Co-location of battery storage assets: creating value for clean energy projects

energy battery storage at a solar farm

The UK battery energy storage system (BESS) market is growing rapidly. The UK remains committed to achieving its net-zero targets and supporting the deployment of renewable energy generation assets, but developers are facing increasing market pressures including from the growing number of new market entrants (both from within the UK and from overseas) and the significant delays in obtaining new grid connections.

As a result, funders, developers and operators are increasingly looking for new ways to optimise their existing assets and ensure sufficient return on any investment for future projects, thus increasing their value.

The co-location of a utility scale BESS alongside a renewable energy generation asset is one avenue that is increasingly being explored by developers.

This article summarises how a BESS asset might be co-located with a renewable energy generating asset and how a funder, developer and operator might look to best structure that co-located project in order to achieve desired outcomes.

But first, what is BESS co-location?

Historically reference to co-located assets indicated the geographical co-existence of two different assets (typically BESS and another renewable energy asset), which were often owned by linked group companies. These two assets would often share some infrastructure (typically grid infrastructure) but would otherwise be operated independently from one another.

In the past couple of years, we have started seeing co-location in its truest sense; where two technologies (again, typically BESS and another renewable energy asset) are designed to share the same grid connection and be operated in a complementary manner.

BESS assets can be co-located with any form of renewable generation but the most common co-located projects we see involve a solar pv – BESS combination primarily because the generation profile from solar pv aligns well with the optimal charge and discharge hours from the BESS. Although it is possible to co-locate a wind asset with BESS, the viability of such a project would depend on the project location and wind generation profile for that location.

A basic guide to revenue generation

A co-located project is connected to the grid through a single point of connection (PoC). In the case of a co-located solar and BESS project, the solar generation profile is considered to complement the optimal BESS charge and discharge profile. A very basic summary of how an operator might seek to optimise the revenue streams for a co-located solar and battery project is as follows:

  • Discharge BESS when the energy prices are high during the early hours of the day before the solar generation begins.
  • Export solar energy to the grid during hours when solar generation takes place.
  • Charge the BESS either from the grid during times where the energy prices are low or from additional generation from the solar pv which cannot be exported due to export restrictions or any other reason.
  • Discharge the BESS to the grid in the late day hours, when energy prices are high.

However, the above will not always be the optimal revenue generation strategy. For example, there might be situations where there is no import capacity from the grid which means that the BESS must be charged purely from solar generation and not from the grid when energy prices are low. In this scenario the solar generation asset could be oversized beyond the grid export limit to ensure that there is excess energy generated which can be used to charge the BESS, but this would only be commercially viable where the cost of energy generated by the solar asset is lower than or equal to the lowest energy cost from the grid. There might also be some instances when the most profitable time to export energy to the grid from the BESS coincides with when solar generation is taking place and there is an export limit to the grid. In these instances, the energy generated from the solar asset will often need to be prioritised which means the BESS asset might suffer from reduced revenues. This can possibly be avoided to some extent by appropriately sizing the BESS.

How are the two separate assets connected to the grid?

The co-location of BESS assets does not have a one-size-fits-all technical solution. Broadly speaking, a renewable energy generating asset and a BESS asset can be connected by AC coupling and DC coupling. The primary difference between AC coupling and DC coupling is the connection point of BESS with the renewable energy generating asset.

  • AC coupling is the most common method to co-locate projects. In AC coupling the two assets are coupled together on the alternating current (AC) side of their inverters before the power reaches the grid connection (in other words, the renewable energy generating asset and the BESS asset each have their own separate inverter, but the two assets have a shared grid connection). This allows each asset to be treated independently which might not be possible in the case of DC coupled projects.
  • In DC coupling the renewable energy generating asset and BESS asset share the same inverter (and a shared grid connection). This is the most efficient solution possible from a technology perspective. This results in lower costs than if a separate inverter for each asset is adopted. However, a DC coupled project might not be suitable where BESS assets are retrofitted with existing renewable energy generating assets and might restrict some of the financing routes available to AC-coupled projects.

Structuring a co-located project

Single SPV

One way to structure a co-located project would be to form a single SPV which owns both the renewable and BESS assets (as well as the grid connection rights). We have listed some of the potential benefits of structuring a co-located project in this way below. It is important to note that whilst there are undoubtedly benefits in adopting this approach, the technical solution adopted and the requirements of each asset, will determine the complexity of any contractual and grid-related arrangements:

  • The corporate/contractual structure is relatively simple.
  • The funding arrangements can be structured in a much more straightforward way.
  • The capital costs and contractual arrangements relating to obtaining and securing appropriate land rights and easements are reduced.
  • Grid connection and capacity use are simplified, although there are nuances here where the projects proceed on a phased timeline.
  • The SPV can aggregate the revenue from both assets so that any shortfall in revenue from one asset can be covered by revenue from the other.
  • The SPV may be able to commission one of the assets (and start receiving revenue from it) if there is a delay to the construction of the other asset (provided independent asset operation is possible). This might make the project more attractive to investors.

Multiple SPVs

An alternative way to structure a co-located project is through the use of multiple SPVs where each asset has its own dedicated SPV. This structure is often preferred where the developer wishes to maintain the flexibility to sell the assets separately rather than as a package. It might also be preferred where separate funding packages is required for each of the assets.

Structuring a co-located project in this way is often more complex from a contractual perspective. Where multiple SPVs own and operate a co-located project, a grid sharing agreement will typically be required. It is also advisable that any infrastructure that ‘common’ to both parts of the co-located project, is owned by a separate company (“GridCo”), to which the multiple SPVs have equal shareholding.

