May 19, 2023
Howard Kennedy’s M&A team work closely with their Energy team to advise on a wide range of corporate transactions in the energy sector. In particular, they have been involved with numerous projects relating to battery energy storage systems (BESS), which is an attractive new asset class to investors. In this article, they explore why investments in BESS are increasing in popularity, how these transactions are often structured and also consider the future of this sector.
Battery Energy Storage Systems
BESS projects offer good capital returns on investment by providing a secure income stream typically over a 25–30-year period in addition to creating environmental benefits. BESS are able to store excess electricity from the grid which can then be used by consumers during periods of excess demand. BESS is critical to regulating the difference between consumer demand and clean energy supply.
The lifecycle and structure of a BESS project
The first stage for any BESS project is to identify a suitable site which is in close proximity to an electricity substation and can provide the developer with access throughout the life of the project to the electricity grid. With these requirements in mind, it is normally agricultural land that is used for the development of BESS projects. Once a site has been identified, the developer will normally set up a new project company (Project Co) to own and operate the BESS project assets and will open discussions with both the owner of the land, the local planning authority and also depending on the size of the project, the local distribution network operator (DNO) or the transmission network operator (National Grid).
Seeking planning permission may involve significant community engagement and pre-application consultations with the local authority. Depending on the location of the site, local residents may raise objections around noise pollution, protection of wildlife and impact on the landscape. All of these objections will need to be overcome before planning permission is granted.
A developer will require the appropriate land rights to undertake the development and operation of the asset typically through a lease over the relevant land. The developer will want to avoid entering into the lease until at least planning is in place and prior to commencement of the construction phase of the BESS project but will need to secure the site with an option in the meantime. Where developers are competing for suitable sites, developers may need to commit to rental payments before the construction phase begins in order to secure the site. The lease will usually include a rent mechanism linked to the projected megawatt output of the BESS project. As well as securing a lease for the site where the BESS will be located, developers will need to secure easements and wayleaves to ensure access rights to the site and for the cabling route – the surrounding land may not be owned by the same landlord as the BESS site and so a developer may find itself negotiating with multiple landowners.
Alongside negotiations with the landlord and preparing a planning application, the developer will also be in talks with the local DNO or National Grid to obtain a grid connection offer for the site. Typically where the projected output of the BESS project is less than 50MW it will require a connection to the DNO’s distribution system and where it exceeds 50MW it will require a connection to National Grid’s transmission system. The grid connection offer will detail the costs that the developer will have to pay to the DNO or National Grid (as applicable) to connect to their system. The developer will normally need to pay a series of staged payments to the DNO or National Grid until the actual connection is made.
At the point that the lease and all access rights have been negotiated, planning permission granted and grid connection offer accepted i.e. when the project has reached ‘ready to build status’, the developer may consider selling Project Co through a share sale agreement. Any incoming investor will take on the development costs and risk but will have the benefit of the grid connection and subsequent income from the electricity sold back to the grid once the BESS project is operational and revenue generating.
The developer may offer the buyer of Project Co services in return for a fee to manage the engineering, procurement and construction phase of the BESS project as well as the discharge of any planning conditions through a Development Services Agreement which is often negotiated in tandem with any share sale agreement.
Once the BESS project is operational, the operator will enter into revenue generating contracts for the sale of the electricity. These contracts are entered into with an electricity supplier or an energy aggregator who pays for the electricity plus the value associated with providing services that improve security of supply to the overall system.
The Future of the BESS Market
There has been a sharp increase in the number of new connections to the grid in recent times due to the development of BESS projects and also due to increased deployment of renewable energy assets such as onshore wind and solar PV. This has resulted in increased pressure on the current grid infrastructure leading to delays to the development programs of BESS projects and an increase in costs to the development capital expenditure budgets. These concerns should be borne in mind by developers at the feasibility stage and may have an impact on site selection.
Further information on Howard Kennedy
The multi-disciplinary team at Howard Kennedy have advised numerous clients on the full range of services needed to invest in and develop BESS projects such as planning, real estate, corporate sales and acquisitions, grid connection, finance, EPC and operational revenue/offtake contracts. This has included advising Atlantic Green UK on three different BESS projects with a total storage capacity of over 1 GWh as well as BESS projects around the United Kingdom for other clients totaling a capacity of more than 400MW.
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