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Making BESS Bankable

Batteries are showing a great deal of promise, and are no doubt a crucial component of the green energy transition. We explore how to make BESS bankable while managing risk exposure.
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By Darren Popham , 

Chief Client Officer, Power and Renewable Energy

10/07/2021 · 6 minute read

Welcome to the last in our four-part blog series on battery energy storage systems (BESS). So far, we have looked at the rise of BESS, thermal runaway incidents, and risk management considerations for combining batteries with renewable energy projects. To finish off the series, we are going to explore how to make BESS bankable while managing risk exposure.

Project owners and their lenders need to ensure that the risks their projects face are managed, considered, and, if appropriate, transferred. Insurance is one of the fundamental risk transfer mechanisms available; in order for a project to be bankable, the insurance policies must offer the assets adequate protection, protect the revenue stream, and be in place on time and on budget. In addition, the execution of the lender security documentation needs to be in accordance with the lender requirements.

There are several significant insurance challenges for BESS projects. Some of these are inherent, others are site specific; some must be actioned and others simply considered.

New technology and the unknown

Whenever any new technology is introduced, the insurance industry always takes a cautious approach. Typical insurance risks are priced according to years of loss history data. This gives underwriters an indication of the average claims they expect to pay per policy period for specific types of property. With new technologies however, this data is not available so underwriters are often apprehensive. Furthermore, the potential for loss is high in battery systems due to the thermal runaway and fire risk, as outlined in our thermal runaway blog. With thermal runaway, even small faults can result in large losses due to the negative feedback loop that occurs. That said, while the exposure to battery fires is high, many traditional risk exposures, such as weather-related incidents, typically have less of an impact on batteries.

Underwriters are still working out how best to price battery projects. To add to this, sometimes projects are struggling to “find a home” within insurance companies’ underwriting teams. While some insurers have specific teams for renewables, they may not have a wealth of experience with energy storage, so the learning curve is steeper than those who have had a renewables team grow out of conventional energy and power teams. The positive that can be drawn here is that the market is responding to the evolving risk landscape. Underwriters are seeing more battery sites every week and with this comes a greater volume of data. At Marsh, we have a good understanding of the technical information that will be required for projects seeking insurance protection.

High-profile losses

Another concern for the insurance industry are the high-profile losses recently seen in battery systems. These have occurred across the globe, most notably in the US, Asia, and Australia. These kinds of incidents attract a great deal of attention from the press, which is harmful for the reputation of batteries and may deter new carriers from entering this insurance market. While losses of this nature occur across all lines of business — claims are a fundamental component of insurance — the fact that they are high profile and widely reported could be a potential issue for the industry.

These incidents aren’t all bad news though, as more publicity will draw greater interest and research into the issues that cause thermal runaway and subsequent loss events. The difficulty with new updates and technology developments is they are often treated as prototypical by insurers, bringing us back to our previous point about insurers requiring data and evidence. While positives can be drawn from the fact that the technology is progressing so rapidly, it is important that insurers are reassured by thorough testing regimes and certifications.

Fire protection and management

Fire protection remains a key consideration for risk managers and insurers alike. Strict testing standards must be followed in order to ensure that the risk is best understood and the fire response protocols are outlined clearly. Site developers and operators must engage early and establish a relationship with the local fire service. This is essential, as there have been incidents in the past where protocols have not been put in place and in the instance of a fire, the immediate actions made afterwards have actually worsened the situation. It is crucial that all parties involved know how to respond when an incident such as a fire breaks out.

Another important factor for fire risk is whether BESS are situated in buildings. This is not seen as desirable by insurers as it makes separation and fire management more difficult. If a fire were to break out in this scenario, the chances of a total loss of the building are significant. This is another consideration that needs to be made when putting together a project proposal.

Closing remarks

Batteries are showing a great deal of promise, and are no doubt a crucial component of the green energy transition. If project lenders, financers, and operators want to construct and run a successful battery project, they need to make them bankable, which cannot be achieved without appropriate and affordable insurance cover.

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