Greentech Media hosted its annual U.S. Energy Storage Summit 2016 in San Francisco on Dec. 7-8. The conference was packed with high-profile executives representing not only energy storage developers, but also institutional investors. Stationary energy storage is becoming more attractive than ever.
This focus on investing is a relatively new and interesting development in the space. There was a marked spotlight on mainstream financing, including ‘value-stacking.’ Value-stacking involves combining revenue streams from different grid benefits and services that batteries provide.
The panel below, “Making Energy Storage-as-a-Service Possible: Views from Integration & Financing,” was moderated by Brett Simon, energy storage analyst at GTM Research. The participants included Swami Venkataraman, senior vice president at Moody’s; Ken Munson, CEO of Sunverge Energy; and Peter Mostow, partner at Wilson Sonsini Goodrich & Rosati. They came together to provide a balanced view of the state of financing for the energy-storage industry today and in the near future.
Simon: What do you see as some of the major risks when it comes to bankability of storage?
Venkataraman: One way to look at bankability is from the viewpoint of lenders who are more risk-averse. While equity is already widely used, attracting debt means off-taking a lot of risk and achieving a lower cost of capital. There are two key components to bankability.
In terms of technology, there is already comfort amongst banks and lenders with lithium ion as a technology.
However, despite the life of the battery being 10 years, lenders perceive risk, and the debt period is only seven years to have a cushion at the end of the period while the asset is still viable. This puts developers in a tough spot – either they need to restructure the project to have a pay-back period of seven years or they have to extend the life of the battery to beyond 10 years.
The second component is about the business models – it’s important to keep it simple. While there has been a lot of buzz around value-stacking, the returns from value-stacking are equity or mezzanine risk and not lender risk. It’s important to identify a couple of services that are easy to understand and result in a steady cash flow. Essentially, there have to be one or two applications that drive economics from a lender perspective.
Mostow: It’s important for energy-storage projects to have completely structured revenue streams as there is a growing movement towards institutional financing. Bankability is the combination of two things – the actual software and hardware components of the battery systems and, most importantly, who will stand behind them if they don’t hold up. This is a huge consideration in this industry, as the number of vendors along the value chain has multiplied. However, banks look at startups and see only empty pockets, irrespective of how innovative the technology is.
Munson: At the risk of being contrarian to what you’re saying – Sunverge has had a different experience. As a new company, we’ve put known brands that have proven track records and megawatt hours built out into that storage value chain. Then, we add in a software that wraps around the whole stack to collect data on how each component performing for each end use. Finally, we deploy under different scenarios and then track that data to establish trends on how the systems and controls are working.
We package that data using a third-party technology and engineering assessment to bring it all together and present it – which is an interesting inflection point in this industry.
Simon: What are some of the energy storage financing models used today?
Venkataraman: To date, financing for storage has largely been on the equity side of things. But debt is beginning to gain traction as more people are willing to lend. So far there have been two types of models that have been funded with reasonably large amounts of money – the RECD frequency response model in the PJM market as well as California’s 1.3 GW storage mandate. In the long term, California will attract more debt capital financing simply because there is an off-take agreement with the utility. As these projects grow in size, there will be bigger investments made and more types of project finance used for these assets.
Simon: What are some of the advantages and disadvantages of these models being used and what have you seen being implemented?
Mostow: We’re currently on the cusp of institutional financing for energy storage. The announcements so far about large financing for storage projects have mostly been through acquisitions by a financial equity rather than structured financing like with debt and equity.
The next level of financing before equity would be special debt or mezzanine debt – basically debt instruments willing to take more risk in a deal (but demand a higher return) and have more involvement or equity at the sponsor level. While this isn’t an institutional deal, it is a step toward it – and we’re seeing this happen in California already.
Munson: These viewpoints are valid for single-purpose uses for batteries. However, new models are emerging with several distributed batteries and fleets of systems being tied together with a robust control layer – to create a new type of power plan which is being increasingly endorsed by both institutional financiers and lenders.
Simon: What are the investors’ internal rate of return hurdles for project finance for storage?
Venkataraman: This depends entirely on the type of investor companies are looking to attract. If it is an equity investor, the figure will most likely be in the teens. But if it’s debt, then the cost of capital still won’t be very cheap, since developers won’t be approaching insurance companies just yet but will be talking to private infrastructure funds. In that case, the figure will likely be in the high single digits.
Simon: How do investors deal with the risk of uncertain revenue streams (such as ancillary services like demand charge management?)
Venkataraman: Ancillary services such as peak shaving are well known and everyone understands the benefits of those – unless there is a tariff-structure change by the utility.
It seems to me that if you have a utility retail tariff and you are saving something for the customer until the retail rate tariff structure changes, you have a steady revenue stream.
Munson: Rather than having a stranded asset, [companies] prefer that the asset can be repurposed. However, that depends on what the asset is, who owns it, and where the value is.
Mostow: The annoying thing about the world of private equity and special situation debt is that it won’t give you any credit to shape-shift like that – but will take credit if you do it.
Simon: What do you think is the path forward when it comes to financing? What do you think is necessary in the next two years for storage to prove more bankability and gain stronger amounts of financing?
Mostow: The next couple of years in this space are going to be exciting. We’re at the cusp of a lot of institutional deals – especially in the two markets we spoke about earlier. We’re on the right path and we’ve already figured out a lot of the technological and legal challenges.
Munson: I think there also has to be an additional focus on the control layer that has been and will continue to be deployed in many instances. It will have to demonstrate ability to fleet-dispatch under stressed environments over time.
Venkataraman: It’s going to take one noteworthy project to get financed by both debt and equity investors – once everyone starts talking about a project like that, it sets the tone and the industry builds off of that and takes the stage forward. It’s definitely a very exciting time to be in this space.