‘Climate risk is a daily operational reality’ for BESS developers in Southeast Asia

“We have reviewed our technical specifications to make sure we cater to more extreme weather, which is now becoming more and more common during the construction and commissioning phase,” with Verdant working to international standards to ensure project bankability and using AI-enabled asset management systems to optimise operation and plant performance.  

Alan Yau participated alongside fellow developer Ruth Briones, chair, president & CEO of Greenergy Solutions, lawyer Samata Masagee from Clyde & Co, and climatologist Brendan Larson, co-founder and CEO of climate risk consultancy AbsoluteClimo. The panel was moderated by me, Energy-Storage.news editor Andy Colthorpe.   

Briones, whose firm has deployed solar PV projects in the Philippines and is now developing a 2GW portfolio of hybrid solar-plus-storage in the ASEAN country, noted that even during the worst disasters, none of Greenergy’s assets has been “affected or destroyed.”

Nonetheless, the Greenergy CEO said, risk assessment and mitigation planning for BESS should be done as early as possible and run in parallel with environmental impact assessments.

With projects in Southeast Asia subject to demanding climate conditions, including high heat and humidity, when it comes to Capex and Opex modelling, Verdant Energy, which is also an investor in its projects, tries to “build upfront resilient investment,” Alan Yau said.

“We try to cater for more extreme conditions based on specific site conditions and data. For example, we want to have enhanced thermal management for our BESS. We want to make sure that our foundations are [suitably] designed for typhoon-prone areas and things like that,” Yau said.

“Cost of maintenance and replacement is that important, especially as we’re talking about battery storage; extreme high temperature will actually accelerate your replacement schedule. How do you then cater for that? Make sure you build enough buffer for replacement Capex and budget. Then, when you are doing revenue modelling, your availability and downtime have to be scrutinised and validated by independent advisors to make sure that it reflects the reality and conditions. Finally, you look at the performance issues by using AI asset management to do a more accurate prediction of what’s going to happen, so that it can help us to be more responsive.”

Briones agreed and emphasised the importance of negotiating very good warranties and guarantees with suppliers.

Black Swans and the changing climate

Climatologist Brendan Larson said that ‘Black Swan’ events or tail risks, in other words, less-frequent but high-impact risks, are increasingly important to factor in.

“The climate system is a nonlinear system. It’s not a mathematical statistical average. Climate is changing, it’s dynamic,” Larson said, citing the example of the Maui wildfires in Hawaii of August 2023 that caught utility Hawaiian Electric (HECO) off-guard.

“Hawaiian Electric was caught so off guard that they didn’t have enough liability insurance to cover that, so they ended up having to do an asset divestiture. They had to sell their bank to help cover the liability costs of that event,” which fell outside of the utility’s recognition of tropical storms and floods that might have been more typical of the region until then.

At the same time, climate “drives the energy” in an increasingly renewable energy-based system. Yet climate change scenarios are often more about “what ifs” relating to global temperature change, while the proper modelling of how things like oceanic atmospheric flows affect weather is lacking, according to Larson.

“So, when it comes to the revenue generating projection of the future, the forecasting of the revenue, you can’t just go to the engineers and say, ‘well, here’s a site and in the past, the wind has blown like this, so this is basically the past data, so we expect for the power purchase agreement (PPA), for the next 15-20 years, it should be like this,” the climatologist said.

As the disclaimers on investment prospectuses read: past performance is not indicative of future results.

Samata Masagee, Clyde & Co partner, works with project sponsors, developers and financial institutions “to bring energy and energy storage projects to life,” with the lawyer’s own experiences in ASEAN largely focused on Thailand and neighbouring countries.

Masagee said it is essential for project documentations: PPAs, long-term service agreements (LTSAs) and so on, to be flexible to cater for changes, from climate to regulatory, to ensure the long-term viability of projects.

For example, during construction, Clyde & Co’s documentation is moving away from generic definitions of force majeure events to more site-specific definitions that are customised and can be based on research from expert sources such as climatologists.

Likewise, contracts that cover a project once it goes into operation should also tie back into the risks identified in the development phase. Meanwhile, supplier warranties should always factor in worst-case scenarios that account for the long term, Masagee said.

Insurance is increasingly moving away from generic and generalised terms

Insurance should stand behind warranties in those worst-case instances, for example, if an equipment supplier goes out of business. This, of course, comes with an internal premium on the cost of insurance, Masagee said before elaborating on project insurance considerations.

“The trend that we’ve seen across the market is pretty clear: that BESS, or energy storage insurance, is relatively more expensive than other insurance products for the renewable market,” Masagee said.

This is not because of a lack of appetite to insure these projects, but instead there is a lack of long-term data that insurers can look to and assess how to price the product accordingly, the lawyer said.

Additionally, there is still a “concentration” of relatively few speciality brokers willing to underwrite BESS projects. The advice, again, is to get into the process as early as possible.

Meanwhile, bankable technology makes insurers more willing to insure projects, if, for example, the equipment to be used has passed fire safety standards.

Verdant Energy’s Alan Yau said that technology solutions such as battery data analytics are examples of “AI-enabled operational decision-making” that are key to securing better insurance terms and project bankability.

“The moment you include the battery [in the project], then it becomes a lot more complicated,” Yau said.

“We have now incorporated insurance premiums as a variable cost that is indexed to site-specific conditions. It used to be just one line item that developers would just input an amount from historical experience, but now it’s a variable cost that every site is specific, so we make sure that we cater for it.”

The wide-ranging discussion also covered permitting, community engagement, and regulatory considerations, as well as audience questions on sustainability and equipment recycling.