Aon’s recent Renewable Energy Insight Forum – Battery Energy Storage Systems (BESS) brought stakeholders together from a wide range of backgrounds including developers, private equity, lenders, legal and insurers to discuss and debate the challenges and opportunities for battery energy storage systems as a key component of the energy mix.
Alison Clarke – Head of Renewables for Aon’s Global Broking Centre and UK, highlights some of the key themes covered and emphasises the need for all stakeholders to work together to ensure battery storage can play a full role in the energy transition.
One of the big challenges for battery energy storage systems and the insurability of any relatively new technology is the lack of data when it comes to informing the risk profile. Our first session in a planned series covering Renewable Energy technologies brought together a panel of insurers and revealed a need for knowledge share between insurers’ and developers’ perceptions of the battery storage risk. One hot topic, for example, focused on the spacing of BESS assets. Insurers look for three metres or more of spacing to mitigate the risk and spread of fire, but developers, as well as the manufacturers and maintenance sometimes specify only two metres.
Other industry sectors often deal with such design inconsistencies by bringing together stakeholders to define industry best practice guidance which can then increase feasibility, bankability and insurability for those compliant projects. It seems that the BESS sector is next in line.
Need for knowledge sharing
The challenge is that there is little in the way of claims data for BESS that are plugged into the grid, unlike comparable renewable technologies such as wind or solar where there are already substantial data sets of claims information to draw on. Bringing real life scenarios to both insurers and developers is important and emphasises the need for mediation between the parties to reach the best outcome for these projects and share information and innovation.
Technology has moved on and manufacturers have realised that there are ways to make these facilities safer so that if they catch fire, for example, the whole site is not destroyed. It’s interesting that the current fire protection systems can do more damage and cause more losses in BESS than a fire itself. The forum also looked at other issues such as the disposal of ruined lithium batteries which is expensive and difficult to do in a sustainable way which all adds to the insurance challenge.
‘BESSpoke’ Wordings Needed
One area discussed that needs a response is in what can trigger a policy. So far, the insurance industry has relied on standard, manuscript wordings which do not reflect the unique nature of the risk. Traditionally there needs to be some physical damage or physical loss for a policy to be triggered, but what if a BESS goes off grid for another reason aside from physical damage but still leads to a loss of revenue which would not be covered by its existing insurance? In addition, more work needs to be undertaken to consider how policy wordings wrap around and dovetail with the existing warranties on BESS projects so that insurance will step in for situations when the warranty does not apply.
The good news in terms of insurance capacity is that while it might be limited, the industry is in a much better position than five years ago. There is currently enough insurance to cover most projects today as insurers get more comfortable with the technology. But considering the pipeline in the UK alone for battery storage is for 32GW of grid connection, there is a pressing need to educate other insurers and bring that capacity to market.
Affordable Insurance is Key
Affordable insurance for these projects is key, particularly given the relatively low margins on BESS which is largely dictated by the cost of debt. Many of these projects are financed by private equity which can prove a challenge because they are not used to the specialist insurance requirements of BESS.
One lender at the forum said they know these projects are challenging and are not massively profitable so they have to make sure they take steps to protect their finance. Again, it is a balancing act to make sure a BESS facility is properly protected from an insurance perspective but in a way that still allows margin for profitability and the debt to be repaid.
Working Together
Aon are bringing together stakeholders to find solutions for the challenges they present – including topics such as cyber, imbalance of supply, warranty protection through our Energy Transition team.
If you’d like to discuss this further, we’d be happy to hear from you.
Alison Clarke – Head of Renewables, Aon Global Broking Centre, UK
Jon Wiegand – Head of Power, Aon Global Broking Centre, UK
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