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Magazine Feature: Guide to implementing BESS projects through PPPs

Why is it that, despite the potential benefits, battery energy storage systems (BESS) are few and far between in developing nations but proliferate across developed countries? While the answer is in its complexity, the solution lies in forming public-private partnerships (PPPs).

The role of battery storage in the electricity sector globally has expanded exponentially. Research finds that, before the COVID-19 pandemic lockdowns, global commissioning of battery storage capacity hit more than 3GW annually.

About half of the battery storage additions were utility-scale front-of-the meter projects. The rest were behind-the-meter projects that addressed individual customer needs.

Rapid cost reductions support growth in this technology (similar to the trajectory of solar PV tech). The cost of lithium-ion battery packs has fallen by 90% since 2010, reaching $150 per kWh in 2019.

But these projects were mostly commissioned in developed countries, despite it being clear that batteries could deliver substantial benefits in less developed countries, including:

• Reliance on expensive liquid fuels means BESS could be an economically attractive alternative to expensive peaker capacity. This use is rarely viable in more developed countries where less expensive peak generation capacity is often available.
• The smaller size of the electricity system in less developed countries means that, in some cases, renewable penetration could reach high percentage levels at an earlier stage. This can increase demand for fast-responding technology to maintain grid stability as grid inertia falls.
• Less resilient grid infrastructure can also mean more opportunities to use BESS to relieve existing network constraints or defer investment in grid capacity upgrades.

However, the shortage of BESS assets in developing countries is at least partly because of the complexity of the asset class. While the use case for a typical power generation project is clear – to generate electricity – batteries can meet several needs.

While this is part of the appeal of the technology, it adds a layer of complexity to project development. So, while developed countries often already have markets for many of the services that the batteries provide (such as frequency response and other ancillary services), these markets do not typically exist in less developed markets.

PPP structures can overcome these barriers, however, are yet to be widely deployed. The World Bank therefore published guidelines to implement battery energy storage systems under PPP structures specifically to provide guidance on how such structures could be implemented to grow the role of BESS in developing countries.

Technical analysis and commercial terms

When implementing a BESS PPP, it is helpful to consider the factors that are important in driving the commercial structure of the agreement. The PPP’s primary driver will probably be the intended use case, ie, how the system will be used and what benefits must be achieved. Still, it is also vital to consider whether the BESS will be a stand-alone or a hybrid project.

There are three types of projects:

1. Bulk energy shifting, including the provision of peak power and arbitrage opportunities.
2. Network and system services, including grid infrastructure and ancillary services, which are grouped as they are commercially similar. Some of these services are location specific, others not.
3. Hybrid projects that cover projects paired with solar PV or wind generation. This category focuses on projects where the BESS is explicitly used to ensure that the variable renewable energy (VRE) generator meets specific requirements (such as a maximum ramping requirement or limited dispatch ability).

Behind-the-meter battery storage projects are not covered by these categories as this type of project is likely to be agreed upon between two private sector parties rather than implemented as a PPP.

How the BESS is used will impact the project’s technical design, the benefits it will deliver and the commercial arrangements to be agreed upon between the parties. So, it is vital for clarity on the project’s objectives and the specification required to meet those objectives as soon as the project opportunity is identified.

Technical analysis is necessary to validate the BESS business case and ensure it is technically feasible. Also, analysis is required to ensure the project does not adversely affect the grid and that the BESS adheres to the Grid Code.

Technical modelling might also be needed to assemble an evidence base to validate the project’s business case. This analysis must be tailored to the proposed project type, focusing on validating the specific benefits the project targets.

The commercial terms for a BESS PPP would also depend on the project implementation type. Each type of agreement would give rise to a slightly different risk allocation between the parties.

The four types of agreement explored in the World Bank Guidelines are:

1. A tolling agreement, where the buyer pays a tolling fee to access the capacity provided by the BESS project and is also responsible for delivering and paying energy to the BESS asset for charging.
2. A capacity-based agreement where the buyer pays a capacity or availability fee. The agreement will set out what the purchase of capacity entitles the of f-taker to, ie, whether this is limited to the provision of certain services.
3. A capacity plus energy agreement where the buyer pays both a capacity and an energy fee. This might be appropriate if the project is responsible for paying for energy to charge the battery. In this case, the round-trip energy losses effectively become a variable cost passed through to the off-taker via an energy fee.
4. A hybrid PPA, which is an extended renewable energy PPA to accommodate a hybrid project combining a VRE generator with a BESS installation. Such a PPA might pay for metered energy output (as with a typical standalone VRE project) but impose conditions on the project, such as ramping limits or limited dispatchability during specific periods.

For hybrid PPAs, the seller will typically reflect the additional cost of the BESS in the energy fee paid f or metered output, either through a higher energy fee or through a separate ‘adder’ to the energy fee. Alternatively, the hybrid PPA might include a time-of-use tariff structure rather than imposing technical requirements on the project. The tariff structure incentivises bidders to shift generation output to peak times.

Technical limitations and site selection

The PPP agreement must carefully consider the technical limitations of the BESS, irrespective of the type of project that will be implemented. The warranty secured from the battery manufacturer

by the project developer may include limitations on how the system can be dispatched. There might be limits on the number of cycles the BESS can incur or the depth of discharge (ie. how much of the storage capacity is usable).

When asset control is directly or indirectly (via dispatch instructions) passed on to the of f-taker, these constraints have to be reflected in the PPP agreement so that simply operating the BESS does not break the warranty.

These constraints might mean iteration between finalising the agreement’s commercial terms and refining the BESS’s technical design to ensure that both support the intended use application.

Some types of BESS projects have to be implemented in very specific locations. If the project is meant to provide voltage support or tackle a particular grid constraint, it must be in an appropriate location to deliver the specific services. But other services the BESS could provide might be less dependent on the project’s geographic location.

The design of the PPP procurement will also have to consider what role, if any, the private sector plays in the project. It will be appropriate to allocate responsibility for system design to the private sector.

Rather than specifying the particular battery design during the PPP tender, the procuring agency might specify a service and a set of technical requirements that the BESS should be able to meet. This would allow private sector developers to optimise the design to meet the specific requirements.

The agreement should cover testing requirements to ensure the BESS meets the requirements defined in the original brief. The procuring agency should clearly define the technical specifications of the BESS and ensure it meets those requirements at every stage of PPP implementation.

The future role of battery storage

In most markets, the drive towards net-zero emissions will involve a substantial increase in the role of VRE generation. This will increase the need for flexibility to accommodate the rapid changes in output from the intermittent generators.

Ongoing cost reduction and technological development will also impact BESS deployment in the future.

Improvements and cost decreases of already well-established technologies will improve the business case for some projects and applications that are marginal or not commercially feasible today.

Also, new technologies such as flow battery technologies could catalyse further potential for BESS. This advancement would improve the technical feasibility of applications yet to be widely implemented, such as longer duration bulk energy shifting.

Together, these factors will mean expanding the potential for BESS projects and implementing PPP structures could help achieve these project types in developing countries.

Compiled from the Guidelines to Implement Battery Energy Storage Systems Under PPP Structures published by the World Bank and Private Infrastructure Advisory Facility (PPIAF).

About the author

ESI Africa
Content Team

ESI Africa

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