The growth of renewables globally continues unabated. Bloomberg New Energy Finance estimates that global clean energy investment has risen from USD 62 billion in 2004 to USD 287 billion in 2016, with 195 countries signatory to the Paris Climate Agreement last year. California, which would rank as the sixth largest global economy in its own right, has plans to generate 100% of its electricity from renewable sources by as soon as 2045.
Despite this growth, concerns around intermittency issues prevent society from relying on renewable energy as our sole source of electricity. Renewables are variable at their core – there are days when the sun doesn’t shine, and days when the wind doesn’t blow. As our reliance on renewable energy sources increases, so too do the challenges in managing the grid to meet our demands for everyday power.
“Cost-effective storage of electrical energy is the only problem holding us back from getting all of our power from wind and solar.” – Professor Ian Lowe, School of Science at Griffith University
The February 2017 power blackout in South Australia is one example. South Australia is heavily reliant on renewable energy sources for power production and although there were a number of contributing factors on this particular extreme demand summer day, blame for the blackout fell heavily on the intermittency of these renewable energy assets. The blackout became a highly publicised event during which Tesla’s Elon Musk promised the state government he would install the world’s largest 100MW lithium ion battery storage system within 100 days, or it would be free of charge. Musk’s facility is already under construction, with a deadline to begin operation by December 1st. On completion, the facility will store and release energy into the grid when required, enabling the state’s grid to cope more efficiently with days of extreme power demand.
Battery storage and the grid
Despite the fact that batteries are far from new (the first battery dates back to 1800) their application to utility scale power storage is recent. Growth in the use of battery storage systems in the power industry has historically been stagnant because of high installation costs and inherent technological issues. This landscape is changing dramatically. According to the Renewables Consulting Group, the battery storage market grew by 300% between 2014 and 2016, while UK installation costs have reduced by as much as 40% in the first six months of 2017 alone.
Battery storage is most often deployed as a frequency response regulator (storing electricity from power generating facilities for on-demand deployment to the grid). We have seen batteries installed on their own; alongside wind and solar facilities; and most recently in the form of a unique hybrid battery, wind and solar project in Australia – the Phase 1 Kennedy Energy Park. The facility under construction by Windlab in Queensland will combine 43.5MW of wind energy, 15 MW of solar energy and a 2MW lithium ion battery. Windlab eventually intends to scale the project into a giant 1,200 MW facility, which in theory could provide baseload power to the grid.
Consumers are also installing batteries. Families now adopt “behind the meter” technology (such as Tesla’s Powerwall), storing power generated by rooftop solar panels for home use.
Charging the future
Battery storage could be the final piece in the puzzle when it comes to fully harnessing the potential of renewable energy. Whilst the most common battery technologies are well understood, their widespread application in power storage is still relatively new and there are inherent risks that must be understood and addressed. In 2012, for example, a 15MW lithium ion battery caught fire at the Kahuku Wind Farm and energy storage facility in Hawaii, causing a fierce blaze and a reported USD 30 million loss.
It is vital to recognise and understand the risks battery technology poses, and identify appropriate mechanisms to transfer or mitigate these risks where appropriate. Insurers will carefully assess the proposed battery technology provider’s experience and balance-sheet strength when pricing insurance for these developments, as they would expect the product warranties to be primary for any physical damage losses during construction as well as for the first years of operation. Insurers will look closely at the extent of the warranty terms and, importantly, that the manufacturer providing the warranty has the balance-sheet strength to actually honour the terms of the warranty being provided. Insurers will “wrap” the warranty and provide loss of revenue cover resulting from an indemnified warranty claim, and step in front of the warranty where it doesn’t respond (and where the underlying physical damage event is insurable).
A summary of the key risk factors insurers will consider include:
Aon’s power team works closely with battery investors and installers to understand these risks. We recommend that new entrants engage with their risk advisors early in the project-design phase to consider and address the key risk factors outlined above. If growth in effective battery storage continues, and its associated risks are appropriately managed, we stand to see an exciting future for renewable energy.
Author: Mr. Matt Langham, Director at Aon UK