The grid sharing agreement will govern matters such as:

  • How any potential liabilities under the shared grid connection arrangements will be allocated between each SPV (such as any responsibility for maintenance and any minimum capacity usage costs).
  • Ensuring that each SPV has the appropriate land rights that it requires to construct and operate the asset held by it.
  • Pre-agreed priority rights between EPC and O&M contractors in respect of access to the respective assets.
  • Pre-agreed priority rights and obligations in respect of shared assets, such as the grid connection (for example, there might be a circumstance where the grid has an export limit and the renewable energy generation asset together with the BESS asset have a combined capacity which is greater than the grid export limit).
  • Appropriate dispute resolution provisions and provisions dealing with allocation of liabilities where, for example, the development and/or operation of one asset results in physical damage to another asset in close proximity.

Retrofitting a BESS to an existing renewable asset

Up until around 2021, most new renewable energy projects that were coming forward were either BESS-only or solar-only projects without co-location. This was for the simple reason that it is simpler and faster to obtain planning permission for, and implement, single asset projects and because from a funding perspective the additional costs associated with co-located projects had not been considered to be proportionate to the resulting return on investment.

We are now seeing an increasing number of owners of existing generating assets, especially solar pv assets, looking to co-locate BESS assets, by seeking modifications to the asset's existing grid connection. The key driver appears to be the utilisation of any existing grid connection capacity in full, alongside with the maximisation of land use (where existing lease arrangements so permit). The retrofitting of an existing renewable asset with BESS is also intended to help manage renewable asset intermittency and improve the revenue input for the project.

Although this may look straightforward it may give rise to a number of challenges, including where a single SPV structure is adopted. These include:

  • Reviewing the grid connection rights to ensure that the BESS installation and operation will not adversely interfere with the export capacity usage of the generating asset or otherwise impact on the grid connection. The grid connection might need to be modified along with contractual variations to and agreements relating to land rights, funding, operation and maintenance etc.
  • The electrical connection will have to be AC coupled and the switchgear panel might need some modification if there is no spare bay provision
  • If the renewable asset is part of any offtake arrangements (e.g., a power purchase agreement), the off-take agreement might need reviewing to ensure that the addition of BESS does not prevent the SPV from being to comply with its obligations. Consideration needs to be given to the following matters:
    • Whether the BESS connection might cause interference to the generation of the solar pv.
    • Whether there are any provisions dealing with exclusivity of offtake from a specified metering point, and a right to offtake ancillary services the project provides (in each case where such provisions exist, BESS co-location will need to be structured either to avoid the consequences of these terms or to acknowledge them (for example, by offering the BESS offtake to the existing PPA counterparty, or by seeking a waiver of such rights).
  • Reviewing the terms of any existing lease agreement or planning permission to determine whether the addition of the BESS will require any amendments or supplemental applications in respect of such lease or permission.
  • Ensuring that any activities in connection with the BESS installation are carried out in compliance with any covenant terms of the existing project’s financing arrangements.
  • Reviewing and, if required, modifying any insurance policies covering the existing project to confirm the new development will not automatically void any coverage and ensure that the BESS asset will be covered by those insurances.
  • Both EPC and O&M contractors for the generation asset and the BESS 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 other project require priority at certain times?

Are co-located projects bankable?

A co-located project may comprise of two assets that are independently viable or two assets where the BESS asset is intended to balance the offtake of the generation asset in order to provide a net revenue benefit.

A funder will be less inclined to invest in a project where the value is impaired by the addition or inclusion of a BESS asset (although we anticipate this becoming less of an issue over time as the market matures). However, where a funder is willing to invest in a project, it will want reassurances that the revenue streams and the assets that protect them (i.e., any offtake arrangements and grid connection arrangements) will not be adversely impacted by the BESS asset. A funder is also more likely to get comfortable with any perceived 'project-on-project' risk of having two separate construction elements if each element can be constructed and operated independently of the other.

In our experience a funder is less likely be concerned by the corporate structuring of the project (i.e., whether there is a single SPV structure or a multiple SPV structure) than it is about revenue security. In some cases, a single SPV structure might be preferred in order to simplify the security and enforcement of revenues.  In other cases, a funder (or funders) might prefer a multiple SPV structure in order to ring-fence the liabilities of each asset from the other and ensure flexibility to sell one or both assets/projects independently.

A word on licensing requirements

BESS assets are considered generating stations for the purposes of the UK Electricity Act 1989. It may therefore be possible, subject to the applicability of any class or individual exemptions, that either or both of the renewable generating asset and the BESS require a generation licence to operate.

Concluding comments

Co-locating a BESS asset with a renewable energy generating asset has some clear advantages and should be considered by all developers in order to help manage any intermittency issues affected by any renewable energy generating asset and to maximise the utilisation of any grid connection. BESS has rapidly transitioned from an emerging technology to a fundamental project component for funders and developers.

However, a significant amount of up-front work and due diligence needs to be undertaken to ensure that the co-location of a BESS asset is commercially viable. Funders and developers need to look closely at their contracting and consenting arrangements to ensure that the inclusion of BESS, particularly when retrofitting an existing renewable generating asset with a BESS asset, will enhance the revenue streams of the co-located project and will not otherwise adversely affect the project.

Developers and funders will also need to ensure that the project is structured in a way that best fits with their objectives and that detailed consideration is given to the pros and cons of structuring a co-located project in any particular way.

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