Underwriting the future of new energy storage
Mounting energy crises around the world, fuelled largely in part by Russia’s war with Ukraine, has focused attention more than ever on the need for a shift to encouraging the development of innovative sources of clean electricity generation.
Battery storage and in particular long duration energy storage (LDES) technologies have become increasingly attractive to policymakers and utilities.
LDES solutions often mean introducing new technologies to markets that have become accepting of the dominance of lithium ion battery tech.
The risks and bankability of new technologies have made it difficult to achieve a breakthrough.
However, the arrival of one of the world’s leading providers of reinsurance, primary insurance, and insurance-related risk solutions in the ener-
gy storage market, Munich Re, could be turning the tables in the favour of new entrants to the market.
Sebastian Scholz, of Munich Re’s
Green Tech Solutions unit, provides B2B primary insurance for large industrial clients — particularly in the renewables sector.
Now Scholz heads a team focused on the energy storage market and whose first customer after launching its insurance scheme is US-headquartered iron-based flow battery company ESS.
“We entered into the energy storage market in around 2019 but we did so having already had more than 10 years of experience in insuring long term product and performance warranties for new technologies, particularly in the green energy space,” says Scholz.
Munich Re had been a driving force in insurance for solar, onshore and offshore wind manufacturers, so the move into energy storage was regarded as a complementary one.
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The path to taking any infrastructure project from the drawing board to commercial operation is fraught with challenges, but firms bringing new BESS tech to market can find it more difficult than most. However, a partnership with global insurance provider Munich Re is underpinning the international development of iron-based flow battery firm ESS.
Insurance scheme aims to lighten the load of developers expanding in the global energy storage market
Sebastian Scholz of Munich Re’s Green Tech Solutions unit
“We know the ecosystem and many of the players and the need for storage and in particular LDES.”
The relationship with ESS grew from a conversation at a trade fair in North America.
Scholz said it quickly became apparent that Munich Re’s service could be a gamechanger for ESS.
“That’s how it started and since then ESS has been on a tremendous growth path.”
Munich Re offers what it describes as a backstop for ESS’s long-running warranty promise and Scholz says the risks that come with it are “pretty similar across different technologies in renewables”.
“We decided to translate our knowledge into the energy storage space — it’s worked with ESS and other players and we are now building a growing insurance book in this sector.”
Scholz says the company is “particularly technology centric” and technologies that are candidates for Munich Re’s books are examined in detail beforehand.
“We also hire market experience, for example we have electrochemists in the team. We also have folks from the energy storage industry that work for us and they do the technical due diligence that comes with insuring an energy storage asset.
“Technical due diligence is the entry point for such a technology-oriented insurance product. That’s what we did with ESS and we’ve been insuring them ever since.”
Scholz is coy, largely because of a number of commercial non-disclosure agreements, about the names already on Munich Re’s battery insurance books.
The company insures players in what he describes as the “more exotic corner of the market — which still is redox flow technology of different sorts” — but it supports “plain vanilla players” too, such as those selling containerized lithium assets into the market, Scholz says.
But there are no battery technologies or chemistries that would be ruled out for insurance guarantee coverage. All would be considered on a customerby-customer basis.
Green Tech Solutions is on a “good growth path… our successful business model is simultaneously enabling the energy transition”.
Scholz acknowledges that while energy storage insurance is a growing niche business, it has the scope to expand alongside other initiatives, such
as insurance for AI projects, which is already being pursued by Munich Re colleagues.
How policies are devised
“AI is increasingly involved in the operation of energy storage assets, such as to make use of arbitrage,” he says.
“Thorough due diligence” is the essence of work before Munich Re adds a customer’s technology to its books.
“We have developed risk assessment questionnaires for the various
technologies we look at considering a number of factors such as cell chemistries.”
Based on the findings of the company’s technical advisers known as risk analysts in insurance lingo, the next stage is opening in depth talks with the customer.
“That’s what we did with ESS cofounder and CTO Julia Song, who was our technology partner for discussions revolving around ESS’s technical due diligence,” Scholz said.
PRODUCTION CAPACITY ‘SET TO TRIPLE DESPITE SUPPLY CHAIN ISSUES’
would likely be near the low end of the range and possibly below it, depending on our ability to resolve these supply chain issues”.
But he revealed a “landmark deal” would see the company delivering more than 1GWh of storage systems to Australia-based Energy Storage Industries Asia-Pacific (ESI) in the next five years.
ESS CEO Eric Dresselhuys (pictured) told an earnings call on August 11 that the company had doubled its annual production capability to 500MWh with the addition of a new manufacturing line in the second quarter of this year.
He revealed the US-based firm expects to have its next fully automated line up and running in the fourth quarter, taking annual capacity to 750MWh — “tripling where we started the year”.
On the operational front, Dresselhuys said ESS continued to “battle various supply issues” with components for its Energy Warehouse units, which have slowed its production schedule.
However, Dresselhuys said while the firm is sticking to its original plan of shipping 40 to 50 Energy Warehouse units this year, “we
ESI has already placed multiple orders for more than 70 EW units, which ESS began shipping in July, Dresselhuys said.
