Battery Storage Projects — Key Property Issues
Battery Storage Projects — Key Property Issues
This article looks at the grant of a Lease, either for a “stand-alone” facility, or where the battery storage facility is to be “co-located” on a site where the developer (or a third party) already has an existing Lease.
Stand-alone battery storage developments will typically involve a Lease of the installation site, together with ancillary rights over the landowner’s retained land (the ‘Lease’).
The Lease is usually granted further to an Option Agreement or Conditional Agreement for Lease. Both ordinarily give the developer:
- the ability to defer taking a Lease until the time when relevant planning and other permissions are in place, and
- greater security in investing money and resources in the planning and development process, because they know that the site is secured without having to pay rent (or a full rate of rent) during the pre-operational phase of the battery storage system.
Freehold acquisition of the installation site is rare, given that the planning permission, and power purchase and funding arrangements are likely to be time limited to some extent, and so the developer will want the property rights to be similarly limited (albeit often with rights to renew the Lease).
Some developments may only involve a single landowner where the battery storage site, grid connection, and access to an adopted highway are all located on the same landowner’s land. However, others may require a “patchwork” of property rights to allow the installation and operation of the battery storage system and ancillary infrastructure (such as electricity substations, transmission cables and access tracks) where parts of the development are located on properties belonging to other landowners.
Some of the key factors which need to be considered early in the project decision making process are set out below.
Term:
The term of the Lease will be influenced by several related factors, including :
- the duration of finance arrangements, the power purchase contracts, construction contracts, capacity market arrangements and the relevant planning permission/development consent.
For example, a developer will not want to be subject to an ongoing obligation to pay rent if the battery site is not generating revenue, due to the lapse or termination of a power purchase agreement (PPA), or where the battery storage site does not have (or no longer has) the benefit of revenue from capacity market arrangements.
To accommodate these issues, the Lease will typically be for a fixed term, but with one or more options for the developer to end the Lease where the relevant PPA or capacity market arrangement falls away.
A possible alternative would be a shorter term Lease, perhaps with an option to extend the term.
- the availability and duration of a subsidy for the relevant technology, taking into account the overall capacity of the installation (such as a feed-in tariff).
Typically Lease terms range from around 20 to 25/30/35/40 years.
This is a key distinguishing factor from other ‘clean energy’ technologies, because battery storage sites benefit from capacity market arrangements which are much shorter than the subsidies historically enjoyed by (for example) wind farm and solar panel installations.
As a result, the developer’s commercial arrangements are all the more important. The profit margins which can be achieved are inextricably linked to the commercial arrangements which the developer puts in place, and to the technical capacity of the equipment to be installed.
The underlying fundamental point is that the developer will not want to be bound to pay rent at a level which the battery storage system cannot achieve sufficient levels of income to accommodate.
DNO substation-alienation provisions of the Lease
Part of the land the subject of the Lease will often have to be underlet, or “shared”, with the Distribution Network Operator (DNO) for use as a substation or switchgear house.
The developer will want to ensure that the Lease permits underletting/sharing with the DNO, and that the term of the DNO’s interest will need to accommodate the term of the Lease (or vice versa).
Co-location where an existing Lease is in place
In the ‘co-location’ scenario, (i.e. where a pre-existing development is supplemented by a later battery storage installation), other factors, depending on whether the battery storage system will occupy an area already let to the developer, or whether a new/dedicated Lease for the battery storage system is envisaged, will be relevant.
Assuming for these purposes that the existing installation was installed pursuant to a Lease (the ‘Original Lease’)to the developer, those factors will include the length of the remaining term of the Original Lease.
If that remaining term is too short for the developer to achieve a return on the capital expenditure involved in installing the battery storage system, other arrangements will need to be put in place to allow all of the pre-existing equipment (as well as the new system) to remain in place for longer than was originally envisaged at the start of the Original Lease.
Those other arrangements may include:
- ensuring that the developer has a right to apply for a new Lease under the Landlord and Tenant Act 1954
- providing for the grant of an option to renew the Original Lease, securing the landowner’s agreement to the installation of a battery storage system, and to the retention of pre-existing equipment beyond the end of the term originally envisaged.
- assessing the decommissioning arrangements within the Original Lease.
Some wind farm/solar panel Leases may include options for the Tenant to extend the term (for example, for a further five years) which, if exercised, may then make a battery storage installation economical.
