In recent years, the UK sourced as much as 60% of its electricity from Europe. However, the forthcoming departure from the European Union also brings departure from Europe's internal energy market and access to cheap electricity from the continent is likely to be reduced. In those circumstances, the UK's energy storage capabilities will play a critical role in providing affordable and flexible power across the country. However, what risks and opportunities does this offer the energy insurance market, and is it a feasible way of meeting the UK's post-Brexit needs?
In defining its post-Brexit energy strategy, the UK government's Industrial Strategy, released in January 20171 highlights two important areas of energy policy being given high priority going forward:
- Securing the industrial opportunities for the affordability of energy policy for businesses and households.
- Energy innovation in the national economy.
Energy storage is expected to play a significant role in achieving the latter. The UK government has stated that it is committed to the development of "... a programme of research and innovation in energy storage and other smart technologies which aligns with the work underway on designing a smart grid and the roll-out of public charging points for electric vehicles, and smart meters at homes and commercial premises."2
What exactly is energy storage and why do we need it?
Energy storage is deemed to be the missing link between intermittent renewable power sources (such as wind and solar) and guaranteed power 24 hours a day, regardless of the weather forecast. It is a process by which power can be absorbed, and released as required; it is generated at one point in time and used at another. The most popular form of energy storage is Battery Energy Storage Systems ("BESS") using lithium-ion, lead-acid, and molten-salt batteries. Additional energy storage technologies also include "fly wheels", pumped hydroelectricity storage, and pumped heat electricity storage.
There are a number of benefits to energy storage, for example:
- Storage of energy for use at a later time. Energy storage can be integrated into electricity systems so that if a main source of power fails, it provides a backup service, improving reliability.
- Increasing the utilisation of power-generation or transmission and distribution assets by absorbing power that exceeds demand (at a particular time) and therefore preventing overloading the national grid.
- In some markets, the cost of generating power can be cheaper in one period than in another; energy storage can help smooth out and stabilise costs thereby making energy more affordable (and price stable) across the board.
It is no surprise that energy storage is an area of rapid development as utilisation of renewable energy sources gains further momentum across Britain. Energy storage solves the problem of overloading the national grid when power requirements are low on sunny or windy days and helps to deliver power at peak times after sunset or when there is no wind.
Clearly there is a strong incentive to develop energy storage sites across the UK. However, installing and maintaining such large scale assets introduces and brings with it a new set of risks, and opportunities, for the energy insurance market to consider.
How will this affect the energy insurance sector?
- We can expect to see an increase in energy storage construction projects. These projects will come with high capital costs and technical challenges, and consideration will need to be given to the unique design and construction features of each project. Underwriting expertise and understanding of project intricacies (i.e. weather regimes and local grid conditions) will be required.
- Energy storage complements various renewable energy sources. One factor to consider is how solar and wind farms will interact and communicate with energy storage units and vice versa. The contractual arrangements between the owners of a renewable energy source operation and the operators of an energy storage unit or site will need to be clearly agreed from the outset. Who will carry the liability if a part is designed or installed incorrectly resulting in the assets not being electrically compatible?
- Operational risks of running energy storage plants and units should also be given consideration. Will underwriters be willing to provide cover for stored energy or loss of revenue resulting from damage to the grid? Who will cover potential pollution liabilities of BESS operations in the event of battery leakage?
There is no doubt that energy storage is on the UK's radar, but is that enough to fulfil its potential and launch Britain as an energy storage worldwide leader? Despite the enthusiasm for its development, there is no clear definition as to what "energy storage" means under the Electricity Act 1989, and the lack of definition in the regulatory framework may be preventing full commercial exploitation of energy storage assets. For further information on the regulation of energy storage in the UK, please see Clyde & Co's commentary at Energy Storage – Is the regulation ready for what's in store?
Nevertheless, notwithstanding the at present underdeveloped legislative landscape, energy storage is gaining momentum and the associated construction, operational and liability risks bring new opportunities for the energy insurance market, all of which will require legal and regulatory monitoring. In realising those opportunities, careful thought will need to be given to the technical and contractual risks which could arise and the structure of coverage provided.
1 "Building Our Industrial Strategy" Green Paper released 23 January 2017 ("Green Paper")
2 Green Paper, Page 90Saving Power For Rainy Days - The Incumbent Rise Of Energy Storage
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.