BESS insurance: A blooming market vs booming risk

Although the BESS market is growing at a much-needed rate, battery projects still pose significant risk in need of remediation to ensure insurer buy in, especially as they continue to be integrated across our power systems, explains Yusuf Latief in this edition of Smart Energy’s Power Playbook.

A few weeks ago a London-based specialist energy and infrastructure broker by the name of NARDAC started underwriting battery energy storage projects.

Underwriting/insurance for renewables unfortunately don't often make headlines, but what makes NARDAC’s initiative interesting is their move into the battery segment despite its significant risk profile.

In fact, NARDAC cites this risk as a key driver for its new service. The company states that, as battery projects continue to proliferate globally, notably across the US, Western Europe and Australia, their risk profiles have reduced the insurance capacity available for operators to secure against their projects.

Older and typically smaller battery projects in the US and the UK are deprioritised, leaving operators with punitive terms and conditions.

NARDAC uses this backdrop as its value proposition: saying there are set-up to service these accounts with a “nuanced approach” to underwriting BESS projects, providing a service that brokers and operators can rely on.

“With deep industry expertise in engineering, broking, underwriting, and claims, we know that BESS businesses face a multitude of challenges as technologies evolve and as revenue streams now focus on ancillary services and merchant trading, moving away from fixed, long-term payments,” said Dr Tom Harries, NARDAC partner in a release. 

“We noticed projects increasingly being fully funded by lenders in the anticipation of reliability and comprehensive risk management and recognised that there was an emerging gap in critical risk cover that was not being met by the incumbent markets.”

The company made $50 million available in underwriting capacity, no small sum, signalling a pivot into a segment that investors are increasingly wary of.

So, what’s there to be afraid of?

Have you read:
Blending financing for transmission infrastructure
Not without risk: the balancing act of insuring renewables

Fire, for starters

One example of why batteries are a risky investment prospect is the fact that fire risk from thermal runaway is still a hurdle that has yet to be fully overcome.

Based on factory quality audits from US-based advisory company Clean Energy Associates, of over 30GWh of energy storage projects from the past six years, 18% exhibited problems with their thermal management systems and 26% had defects in their fire suppression systems.

Also, according to Fire Trace International, a global supplier of fire suppression technology, high profile fire incidents in battery storage have had a significant impact on the insurance market, threatening to derail deployment of the tech and bring down public opinion.

In Fire Trace’s report, How to reduce battery storage fire risk, the company says that, because of this risk, the appetite to cover energy storage projects has declined, with some insurers exiting the market.

This has resulted in increased premiums, higher excesses, and difficulties in securing 100% cover. Addressing the fire risk of battery storage has thus become a focal point for owners, contractors and operators.

And this is fire alone.

According to London-headquartered GCube Insurance Services in Batteries Not Included, Getting the insurance market on board with BESS, four other key considerations for underwriters include augmentation and compatibility issues, tech evolution and diversity, transit and cargo and liability.

Risk appetite in a fruitful market

In March, the same time as NARDAC’s announcement, in Smart Energy’s Power Playbook I covered Europe’s energy storage financing climate, including research from Aurora Energy showing that the continent’s battery market is expected to increase sevenfold in capacity by 2030.

With Great Britain, Italy and the Ireland Integrated Single Electricity Market (I-SEM) leading the way, installed capacity of grid-scale BESS in Europe is expected to grow to 51GW by 2030 and 98GW by 2050, an investment opportunity of €78 billion ($83.3 billion) through 2050.

However, commenting in a release, Aurora’s European power markets research lead Ryan Alexander said that, although the market is expected to exponentially surge, “battery markets are challenging to navigate and developers and investors alike will need to embrace complexity to deliver a compelling business case or keep a look out for public support schemes that can help them get a kick-start in emerging storage markets.”

Eva Zimmermann, Aurora’s lead for flexible energy, added that, although batteries are no doubt indispensable assets, “the attractiveness of the market hinges on a multitude of factors.

“Elements such as risk appetite, investment scope, and preferred setup are just as pivotal as market design and a comprehensive understanding of future power market developments. Considering these variables collectively is essential for making informed investment decisions in this evolving landscape.”

Also of interest:
Round Table for Industry identifies €800bn EU energy infrastructure investment gap
Investment needed to keep grid fit for purpose says Enel Grids boss

Where to from here?

In their report, GCube outlines short-term steps and long-term considerations for asset owners to cope with ongoing uncertainties in the market.

In the short term, asset owners and developers should:

• Carefully consider the type of battery used for BESS.
• Ensure adequate spacing between battery modules.
• Provide detailed information about the qualifications of project participants.
• Provide a clear understanding of how the BESS interacts with solar or wind generation.
• Provide a complete root cause analysis.

Regarding long-term market strategies, GCube recommends:

• Spacing standards be developed for BESS units to minimise the risks and uncertainties of thermal runaway.
• A liability framework be defined for BESS projects to specify the roles and responsibilities of different parties, such as developers, OEMs and insurers, and outline the scenarios and conditions under which they are liable. This will provide clarity and certainty for all parties involved and encourage safer and more reliable practices in the industry.
• Finally, Developers and project stakeholders should actively engage OEMs from the early stages of the project, to help ensure that BESS projects are built and operated according to the highest standards, reducing risks and uncertainties in the long term.

What has been your experience within the battery storage market, whether insuring, underwriting or investing in new projects?

Reach out and let me know.

Cheers,
Yusuf Latief
Content Producer
Smart Energy International

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