Battery storage projects typically have multiple revenue streams and revenue contracts. It is important that battery-specific construction and operation contracts are put in place.
The past year has seen massive growth in the number of battery storage projects being developed in the UK, with battery costs dropping and appetite for investment into the sector growing. However, against this positive backdrop, significant challenges remain for parties looking to build, operate and, in particular, finance these projects.
This article looks at how to help mitigate these challenges by ensuring that suitable construction and operation contracts are put in place.
Lack of data on long-term performance of batteries
The lack of available data on long-term performance of batteries within the UK is a key hurdle to securing investment into battery storage projects. As a result, we are seeing funders adopt a much more risk-averse stance on construction and operation contracts for battery storage projects than they are currently taking on other, analogous technologies such as solar.
Despite the understandable temptation among developers and contractors to roll out the same forms of construction and operation contracts that they have been using for solar projects, this is unlikely to satisfy funders' requirements.
It is important that properly tailored, battery-specific construction and operation contracts are put in place which allocate construction and operational risks to those parties best placed to manage them.
Revenue stream complexities for battery storage projects
Unlike many other energy projects, battery storage projects will typically have multiple revenue streams and revenue contracts. At present, for grid scale batteries, this is usually some combination of:
- Firm Frequency Response (FFR) or Enhanced Frequency Response (EFR), both of which are services procured by the National Grid
- Capacity Market
- Triad avoidance (which is coming to an end for distributed generation)
- Energy price arbitrage.
Known as "revenue stacking", this is necessary to maximise revenues, but requires careful analysis to ensure that each revenue stream is compatible from a technical and legal standpoint.
The ability to access multiple different revenue streams goes some way towards offsetting the risk of any individual revenue streams coming to an end (or undergoing a significant change in value), but a key issue that battery storage projects face is the relatively short-term nature of revenue contracts on battery storage projects in comparison to revenue contracts on other, more established technologies. For example, the fixed-term length of a contract for FFR is between 1 month and 2 years, which, in isolation, can make it difficult to secure significant medium to long term financing.
This already complex structure is often further complicated by the introduction of a third party “aggregator” between the owner of the project and (typically) National Grid. As the name suggests, aggregators offer developers of battery storage sites an opportunity to group their project(s) together with others in order to qualify for National Grid contracts. In practice, this means that developers will often have two sets of requirements to meet in order to generate revenue through this route – National Grid's and the aggregator's.
How does this impact construction and operation contracts?
Given the arrangements underpinning the commercial viability of battery storage projects, it is essential that specialist legal and technical input is obtained to ensure that the construction and operational contracts and revenue contracts are fully 'back-to-back'. For example:
- any pre- or post-completion testing requirements under the installation contract must be at least as onerous as testing requirements under the revenue contracts, otherwise a developer may find that it unable is to attribute any shortfall in revenue to a contractor breach
- the installation and maintenance contracts will need to allow the National Grid and/or any aggregator to access the site to carry out inspections, monitoring, testing, etc. and the contractor will need to plan its on-site activities accordingly, without any entitlement to any additional time or money.
With the right guidance, challenges such as those outlined above can and will be overcome and battery storage can establish itself as a key part of the energy mix within the UK.