Battery storage technology is rapidly moving into the limelight, as the ability to cheaply and efficiently store up renewable energy for use when required will vastly improve its reliability
The renewable energy industry has matured rapidly in recent years, with long-standing environmental drivers now matched equally by a compelling business case. Indeed, in the US, the industry has doubled in size in the last 10 years and makes up 18% of the US power mix, according to data from Bloomberg New Energy Finance.
But while in many markets onshore wind and solar PV can now quite comfortably stand toe-to-toe with conventional power in an argument over economics, these low-carbon technologies still suffer from the Achilles heel of their intermittency. If the wind does not blow, or the sun isn't shining, energy needs to be found elsewhere.
For this reason, battery storage technology is rapidly moving into the limelight, as the ability to cheaply and efficiently store up renewable energy for use when required will vastly improve its reliability.
And the sector is on a steep upward trajectory. In just a few short years, battery storage capacity has as of today reached circa 1GW in the US. Industry experts forecast that this could rocket to at least 25GW over the next five years.
Unsurprisingly, given the potential size of the market, Deutsche Bank's solar & storage event in partnership with Pillsbury in New York on March 14 was packed to the rafters.
"It really showed that for a sector that is still in its infancy there is enormous interest and enthusiasm," says Thalia Delahayes, Deutsche Bank's U.S. Head of Project Finance Agency Services.
Interest from all sides
The storage market is essentially divided into three main segments: stand-alone storage projects; storage facilities which are co-located with a renewables project; or storage facilities associated with an application, such as electric vehicles.
Market growth across all these areas is being put down to two main factors: the versatility of lithium ion, the main technology currently used in the storage space; and the fact that manufacturing costs are continuing to fall.
And interest is coming from all sides, with utilities, bank lenders, pension funds, sponsors, and asset managers all in attendance at the Deutsche Bank-Pillsbury event.
"Funds are looking to diversify - they want to be able to say they've done these deals before, even if they're very small in scale, and that goes across all potential investor types," adds project finance agency business developer Adam Raffa.
Appetite is driven by the huge runway of investment activity forecast over the next five years - "when these deals come to market they all want to be able to say we have the experience and we've done the heavy lifting," he adds.
Following the recent landmark decision issued by the FERC laying the ground for the integration of energy storage in the US wholesale market, certain investors in the space, and their technical and legal advisors, are calling for further state regulatory action to get more insight and clarity on the rules governing energy storage.
"Regulation, together with technology and scale, will really push the growth of this market," Delahayes says.
The absence of a roadmap, and the uncertainties this can bring, is nevertheless driving innovation.
"What's unique about energy storage is that there are several types of new storage capabilities which are coming to the market - what drives the excitement is the need for sophistication, both on the development and the financing side," Raffa says.
A portfolio approach
To date, the sector has only seen a small handful of marque deals at the utility-scale, with most completed transactions smaller in size, typically coming in at under USD 20m of investment.
Yet these small deals are vital to the growth of the sector, as they help new entrants more fully understand the potential cashflows on offer ahead of an upswing in investment in the coming years.
"Players are ready to take on smaller tickets to be able to build their experience, and be part of the game – Deutsche Bank is proud to already provide agency services on a few of the first storage transactions, having partnered with some of the early movers," Delahayes says.
While Deutsche Bank expects to see more stand-alone deals in the future, it is also forecasting more bundled portfolio financings comprising smaller assets, in addition to a proliferation of storage coupled with solar.
"Our team, in terms of agency services, has a lot of experience working on those types of portfolio transactions for wind or solar, in the renewable space," adds Delahayes.
Location can be a massive determining factor in the need for energy storage, and the option is particularly useful for off-grid power generators.
As such, energy storage is expected to have a big role to play in remote locations and emerging markets, and countries which currently have an archaic system of back-up power generation could conversely ramp up their use of storage relatively rapidly.
"We're excited to see how the sector develops in markets like Latin America and the Caribbean as well as India, UAE, Saudi Arabia, Egypt," Raffa says.
Due to the relatively nascent state of the industry, equity has played a leading role in financings date, although lenders are hoping to eventually be able to get in on the action en masse.
Understanding the sector's cashflows will be key.
Battery storage projects have a variety of revenue streams to work from, although panelists at the event loosely agreed on three main sources: fixed demand charge; peak shaving contracts; and leasing structures.
There was also a consensus that storage backers shouldn't stack up too many revenue streams, and instead focus on one or two sources, to simplify and strengthen the cash flow forecast.
Warranties are expected to be crucial, given that the longevity of battery storage infrastructure has not yet been tested, while independent engineer reports for new storage projects will be gone over with a fine toothcomb by bankers.
One concern often voiced by potential investors in battery storage is the threat of technology obsolescence, that facilities which they invest in could in just a few short years look outdated and uncompetitive in relation to newer, more efficient models coming on the market.
Yet a counter-argument is that existing battery storage infrastructure could harness new technology to make projects more efficient.
And there is also great value to be gained in getting experience in the nascent sector now, ahead of the expected rush once it is de-risked and better understood.
"Getting in to the market now also means you'll better understand your cashflows, models and warranties when you come to refinance," Raffa says.
He adds: "It’s going to be an exciting couple of years – that ramp up and scalability is huge. I'm very bullish it's going to take off. How it does so – what types of technology, what warranties are going to be reciprocated, how cashflows are going to be modelled - all this has to be resolved and analysed to see what works the best."
Stay tuned for further discussions where Deutsche Bank deep-dives into timely and relevant topics in the project finance arena. Contact Adam Raffa on firstname.lastname@example.org
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