Co-locating battery storage
Published on 1st Nov 2021
As the battery storage market matures and the owners of solar generation portfolios increasingly focus on optimisation and maximising the value of their grid connections, the co-location of battery storage with existing solar projects is an increasingly important consideration for asset managers.
Who will own the battery assets?
Asset managers will need to consider early on whether the battery is going to be owned by the solar project company (solarco) or by a separate special purpose vehicle (SPV) (batteryco). Having a separate batteryco will be necessary if the developer intends to finance the battery on a standalone basis (or as part of a separate portfolio of battery storage assets), or wishes to retain the flexibility to dispose of the battery at a future point. Having a separate batteryco may also be necessary if lenders to the existing solarco are unwilling to consent to the battery assets and liabilities being brought within their financing perimeter. However, if lenders are willing to consent, and if the developer is less concerned about having future flexibility, having the battery owned by the solarco would be simpler and could therefore reduce execution and administration costs.
In either scenario, a technical review of the connection agreement will need to be carried out to check that the capacity is sufficient for the addition of storage plant to the site, and potentially, additional cabling may be required. Where a separate batteryco is set up, the batteryco and the solarco will need to share the existing grid connection. This is generally done by following one of two alternative structures: either by incorporating a new "gridco" (in which batteryco and solarco are shareholders) and transferring the connection agreement and connection infrastructure to it; or by leaving the connection agreement with the solarco and putting in place an agreement between the solarco and batteryco whereby the solarco agrees to share the spare capacity in the connection agreement with batteryco. Despite the additional implementation costs (notably, the setup of the gridco and negotiation of a shareholders' agreement), a gridco structure is often seen as preferable given it is more balanced and reduces stranded asset risk for the party that is not a party to the connection agreement (in this case, the batteryco).
A legal review of the lease should be undertaken against the proposed location of the battery in order to establish if a variation of the lease is required to permit the installation of a co-located battery. If the battery is to sit outside of the leased area, or if a batteryco is to own the battery, a new lease will be required. Any new or varied lease will also need to include rights in respect of the cable route and any access.
Planning, EPC and O&M
A legal and technical review of the planning permission will need to be carried out in order to ascertain if a new planning permission is required. A new EPC contract will be required for the provision of the battery and associated works. In the context of bank-funded projects, as a new EPC contract would involve the incurrence of construction risk and additional payment liabilities, this would likely require significant amendments to the loan documentation (and a new credit approval). This may give added weight in favour of ring-fencing the battery assets and liabilities in a separate batteryco. The operation and maintenance (O&M) scope for the battery will also need to be considered, including whether this is brought within the existing solar O&M or a whether a new battery-specific O&M contract would need to be put in place. The latter approach would likely need to be followed where a separate batteryco has been incorporated.
PPAs and subsidies
A legal review of the existing power purchase agreement (PPA) should be undertaken to ensure there are no terms in the PPA which cut across the proposed co-location. (For example, how is the export point defined and are there provisions around exclusivity over offtake from the export point?) If a variation to the existing PPA is required to clarify the position in relation to the co-located project, early engagement with the offtaker will be needed. In addition, the revenue streams for the battery will require separate consideration. If the existing solar project has subsidy support (that is, Renewable Obligations Certificates or Feed-In Tariffs), where the solarco is to own the battery, it will be necessary to follow Ofgem's co-location guidance when structuring the battery project to ensure the solar project can retain its subsidy. Where a separate batteryco is incorporated, this will be less of a concern (and will help alleviate concerns that asset managers and lenders may have around this aspect).
Osborne Clarke comment
There is currently no clear "right" way to structure a co-location project. The costs of a more complex set-up involving a gridco and separate batteryco may provide asset managers with greater benefits in the future; however a simpler structure whereby the battery is held within the original SPV could potentially simplify the execution process. Early engagement with funders, advisors and contractors will be key to establishing the best route, as will keeping a keen eye on the market as it evolves.