Batteries aren't just for Christmas

Battery Energy Storage System (BESS) projects are booming - according to the International Energy Agency (IEA), total battery energy storage capacity in the power sector doubled in 2023 (with grid-connected storage responsible for most of that growth).

BESS's growth is expected to increase significantly in 2025. The UK government's Clean Power 2030 Action Plan (CP30), published last week, anticipates that 23-27 GW of battery storage will be required by 2030, which is a significant increase from the 4.5 GW of currently installed capacity in Q4 2024.

What is BESS?

BESS are advanced energy storage solutions designed to store electrical energy in batteries, typically using lithium-ion technology, at times when energy supply is greater than demand. The stored electricity can then be released for future use when needed. They are essential in maintaining power stability both on-grid and off-grid, optimising energy utilisation, and reducing emissions and fuel consumption while providing additional capacity.

Why BESS are so "current" with investors

As coal and gas fired plants close across Europe (the UK closed its last coal power station this year), the share of intermittent renewables on the grid is increasing. Renewable forms of generation such as wind and solar are often reliant on the weather to generate electricity, meaning they can't adjust to demand from consumers or provide reliable baseload supply as easily as coal, gas and nuclear power generators can. The result is periods of oversupply (e.g. when it is both sunny and windy), during which time the electricity generated is relatively cheap, and periods of undersupply (e.g. when it is neither sunny nor windy), during which time the electricity generated is relatively expensive. BESS can help to smooth out this inconsistent supply and investors are able to monetise this by buying and storing the lower cost power when supply exceeds demand and selling it at a higher price when demand is higher than generation. Other sources of revenue provide availability and utilisation payments for helping to maintain the stability and reliability of the electricity grid (e.g. the Capacity Market and National Grid ancillary services contracts).

BESS is seen as a critical enabler to the flexibility and security of electricity supply by the UK government in CP30 and further actions to support the growth of BESS are expected to be published in the UK government's Low Carbon Flexibility Roadmap next year.

Given the importance of BESS in supporting the lowering of carbon emissions by helping support a renewable energy future, BESS is also attractive for investors with an ESG focus.

There is also a growing market given the projections for energy demand increasing as economies electrify as part of the renewable energy transition – including with electric vehicles, public transport and home heating.

5 Key Points for getting going with BESS

Here are five key points for investors looking to get "powered up" in this space:

1. Land Rights

Identifying and securing the project development site, giving proper consideration to access requirements and grid connection is key. The most desirable sites are often next to, or very close to, existing substations.

Option Agreements are frequently used as a first step to acquiring land interest(s) (often leasehold) and access requirements, any required rights and potentially grid connection rights.

2. Grid Connection

In order to import and export power, a BESS project must have a grid connection agreement with the National Energy System Operator (NESO) or relevant distribution network owner (DNO), allowing the project to connect to the transmission system (for large grid-scale projects) or the local distribution system (for smaller projects), or otherwise have private wire arrangements in place directly connecting the battery to generation and consumer sources. Unlike with other forms of renewables projects, a BESS project's grid connection must provide for substantial import capacity to allow the system to import electricity during charging, as well as export capacity to allow dispatch.

Note however that the current grid connection application process is set to be reformed; NESO has set out a series of transformative proposals to overhaul the process for getting new projects connected to the grid, which are expected to take effect next year. The aim of these proposals  is to speed up the grid connection process for viable projects that are 'ready' and 'needed' (as set out in CP30) and prevent the grid connection queue from being clogged up with unviable or unrealistic projects (known as phantom or zombie projects) which are not deemed necessary to achieve the Government's net zero goals – check out previous HSF Blogs on the proposals here and sign-up here for alerts going forward.

3. Planning & Licensing

There are two principal methods of obtaining planning consent for BESS in England and Wales:

• Applying for planning permission from the relevant local authority under the Town and Country Planning Act 1990 regime (TCPA); or
• Seeking consent for BESS as "associated development" as part of a Development Consent Order (DCO) application for a nationally significant infrastructure project (NSIP) under the Planning Act 2008. BESS is commonly included as associated development in applications for solar DCOs, as well as other generating technologies. DCO applications are decided by the Secretary of State, rather than the local planning authority.

There are pros and cons to both consenting routes which will need to be considered on a case-by-case basis. The TCPA route is generally a faster and less onerous process but offers less certainty of success. The DCO process cannot be used to consent BESS as a standalone asset, it must be part of a project for which the generating station is itself an NSIP, however, the co-location of BESS with solar and other forms of renewable energy generation has strong policy support from government. A benefit of the DCO process compared with TPCA is that the application can "wrap up" compulsory acquisition powers within the application, if required.

Depending on the installed capacity of a project, the owner of a BESS may also require an electricity generating licence to operate. Generating licences are issued by Ofgem in Great Britain. Many owners of smaller, exempt, BESS projects also choose to obtain an electricity generation licence in any event due to the consumption levy savings that this can attract.

4. Construction

Two construction routes are most prevalent:

• an EPC 'wrap' around BESS and balance of plant – usually led by the BESS supplier – provides a single point of responsibility for commissioning, testing and whole facility performance guarantees; and
• a 'split' structure separates BESS supply and balance of plant/installation, bringing potential cost efficiencies and programme flexibility (including early reservation of BESS capacity), but requiring some technical and commercial interface management by the client.

A long-term service and maintenance strategy should be in place from the outset.  Key benefits of the BESS supplier performing these services are continuing cover for performance, breakdowns and outages in a fee 'wrap'. Third party support is possible but increases the importance of securing longer-term product warranties with the BESS supply (as third parties are unlikely to cover breakdowns).

Performance guarantees are typically focused on capacity (how much energy can be stored), round trip efficiency (how much electricity is discharged compared to how much is stored) and availability (to operate without failure), with the supplier/contractor liable for capped liquidated damages for shortfall performance.

5. Offtake and optimisation

BESS have the ability to access and stack multiple revenue streams. Many investors choose to enter into optimisation contracts (where the optimiser trades the BESS with a view to maximising revenue across the available revenue sources) in exchange for a share in the revenue achieved, and this is essential for BESS operators without an internal trading function and without the desire or ability to develop one.

Many optimisation contracts will also include a guaranteed floor revenue arrangement, helping operators to manage market price volatility and secure project finance.

What can we help with?

All of the above!  We have BESS and Energy experts across the firm in Real Estate, Planning, Construction, Corporate Energy and, importantly, Finance.  Far too often when we're asked to act for lenders we discover project documents that simply haven't been negotiated with debt/financing in mind which inevitably leads to delays and additional costs that could have been avoided.

Key contacts from each of the teams mentioned are below – please do not hesitate to get in touch with anyone of us if you have any questions or if you think we can help with your BESS or other Energy project.

Come back tomorrow to open the door to Day 20 of our advent calendar for our key insights from Bisnow's recent Women Leading Real Estate event.