“In the coming quarters, ESI will ramp up facilities in Queensland, Australia, that will take key components that ESS will ship from our Oregon factory such as energy modules and proton pumps and assemble them with the balance of plant.”
Dresselhuys also welcomed the signing in the second quarter of a contract to deliver an Energy Center storage system to Tampa Electric Company (TECO) in Florida. This installation will support TECO’s Big Bend Solar Project, which powers 3,300 homes. The Energy Center which should ship early next year, will be able to provide up to 10 hours of total capacity and is intended to be used for solar peak shifting, and fossil fuel displacement.
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“In the coming quarters, ESI will ramp up facilities in Queensland, Australia, that will take key components that ESS will ship from our Oregon factory such as energy modules and proton pumps and assemble them with the balance of plant.”
Only then can Munich Re start to structure a policy based on technical risk and on talks with the future client about how much risk should be placed on the insurer’s books.
In a world where concerns about security of supply in the battery materials supply chains are a dominating factor, that is not an influencing factor as far as Munich Re is concerned.
Scholz says there is no coverage for any impact on delays to supply of a battery’s ‘fuel’. But there is ‘delay-instart-up’ insurance for larger scale energy storage investment projects.
“What we currently focus on is the point when the asset comes into operation. And as we know, they are supposed to be in operation for 10, 15 or in some cases 20 years. We cover endogenous risks over the duration of the lifetime of the asset.”
An additional layer of protection — solvency coverage — is available to offer support and confidence in large scale developments, such as in cases where a technology provider might go out of business and a valid warranty claim occurs in the future, be it in connection with the product or performance.
Scholz said developers can then turn directly to the insurer for a financial indemnification.
“This really speaks to the bankability aspect that financiers do want to see when they invest in these types of new technologies.
“On this very aspect, the fact that Munich Re has been operating since 1880, with our credit rating backstopping the warranty promise, ensures projects are viewed as bankable.”
ESS: ‘Insurance is an enabler’
For iron-flow storage firm ESS, as one of the relative ‘newcomers’ on the LDES scene (although the company has been developing its systems since the early 2000s), Munich Re’s support has been key to its expansion in the US and Europe.
Europe director, Alan Greenshields, praised the leadership of Munich Re in showing support for the challenges facing new technologies coming in to the market “where financeability is a big issue”.
“They have created a path for companies such as us by defining the insurability of new technologies that can contribute to combating climate change,” he says.
Risk mitigation and management is “probably one of the biggest single elements” private sector developers
and utility customers look at because “they are always looking for what could go wrong”.
“An insurance product that is covering part of the tech risk is a huge thing from their point of view. It’s also an enabler from going from early-stage deployment up to making the product ready for mass deployment.”
Greenshields says he thinks policymakers and utilities have been encouraged to see the private sector turn to non-lithium technologies
“They are interested in trying something new and excited about the features of the product and that’s the status ESS had in 2015. We had small numbers of our products going out for trials.”
But what global decarbonization policies need now is mass deployment, Greenshields says.
“And whether it’s a private sector developer, power utility or any other large body seeking to enact mass deployment the financeability of their project is the important thing and is a completely different focus from the point of view of the customer.”
The real value of the kind of policy provided by Munich Re is in those early stages of deploying a new technology or entering foreign markets.
Greenshields says the huge balance sheets of major Asian companies has been a key driver in the deployment of massive amounts of lithium, “even though there are concerns about durability and fires”.
“It will take ESS sometime to have a balance sheet to anything as close as theirs, so this insurance offered by Munich Re is essential for the scaleup.”
Greenshields says the need for a major ramp-up of LDES systems is a key building block to building sustainable energy policies that can make the most of the intermittent nature of renewable power generation such as solar and wind.
“But technology is only part of it — a big part is funding.”
Such funding has to come from the private sector such as pension funds, which have shown a zeal to invest in energy storage.
However, funds will expect to get a reasonably safe return on their investments and insurance is “an invaluable part of that equation”, Greenshields says.
In a report published last June, the International Energy Agency said investment in battery energy storage was expected to more than double to reach almost $20 billion in 2022.
From a low base, there is rapid growth underway in spending on some emerging technologies, “notably batteries” and other clean tech systems such as carbon storage, the IEA said.
It could be argued that despite the frequent reports of fires caused by the propensity of thermal runaway in lithium ion battery storage systems, it might seem surprising that the chemistry has continued apace.
However, as Greenshields says, the deep pockets of the largely Asian battery behemoths behind vast numbers of lithium BESS projects around the world has comforted customers.
The financial fire blankets that established battery makers can rollout to quell concerns of utilities and others in the event of explosions and other such incidents involving energy storage systems has been a major influencing factor.
But the entry of Munich Re into the battery insurance market appears to be signalling a wind of change in favour of new technology players.
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“Africa needs everything at the moment and I would say it’s too early for consolidation. If you really want to speed up the use of energy storage to help achieve industrial production and climate goals, then every technology is going to be needed.”
Alan Greenshields, ESS Europe director
