Financing battery storage: navigating a maturing market
PA Consulting energy markets expert Mark Repsher discusses the growing opportunities for installing and financing US battery storage projects.
The article notes that battery storage is the fastest growing segment of the renewable energy sector. It is projected to be a trillion dollar market. Installation of stand-alone battery storage projects is expected to increase fivefold in the next four years. Another substantial portion of the commercial battery storage market, almost one-third, will be installed in combination with solar facilities. The financial markets for battery storage projects are beginning to catch up with the solar and wind markets. Still, many differences remain.
Breaking Down the Storage Market by Segment
Developers are pairing storage projects in the Northeast with solar projects in order to receive the federal investment tax credit (ITC). In New York, storage also receives the benefit of Value of Distributed Energy Resources (VDER) pricing, an attractive pricing formula established by the New York Public Service Commission.
Mark noted that certain economic benefits come from pairing storage with solar, such as savings on interconnection costs and construction. He added that the concept of siting storage with solar projects in the northeast in order to receive the ITC creates a forced fit that drives decisions as to where storage will get located. He would like to see the pricing and governmental incentives designed in a manner so that locational decisions for storage are made based on where the storage project provides the greatest benefit to the grid and to consumers, such as by alleviating price volatility, eliminating bottlenecks and reducing system constraints.
The Markets for Financing Storage Projects
Bank financing is generally available for storage projects. The cost and terms of bank financing may vary significantly depending on what segment of the storage market the project is participating and its physical location.
The terms for financing a storage project in California are attractive. A fully contracted stand-alone storage project (e.g., with a fully tolled 15-year offtake contract) can obtain a bank loan for up to 90% of the construction costs, and 100% for term financing. The cost of financing a merchant project is less attractive. A merchant storage project in California, having an RA capacity contract representing 25% to 40% of the project’s dollar per kilowatt month revenue profile, can receive 70-80% debt financing. This is a marked improvement from the past.
Mark noted that the financial community has gotten increasingly comfortable with storage projects selling products on a day-ahead or real-time basis into the CAISO markets. “To get that same amount of leverage a few years ago in California, your revenue profile from an RA contract would have had to be 50%.”
The investment case for a storage project in New England, New York and PJM is much different than in Texas and California. The reason, Mark explained, is that price volatility in the PJM market, for example, currently does not and is unlikely to achieve what exists in California or ERCOT, because of how diverse those markets are geographically and types of energy resources.
Mark adds that an investor and lender has to take a longer-term view for valuation of a storage project in New England and PJM. As the Northeast markets move forward with offshore wind and other technologies, the markets will experience increased volatility and the market structure will change to make the case for storage. However, that the Northeast markets are still unlikely to get to where the markets are in Texas.
The Northeast markets, however, are not monolithic. Mark mentioned the Delmarva Peninsula as an example. Approximately 10 to 15 GW of offshore wind is expected to be built off the Delaware shore that will be coming in on the same transmission line. Fossil fuel plants in the Delmarva Peninsula are shutting down, which will lead to volatility in those markets. “The Delmarva Peninsula already has a tremendous amount of volatility,” says Mark. “The commonly-held view is that transmission grid upgrades are needed in that area but are not likely to be delivered quickly. This will therefore increase the importance of storage assets.”
The Benefits of Storage Portfolio Financing
The financing markets for storage have also evolved to the stage where banks will loan against a diverse portfolio of storage projects. By loaning against a diverse project portfolio, lenders receive the benefits of operational, revenue, and energy volatility diversification. Lenders will therefore provide better terms, and developers with greater leverage, when loaning on a portfolio basis.
The project portfolio can also be across geographically diverse locations. Mark says that lenders would loan against a storage portfolio having operating assets in California, ERCOT and New York, in which the projects on an individually basis might be difficult to finance based on their size and risk profile.