Lithium-Ion Batteries Finally Reaching Adolescence

Around five years ago, grid-scale lithium-ion batteries exploded onto the scene—some literally.

First, insurers faced the same questions as grid operators: How do you define a battery? Is it power generation? Is it grid equipment? The answer had practical implications for underwriting authority. Whether a battery falls under traditional power generation, “renewables,” or any other team, each had treaty and ultimately underwriting appetite limitations. For reference, for most insurers, batteries fall under the “renewables” teams.

Batteries aren’t rotating mechanical bits of kit or, as yet a commoditized technology. Insurers (and their engineers) specializing in solar, and wind were suddenly faced with a new technology and having to grapple with chemistry. Turning to engineering and safety standards for guidance barely helped and there was no track-record for actuaries.

A few insurers were early adopters and should be applauded for supporting the energy transition, but most stood back. It meant a supply shortage and insureds were price takers. Now, insurer appetite for BESS (battery energy storage) projects has increased but expertise is spread thinly across the market. While the outcome is insureds have more options, many of these providers haven’t the depth of expertise to continually reassess and adjust risk based on the underlying improvements made in lithium-ion batteries.

An Improving Track-Record

Fundamentally, insurers are concerned about thermal runaway causing a fire or a fire causing thermal runaway.

Thermal runaway is when the temperature of a cell begins to rise. When the cell reaches an irreversible critical heat level, it sets off a chemical reaction that causes the temperature to rapidly continue increasing. When cell temperatures reach up to 400 degrees Celsius and beyond, surrounding equipment—cell housing, cables, ancillary equipment—begin to catch fire. Equally, a fire outbreak can increase a cell’s temperature to the point of initiating thermal runaway.

A cascading thermal runaway (TR) event is the main battery-specific concern for insurers and forms one of the key probable maximum loss (PML) scenarios. This is when a thermal runaway event in one unit spreads to another and cascades through a project.

The other, often dominant, PML scenario for insurers is agnostic across all power technologies: exposure to damage to the main power transformer and ensuing lost revenue.

Recent market history carries a number of instances of battery fires and thermal runaway, with, most recently, an LG Chem facility in San Diego catching alight in May. Last year saw battery fires at a Tesla battery project in Australia, LG Energy in California, fire damage to Powin projects in New York state, as well as other examples in Europe, South Korea and China.

• Augmentation strategies. By year five, most projects start enacting augmentation. Insurers are likely to scrutinise minor works allowances and any narrowing of spacing from new batteries.

• Greater scrutiny of ancillary equipment for operational projects as the focus shifts from thermal runaway exposure. Think inverters and medium voltage transformers with the focus on redundancy and access to spares or replacements.

• Steep changes in declared values. As more projects go operational, insureds will be revising replacement cost estimates compared to pre-construction. Over the last two years, overnight capital cost benchmarks have dropped by up to a third for 2-hour systems. For operational projects, 12-month revenue forecasts are changing by ±40% a year.

• Longer indemnity periods. For non-recourse financed projects, it’s a matter of time until banks start mandating greater than 12-month indemnity periods on projects with main power transformers.

• UL9540a reports trailing financial close. Insurers should prepare for insureds not receiving UL9540a reports for the latest products until after inception of construction projects. Insureds should be including these in critical document schedules in supply contracts.

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Whichever way you slice and dice publicly available data on the number of global thermal runaway events, you see a huge reduction in the frequency of thermal runaways compared to the early days. These datasets are incomplete as they rely on media reports, but even doubling the incidents points to low and falling frequencies—whether it be number of thermal runaway events per year, events per MWh per year, or, events per battery cell, per year.

Forget about sprinklers

Distinguishing between a fire and thermal runaway isn’t academic. Because batteries are inside containers, in the early days, many insurers incorrectly judged the fire safety precautions of a BESS project against that of traditional property. Insurers insisted on container-level water suppression (sprinklers) and gas suppression.

