Global grid constraints, grid connection security and significant delays to new grid connections are forcing sponsors across multiple jurisdictions to look at maximising existing grid connections via the co-location of battery storage and renewables projects.
The large majority of the world's economy continues to strive to achieve its (arguably ambitious) net-zero targets. However, somewhat paradoxically, due to an increase in the number of renewable energy developers participating in the market and, in many countries, network constraints, the electricity generation market is facing significant challenges with respect to (i) a shortage of grid connections, and (ii) delays for new grid connections. As a consequence of these challenges and other factors (including inflated electricity prices and the need to balance intermittent generation), sponsors and network operators are looking for ways to maximise the value of their existing grid connections and ensure new renewable energy projects are future-proofed.
The co-location of a utility scale battery energy storage system alongside a renewables project is one solution to these issues that is currently receiving much market interest. Below, we take a brief look at the current state of the co-location market and the corporate structuring solutions being adopted, as well as certain bankability considerations.
2. Battery Storage Co-Location
The battery storage market is still at a relatively early stage, despite recent rapid developments. The global deployment of global battery storage reportedly grew by about 50% in 2022. By way of example, Fitch Solutions reports that the United Kingdom had a total of 65 battery storage projects in the pipeline in the first quarter of 2023 compared with five projects in the first quarter of 2021. This growth is expected to continue to rise exponentially, reflecting what we and others are seeing in the battery storage market as a wider pool of lenders and project developers accelerate their interest and involvement. This growing interest in the battery storage market has, predictably, lead to an increased focus on maximising the output of existing renewable assets.
Battery storage assets can be co-located with any form of electricity generation (solar, wind, gas, etc.) but the most common format involves a solar-battery combination. These projects are driven by a multitude of efficiencies and benefits that can be realised through co-locating the energy and storage assets, as land use is maximised, infrastructure costs are shared, generation intermittency may be balanced, and grid connection capacity is utilised in full. In addition, only having to obtain one interconnection agreement is often a significant benefit for project developers.
That said, some battery storage developers do not consider the added costs of incorporating renewable energy generation as sufficiently remunerative and consider it simpler and faster to obtain planning permission for, and implement battery-only energy storage projects. Many battery storage projects are therefore "battery only" projects. However, renewables projects are increasingly being developed on a co-located basis and owners of existing generating assets, especially solar assets, are actively looking to add co-located battery storage assets so as to leverage their existing grid connection(s) and benefit from the efficiencies mentioned above.
3. Project Structuring – Single or Multiple Special Purpose Vehicles (SPVs)?
Single SPV – new, integrated projects
There are a variety of factors that can influence which corporate structure best suits a given co-located project. The preferred structure will be influenced by national regulatory requirements or local laws. However, in jurisdictions where such structuring constraints are not applicable, the most straightforward approach is to have a single SPV holding both the renewable asset and the battery storage asset, as well as the grid connection rights. If it is a new, entirely integrated project, this will be the simplest project structure, allowing the sponsor to benefit from all the efficiencies of co-location, in particular:
- Revenue streams from both assets are easily and justifiably aggregated, which can increase the attractiveness of the project from the perspective of investors and lenders. There will be a de-risking of the revenue inputs from both assets with a quasi-offset of (i) the intermittency and underutilisation of renewable generation, and (ii) the lower guaranteed revenues that may be available for the battery offtake. There may also be a mechanism in place to allow for price arbitraging using the battery storage asset.
- The capital costs of contracting for ownership and use of land will be reduced as there will be no need to provide for independent land rights (e.g. separate leases and easements) or separate planning consents. Other issues that can arise where two or more corporate entities require shared access to land (discussed below in respect of Operation & Maintenance (O&M) and Engineering, Procurement & Construction (EPC) matters) will be avoided.
- Grid connection and capacity use can be greatly simplified, with any fees, maintenance costs or other liabilities easily allocable, without the need to apportion responsibility between separate owners.
- While the construction process may be deemed to create 'project-on-project risk', whereby a delay in completing one element (e.g. the solar/wind generation element) of a project would impact full monetisation of the other element (e.g. the battery storage asset element). However, if the co-location project is structured to enable the independent operation of each element, then this risk is reduced and can even be seen as an advantage (in the previous example, the project would at least generate some revenue through the battery storage asset element while the solar/wind generation element is being completed). We have seen co-located projects structured and financed on the basis of separate revenue streams for the solar asset (being a corporate Power Purchase Agreement (PPA)) and the battery storage asset (being an optimisation agreement with an energy trader).
There are plenty of instances in the battery storage market where two or more sister companies holding the co-located assets may be the optimal structural approach.
A separate SolarCo/WindCo (to hold the solar/wind asset) and BatteryCo (to hold the battery storage asset) might be an appropriate structure if the developer intends (or wishes to maintain the flexibility) to sell the assets separately rather than as a package at a future point in time. Similarly, this separation may enable separate financing packages for SolarCo/WindCo and BatteryCo (noting that this may not be practical given the relatively small size of some of the earlier battery storage projects).
Furthermore, as competition for assets increases and the investor pool diversifies, we expect to see more complex structures adopted to facilitate disaggregated re-sale and avoid stranded assets (for example, tri- or bipartite structures where a standalone GridCo offers shared grid connection access to SolarCo/WindCo and BatteryCo).
Structuring a project in this way is likely to result in greater upfront costs, including in terms of considering and documenting the rights and obligations of SolarCo/WindCo and BatteryCo in respect of shared assets (including, in particular, the grid connection and access rights) but may provide more flexibility for future actions. Separate legal entities for the relevant renewable asset may also help future-proof against regulatory developments that might differentiate the requirements for battery and solar assets. Such a structure also offers the benefit of ring-fencing the development risk of each individual asset, potentially offering some downside protection to interested parties if there is a serious loss event.
