk.lockton.com
Robert Wilson, Energy Construction Leader Lockton Global Energy (LGE)
T. +44 (0) 20 7933 2373
M. +44 (0) 73 4207 8235
E. robert.wilson@uk.lockton.com