However, such options usually specify that the renewed Lease is to be on the same terms, other than the amendment of some commercial terms (such as bringing rent up to the amount paid prior to the end of the term of the Original Lease).
The provisions of the Original Lease may not accommodate battery storage (see the ‘Permitted use’ section below) and so a Deed of Variation may be necessary.
Permitted Use
In addition to a requirement for the developer Tenant to comply with applicable planning legislation and the terms of any applicable Permissions or Consents granted further to that legislation, the ‘Permitted Use’ definition in the Original Lease may restrict the type/capacity of the equipment that can be installed, e.g. limiting use to generation from wind turbines (and perhaps not permitting any form of electrical storage at all). If so, it will be necessary to vary the Original Lease to avoid a breach of the permitted use provisions.
The ‘Permitted Use’ definition may also refer to the planning permission/development consent order further to which the initial development was installed. If a further planning permission/development consent order, or an amendment to the initial one, has to be obtained to allow for battery storage, the relevant terms in the Original Lease may have to be varied to accommodate the new planning permission/development consent order.
These points should also be considered if an option to renew the Original Lease is exercised, because the probability is that the ‘Permitted Use’ definition would only reflect the configuration of the original project.
Rent
As above, the developer must ensure that the rent payable under the Original Lease (and any new leasing arrangements) can be paid from the revenue generated by the development.
The landowner may want to re-assess the level of rent payable if updated or new equipment is installed. The issue then is again one of commercial viability. If the landowner makes excessive demands, this may have an adverse impact on the benefits of the installation of a battery storage system.
The developer may have to assess whether the “price” of a more content landowner is worth any additional financial incentive which the developer has to pay to achieve that. As there are differences in the revenue/subsidies available as between battery storage technologies on the one hand, and other co-located technologies (such as solar panels) on the other, it may be necessary to have specific rental arrangements for each type of technology installed under the relevant Lease.
Implementing variations
If the Original Lease is to be amended, the necessary changes could be implemented by means of a Deed of Variation (Although that could operate as a surrender and re-grant of the Original Lease, which may not be desirable. That possibility is not within the scope of this article).
Commercially, the proposed installation of further technology could prompt the landowner to renegotiate other commercial terms, such as rent, if there is no binding obligation on the landowner to help to promote a co-location site.
However, and if the wording of the permitted use clause in the Original Lease is sufficiently wide to permit the developer to install other technology (for example where other uses ancillary to the main permitted use are expressly allowed), it may be that (only) a Licence for Alterations is required to permit the works necessary to install the battery storage system.
Access and cabling rights
Where rights are granted to the developer, either pursuant to a Lease, or a Lease of rights, or a separate easement with other landowners (i.e. over any not owned by the landowner of the battery storage site), then similar issues need to be considered : there must be provision for transmission from the battery system as well as from the pre-existing generation technologies.
Where the rights are granted by means of a separate easement, consideration should be given to the extent of the land intended to benefit from the easement.
In broad terms, if the easement is drafted for the benefit of the land the subject of the Original Lease alone, rather than for the benefit of the main site landowner’s land as a whole, then amendments, or new documents dealing with the grant of the required rights, may be necessary to enable the battery storage site to benefit from an easement.
These points may be less significant in connection with transmission cabling rights if the transmission cabling has been (or will be) adopted.
Funding and other considerations
The financing of clean energy developments (such as wind farms and solar panel installations) will ordinarily involve non-recourse project finance
The battery storage market is for the time being still quite variable in this respect, on the basis that batteries are potentially also suited to asset finance (due to the nature of the asset and the period of typical electricity “offtake” arrangements) which, in turn, usually involves a shorter period of financing in contrast to project financing arrangements.
This in turn can have an impact on the availability or structuring of financing of battery storage sites.
The decommissioning/reinstatement security which a developer should provide is proving to be changeable in the battery storage market. This is often the source of extensive negotiations between the parties, about the type and amount of security, given the potential risks of long term environmental damage due to (for example) battery leakage.
Over recent years, Local Authorities have become increasingly active players in the energy market with the development of Energy Service Companies and, looking forwards, may potentially become increasingly interested in battery storage schemes as part of this trend.
(This article is not intended to be comprehensive or to provide specific legal advice. It should not be relied upon in the absence of specific advice given in relation to particular circumstances.)
For further information, please contact: Natalie Linehan, Andrew Williamson or David Thorp