If considering a multiple SPV project structure, there will be a few key points of interaction to manage, most of which relate to the allocation of costs (and all of which should be manageable by entry into a form of grid/land sharing agreement):
- Any potential liabilities under the grid connection arrangements will need to be allocated between the entities, such as maintenance or minimum capacity usage costs.
- For shared access routes, pre-agreement of priority rights between EPC and O&M contractors will help avoid unforeseen impediments to project development and/or operation and rights and obligations in respect of shared assets, such as the grid connection.
- If development of the projects is taking place in close proximity, it may be of value to have in place a mechanism for dispute resolution and apportionment of liability for serious loss events, to the extent the development or operation of one project may result in physical damage to the other. This will be of particular concern where one project is operational and receiving revenue.
4. Retrofitting an Existing Project
Where a battery storage asset is to be added to a generation asset which is under construction, in pre-commissioning or already in operation, there will be additional considerations, even when using a single SPV structure. The sponsor will need to carry out a detailed review of the existing arrangements to ensure the battery installation will not prejudice the generating asset. Although not a complete list, certain key matters that should be considered are as follows:
- A key asset for both the generating and battery facilities will be the grid connection rights. The project developer will need to get comfortable that the battery installation and operation will not interfere with the export capacity usage of the generating asset or otherwise jeopardise the grid connection. The technical specifications under the grid connection agreement and any related construction agreement should be closely reviewed.
- Any existing offtake arrangements for the generating asset
(usually a PPA) will need to be preserved in order to ensure that
the SPV continues to comply with its offtake obligations and, where
relevant, continue to repay any financing. If included, the
following terms in particular should be considered:
- planned outages and outage payments: if there are notification or payment obligations that apply in respect of outages, the developer should make appropriate provisions for any interference the battery connection may cause;
- delay payments: similar to the above, if there are terms that require payment in respect of any delays to commission of the project, these should be borne in mind when planning the battery connection; and
- rights to offtake: PPAs often provide for (i) exclusivity of offtake from a specified metering point, and (ii) a right to offtake ancillary services the project provides. In both cases, co-located batteries will need to be structured either to avoid the consequences of these terms or to acknowledge them (for example, by offering the battery offtake to the existing PPA counterparty, or by seeking a waiver of such rights).
- The terms of any existing lease agreement or planning permission will need to be considered in order to determine whether the addition of the battery will require any amendments or supplemental applications in respect of such lease or permission.
- Any activities in connection with the battery installation will need to comply with the terms of the existing project's financing arrangements.
- Insurance policies covering the existing project should be reviewed to confirm the new development will not automatically void any coverage.
- Both EPC and O&M contractors for the generation asset and the battery storage asset should be engaged with from an early stage to consider the practicalities of working on the site and how that is to be managed. For example, if there is a single accessway, how are access schedules to be managed and will one or another project require priority at certain times?
5. Financing and Bankability
As referenced above, there are distinct benefits from a finance perspective to having the asset revenues aggregated. Nonetheless, it should first be established that the two projects are independently 'bankable' or, if the battery storage asset is intended to balance the offtake of the generation asset, that it provides a net revenue benefit. A lender will not wish to invest in a project where the value is impaired by the addition or inclusion of a battery. This is likely to become less of an issue over time as the proposition of a limited recourse financing for a battery storage project is proved in the market, but it remains a point of consideration for the time being as certain battery offtakers remain less established (for example, some of the start-up optimisation service providers) and long-term revenue streams remain uncertain compared to that of traditionally financed renewables projects (which invariably benefit from some form of long term PPA or government support mechanism (such as the UK's contract for difference)). That said, the terms available from optimisation service providers and the related optimisation agreements have advanced significantly in recent years and can form a key part of the bankability of a project.
Other than establishing that the project will provide returns of a sufficient magnitude (often as set out in the optimisation agreement), there is little about the project structure that will influence a lender's decision as to whether a co-location asset is 'bankable'. The key will be to demonstrate, regardless of the nature of asset interaction (i.e. whether the battery is load sharing/arbitraging with the generation or is entirely independent and providing grid services), that the revenue streams and the project characteristics that safeguard them, namely the PPA and grid connection agreement terms, will not be compromised by the battery, as discussed above. In addition, a lender may consider a co-location project to be more complicated from a construction perspective due to the perceived 'project-on-project risk' of having two separate elements. However, as mentioned above, this risk can be mitigated if both elements can work independently.
The single versus multiple SPV structuring question is largely insignificant when compared with the issue of revenue security. Whilst it can be argued that a single SPV with stacked revenues is simpler from a security and enforcement perspective, a multiple SPV structure will afford each project a degree of insulation from losses that may affect the other. This latter potential benefit may be a determining factor for project structuring where there are to be multiple lenders, simplifying enforcement, payment flows and other matters that would need to be managed by way of intercreditor arrangement.
We have seen that battery co-location is an effective method of optimising renewable generation and maximising grid connection value on a project-by-project basis.
Battery storage has swiftly moved from an emerging technology to an asset class that is attracting significant attention from major developers and financiers. The growth of co-located battery storage assets would appear to be assured as intermittent generation assets constitute an expanding proportion of the increasingly crowded global energy matrix. However, it remains important for sponsors to look closely at their contracting and permitting arrangements to ensure there is adequate flexibility for the inclusion of battery storage, whether at the outset or for retrofitting an existing generating asset.
Originally Published by International Comparative Legal Guides
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