Battery storage capacity can facilitate the move towards the decarbonisation of electricity generation, provide greater resilience for integrated grids and solutions for local and off-grid users of electricity – some barriers to widespread adoption though do still remain.
In recent years, markets have seen an increasing and established transition towards electricity generated from renewable sources. The prevalence of the sun and the wind as such sources can result in variable and unpredictable output, which in turn can create an imbalance between electricity generated and consumer demand in the short and the medium term. Energy storage can help to resolve this.
The energy storage market overall is dominated by pumped hydro which accounts for the vast majority of available capacity. However, in recent years the use of batteries as means of storage on a commercial scale has dramatically increased and installed costs have fallen considerably.
The use of battery storage has also been facilitated by advances in digital technologies to provide ancillary services for the benefit of utilities and grid operators. Every indication is that will continue, with aggregation models powered by artificial intelligence and predictive analyticsenabling distributed energy resources to be grouped together to create capacity while retaining flexibility and response times.
Lastly, battery storage can be implemented in various ways, such as part of generation facilities in development, being added to existing generation facilities or being developed on a stand-alone basis.
Key challenges
Regulatory policy has lagged behind changes in this evolving sector but regulators are catching up. For example, following a 2019 consultation, the UK government announced it would exempt battery storage projects (other than the very largest) from the nationally significant infrastructure projects (NSIPs) regime which should ease development cost and time.
Another key challenge for battery storage is the relative unpredictability of revenues overall in the medium to long term. Compared to other energy storage methods, revenue contracts for battery storage are still relatively short – for example, the length of an enhanced frequency response contract (a mainstay for many battery storage projects) is usually between one month and two years. To mitigate that, many battery storage projects will have multiple revenue streams with emergence of availability based contracts for use of part(s) of the capacity –challenges for their longer-term investment prospects though do remain.
It is not just the economics of particular projects which pose a challenge to the uptake of battery storage. The relatively limited shelf-life, the amount and nature of the raw materials required for production and the pollutants generated during the manufacture, use and disposal of large-scale batteries have given rise to environmental and political concerns.
Construction Contract structures
Given the constituent elements of any battery storage project, the options as to procurement, the contract structure for the construction of the project can be simple or relatively complex.
Battery storage projects to date have generally been let using either (i) an engineering, procurement and construction contract under which the contractor is often a joint venture between the main battery supplier and a construction and installation contractor; or (ii) by letting various elements of the works separately with employers taking a more extensive managerial role and, for example, providing the batteries and/or equipment as ‘free issue’ materials to the construction and installation contractor.
Standard form construction contracts which are internationally or nationally recognised are widely used but amended to varying degrees in order to reflect the relevant procurer’s requirements as to risk transfer and retention.
Key terms particular to battery storage projects include enhanced environmental indemnities and payment provisions to reflect the up-front costs of reservation and manufacture. Defects liability periods or warranty periods reflect the expected life cycle of the batteries and related equipment, as well as the more traditional set periods for civils and related infrastructure.
On the operation and maintenance aspects, aside from routine activities, any requirements as to ongoing performance levels are usually provided under and subject to ongoing contracts withrelevant suppliers and/or dependent upon operating parameters being kept to. A more recent development has been to agree terms with suppliers for upgraded batteries and/or related equipment to be provided and installed as soon as ‘proven’ and available.
A market set for growth
From a construction perspective, while it is true to say that there are certain procurement choices to be made, in common with the early days of the solar sector, the market is currently led by the manufacturers. However, the contractor market is expanding to keep pace with this dynamic and evolving sector.
More broadly, the increase in renewable generation combined with improvements in battery technology, the fall in installed costs and the range of ancillary services indicate that demand for and reliance on battery storage will only continue to grow—something that is being increasingly recognised by governments and regulators in all jurisdictions.
Authors: White & Case LLP partner Richard Hill, and associate Sofia Lambert
