The unique construction risks of long-duration energy storage system projects

As the world moves toward a greener future, more long-duration (> 10 hours’ storage) energy storage (LDES) facilities will be necessary to support increased power demand, mitigate spot power price volatility, complement intermittent power generation growth, and offset accelerated baseload decommissioning.

LDES incorporate a variety of emerging technologies. Lithium-ion based battery energy storage systems (BESS) are one of the most popular types of LDES, but other technologies are evolving in pursuit of larger commercial market share. These include flow batteries, compressed air energy storage (CAES), pumped-storage hydroelectricity (PSH), thermal energy storage (TES), and gravity energy storage.

As the technologies used in LDES projects are newer than those used in traditional power generation, securing insurance is fundamental to proving project bankability, especially since losses can derail the financial sustainability of a project. Insurance, however, remains one of the highest expense line items for energy storage projects.

To manage both risk and cost efficiently, construction professionals should seek to understand and address insurance and risk management challenges that persist throughout the entire life cycle of these projects. Companies that have not thoroughly reviewed their physical and contractual risk profiles may not be able to secure adequate and/or efficient coverage.

LDES projects carry added risks

LDES projects are subject to additional risks compared to typical construction projects, mainly due to the use of perceived novel technology. Unlike traditional power generation construction, from an insurance underwriting perspective, there is greater uncertainty about efficacy, safety, and performance. Each of these factors poses insurance and risk management challenges to an energy storage project as well as to all stakeholders involved:

Technology: LDES projects often use technologies that are deemed prototypical, assembled in unique ways, or otherwise have not yet been proven on a large time scale. While underwriters have years of loss history information to price coverage for traditional power plants, this industry and institutional experience is not yet available for LDES projects.
Business interruption (BI) and delay in start-up (DSU) risks: LDES projects will typically need to integrate with existing power grids and require permits and licenses from local governing bodies, which can take more time than anticipated. Supply chain challenges, shortages of skilled personnel, and unpredictable inflation can also increase time and money spent for completion. Even if a project is months ahead of schedule, a covered loss could result in a complicated DSU claim if underwriters are not informed about a change in project status.
Fire exposure: A well-documented risk associated with some BESS technology, such as lithium-ion batteries, is thermal runaway, a chain reaction in which a battery begins to release energy in the form of heat, leading to damage and a feedback loop that results in rapid heating. If left unchecked, the heat generated can cause a fire. Expect insurers to closely scrutinize your fire prevention and suppression capabilities within your overall risk management plan.
Finance and performance exposure: Investors will likely be looking for performance guarantees that a LDES project will charge and discharge energy as designed. Additionally, many investors will have considered tax credits when determining the profitability of their investment. However, these credits may be phased out over time or their eligibility requirements may change. If construction takes longer than anticipated, investors may no longer qualify for these credits.
Equipment warranties: The original equipment manufacturer (OEM) warranties for equipment used in LDES projects may have a limited duration. Some OEMs also offer warranty extensions and enhancements, often as a small percentage of CapEx paid annually. Determining the best course of action for contractual risk transfer while accounting for warranty scope is often a long but vital process.

Achieve more cost-effective insurance solutions

Risk assessment and de-risking efforts set the stage for a more effective and cost-efficient process of risk allocation. To better understand and address a project’s potential insurability challenges, construction professionals should engage a risk engineering team specialized in assessing LDES projects. They can help you identify actions you can take to reduce risk where possible, advise on potential risk mitigation tactics, and provide options to de-risk projects. They may also be able to present risk allocation options that align with your risk financing appetite. An LDES project with a robust risk management plan is more attractive not only to insurers, but also to investors.

Project-specific insurance products are often part of the solution set, which can include controlled insurance programs (where one party purchases insurance on behalf of all parties performing work on a construction project, also known as wrap-ups) and builder’s risk, as well as environmental and professional liability coverages. These programs usually give project owners, stakeholders, and contractors a more cost-effective means of risk transfer than standalone insurance programs for each contractor and subcontractor. Further, a combined insurance strategy provides a natural platform from which to advocate for rigorous risk mitigation controls, all to drive down the total cost of project risks.

When facing budget constraints and reduced coverage availability, construction professionals have more creative solutions available to them than in years past, such as parametric insurance — a type of insurance contract that insures a policyholder against the occurrence of a specific event by paying a set amount based on the magnitude of an event. In some cases, clients may find that other non-traditional financing solutions, including insurance-linked securities and captives, may be useful sources of capital. Completing a risk finance optimization analysis (by calculating your risk tolerance, understanding your risk appetite, and reviewing your risk assessment) can help construction professionals structure their insurance programs to provide efficient risk transfer solutions that extract value in other ways, helping to alleviate budget constraints.

Consider the entire project lifecycle

Prudent risk management continues long after project construction begins, persisting for the whole lifetime of the project. Best practices include careful monitoring and reporting of construction activity and procurement status, communicating any delays as well as faster-than-expected progress, and keeping up to date with all change orders.

For construction professionals to be best protected against LDES project risks, it is crucial to work with a broker or insurance advisor experienced in LDES construction projects who can help you develop a holistic project risk management strategy designed to protect both your project and CapEx from inception through operation. They can help you identify the need for additional coverage and, if necessary, can help execute any disaster management and recovery plans, including providing helpful guidance for pursuing any applicable insurance claims.

Why Marsh

By working with Marsh, construction professionals will have the benefit of our knowledge and experience in the LDES space, supported by specialists from our Power & Energy and Construction practices. Our specialized early guidance and de-risking platforms, robust risk mitigation and allocation strategies, and innovative risk finance optimization and risk transfer practices can lead to greater transactional excellence, increased contract certainty, and a smoother transition into operations.

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