The legal perspective: Howard Kennedy on what makes battery storage ‘bankable’

The increasing capacity of battery energy storage systems (BESS) in the UK is leading to the development of new types of contractual arrangements, while financing is “developing at a rapid pace”, according to Jonathan Cohen, head of energy at law firm Howard Kennedy.

Howard Kennedy recently closed the 700MWh Cellarhead project, the largest BESS project the law firm has acted on, which it claimed is the largest in the UK and Europe. Under development through a joint venture between Nofar Energy and Interland, the project is expected to incurr construction costs of £214 million, with construction kicking off in the first half of this year.

“From the legal perspective, these types of projects involve many new types of contractual arrangements and structures that haven't been done before especially at such scale,” Cohen told Solar Power Portal.

“As with any large-scale energy infrastructure project, obtaining the requisite development rights is fundamental to the project's success. These include receiving planning permission, procuring the real estate rights over the land, acquiring grid connection rights, entering into robust construction arrangements and negotiating the revenue generating contracts.”

The finance of these sorts of projects is also undergoing rapid development, with Cohen stating that given the physical nature of battery storage technology, the traditional sources of capital that have financed clean energy projects by way of project or non-recourse financing have not yet financed these sorts of projects given the physical nature of battery storage, especially not at the scale of Cellarhead.

Cohen gave the example of technologies such as solar PV, wind and biomass – technologies which he advised on for around 15 years – which have historically had relatively straightforward revenue streams, with a long-term power purchase agreement linked to the term of debt under which the power is sold to an offtaker.

These sorts of renewable energy technology projects have also historically benefitted from government-backed renewable incentives such as ROCs and feed-in tariffs.

“Financiers were very comfortable with this model. On the other hand, battery storage projects are a very different proposition due to the multiple revenue streams and markets that batteries can operate in. The 'stacking' of these revenues on the face of it are not as simple as the more traditional renewables technologies,” Cohen said.

With capacities of BESS projects steadily rising, so too must the size of land in which they are sited. Developers will need a large land parcel on which to develop the project, as well as the availability of a substantial grid connection.

Indeed, Cellarhead is not the only large BESS project to be planned for UK soil, with other projects including two 400MW/800MWh sites under development by Amp Energy that are due to be operational in 2024, while construction began on a – comparatively smaller, but still of significant scale – 99MW/198MWh BESS being developed by Harmony Energy and Fotowatio Renewable Ventures last year.

A large land parcel and availability of grid connection are two elements that all developers are seeking, according to Cohen, leading in turn to increased demand for such sites and an increase in costs of procuring the grid connection rights.

“Clearly, the more a developer pays for the land and grid will impact on the project's IRR. As a result, we are seeing a number of models being developed around the rental of such land with the landowner often basing the rental figure on a pound per megawatt of final installed capacity.”

One key legal requirement for BESS projects is making them 'bankable', meaning all risks should be sufficiently mitigated and revenues sufficiently secure so that the project can pass rigorous scrutiny and diligence checks by a lender. 

“Given the fast-moving pace of the development of energy storage projects, what is bankable now may not be the same in two or three years' time so we have to ensure that the suite of project documents are drafted and negotiated with this in mind,” Cohen said.

Key bankability concerns in the due dilligence of BESS projects include that the project has acquired the necessary development rights, that project counterparties are creditworthy or an appropriate security package is in place and that revenue streams and routes to market are secure.

Additionally, concerns include that the project complies with all electricity regulation, for example, licensing and compliance with market codes, as well as that robust EPC/construction arrangements are in place.

It's Cohen's belief – and perhaps one held throughout the industry – that more projects of the size of Cellarhead will spring up, with BESS being an area that Howard Kennedy has been very active in over the past 18-24 months – a trend driven by the increase in renewable energy and the need to mitigate against intermittency.

“We are seeing many new entrants entering the market that consider energy storage as a key technology to enable the energy transition but also a technology that can be commercialised with lucrative revenue streams,” he said.