Gas and water suppression cannot extinguish a thermal runaway event. They might act to extinguish an incipient fire inside a container but with costly collateral damage. And even if designed to cool down a container undergoing thermal runaway—container-level water suppression is ineffective: spraying water from the top of battery racks means it has little effect if a low-down central cell was undergoing thermal runaway. Several high profile claims later—from malfunctioning wet-pipe water suppression—have led to most insurers dropping the necessity of container-level water suppression.

Today, if water suppression is present, it is targeted. It is at the module-level, where watertight modules (high IP ratings) can be individually flooded if cells surpass a threshold temperature. Thus, cooling down the target module and reducing the likelihood of neighbouring modules reaching thermal runaway temperatures.

Spacing, Spacing, Spacing.

Insurers accept the unavoidable but unlikely risks of a thermal runaway event. But to reduce the likelihood of a cascading thermal runaway insurers are setting global expectations for how far apart clusters of battery units should be. There are no standards that reflect insurer expectations. An insured engaging at the development stage of its projects should be guided by its broker as to the spacing expectations of insurers. The acceptable range is 8-10 feet between clusters of units, where a cluster is typically two units back-to-back or occasionally four back-to-back and side-to-side.

Most designs tend to meet or are already close to this requirement because of the practical reasons of access and the reach of the container doors. So, moving units a few feet here or there doesn’t tend to harm the economics of a project. Insurers will penalise closely packed projects with a combination of higher premium and/or higher deductibles and/or a loss limit.

Standards

The UL9540a reports have been demoted to supporting roles in underwriting reviews. Although still a prerequisite for insurance, the influence of the UL9540a results is dwindling. With most cells, modules and units showing positive test results—little to no spread of thermal runaway—the UL9540a now plays the role of identifying bad projects, rather than good ones. A good test result is now expected. And technology surpassing minimum standards is only a good thing.

Distribution versus transmission connected projects.

This is important. Distribution connected projects do not have high voltage step-up main power transformers. It means these smaller, distributed projects should not be burdened with the rates and deductibles of projects with long lead time main power transformers (MPT). Without an MPT, the dominant PML scenario is cascading thermal runaway.

When maximising revenue improves safety

To optimise earnings, BESS asset owners are subscribing to software solutions that provide a granular overview of a battery’s performance down to the cell or module level. A more accurate understanding of the battery state-of-health, state-of-charge and other metrics can mean greater revenues—think of the sum of removing the uncertainty in charge levels and squeezing an extra bit of discharge for each daily cycle. It’s also making batteries safer.

For the same reason that monitoring key metrics and derivatives maximises revenue, it also forewarns of any damaging trends. For example, an out-of-balance cell within a module, where the cell is running at higher temperatures than the others. Providing the results are acted on by the insured, insurers welcome cell or module-level advanced analytics and prognostics, be it through third parties, in-house, or from the battery supplier.

Some third parties are offering these services during the hairy stage of construction for insurers: commissioning. A large share of BESS insurance claims and thermal runaway incidents have occurred at the point of commissioning when defective or poorly installed equipment is being turned-on, tested and energised. A granular analysis of cells and modules at this stage can detect underperforming, defective cells and modules—it comforts insurers, increasing competition for the business, and equips an insured with evidence for warranty claims. Demand for commissioning reports is set to increase as commissioning periods increase with growing project sizes.

In summary, as lithium-ion battery technology matures, insurers are adapting to a more sophisticated understanding of the risks involved. While thermal runaway remains a primary concern, improved safety standards, more accurate data monitoring, and better project design are helping to reduce incidents and improve insurability. With increased industry expertise and more targeted insurance products, battery energy storage systems are transitioning from a risky, emerging technology to a vital, more secure component of the renewable energy landscape. This evolution reflects a growing confidence in the technology and a commitment to supporting the energy transition.

Harries is a partner, renewable energy, at NARDAC, part of the Amwins underwriting division.