Dealwatch: Is royalty financing the future of storage?

BY BEN COOK AND ROBERT MALTHOUSE

  • Debt and equity financing deals are common in storage
  • But downsides of such financing mean appetite exists for alternatives
  • Some storage companies instead obtaining ‘royalty financing’

Energy storage finance is starting to gain significant momentum.

This is particularly the case in North America and Europe, and the last month saw a number of notable storage financing deals concluded that demonstrated the range of financing-types available to businesses in the sector.

Most common are traditional debt financing and equity financing deals. However, while debt financing and equity financing each have their own advantages, they also have downsides. As a result, there is evidence of alternative forms of financing gaining in popularity.

One of the most notable in recent times has been royalty financing.

If you have an energy storage business and you’re looking for investment in order to grow, there are a number of financing options on the table. But which is the best for your business?

Let’s take a look at the pros and cons of debt financing and equity financing and the emergence of royalty financing as an alternative.

Recent debt financing deals: Intersect and Plus Power

One of the biggest storage financing deals in the last month involved utility-scale renewable energy developer Intersect Power and consisted of predominately debt financing, but also elements of construction financing, tax equity and land financing. The deal saw Intersect close eight separate transactions representing a total of $2.6 billion of financing commitments for the construction and operation of a portfolio consisting of six US solar and storage projects.

Of the $2.6 billion in total financing, $1.4 billion consisted of portfolio level, term debt funding, which incorporated structuring and pricing provisions “designed to account for the higher proportion of uncontracted revenue in the portfolio”. Proceeds from the term facility will support both construction and operation of the portfolio. The debt financing complements a portion of equity financing – providers of the debt and/or equity financing to Intersect include HPS Investment PartnersCarVal InvestorsGenerateClimate Adaptive InfrastructureBank of America and Morgan Stanley.

Other notable debt finance deals in the storage sector in recent weeks included Plus Power’s closing of what it described as a $219 million “landmark credit facility” for its 185MW Kapolei energy storage project in Hawaii. The facility included $188 million in non-recourse construction debt, in addition to $31 million in letters of credit.

What are the pros and cons of debt financing?

One of the appeals of debt financing for energy storage companies is that, unlike equity financing where an investor takes a stake in the company, the entity lending the money has no control over the business – once the loan is repaid, the company is free to sever ties with the financier. Another benefit of debt financing is that it is easy to forecast future expenses because loan payments don’t fluctuate.

However, the downside of debt financing for, say, a smaller energy storage company is that if the business does not grow quite as quickly as expected, the obligation to continue paying off the debt could mean the company has less to invest in growing the business.

Recent equity financing deals: Harmony, Titan, Yotta and Nostromo

An alternative to debt financing is equity financing. Major storage equity financings in the last month included Harmony Energy Income Trust raising £186.5 million through its initial public offering, with the proceeds to be used to build a portfolio of large battery storage projects across the UK.

On a smaller scale, battery management system provider Titan Advanced Energy Solutions confirmed a $33 million series B financing led by HG Ventures, the corporate investment arm of The Heritage Group. Additional investors included H+ PartnersGS FuturesGS EnergyDoral Energy-Tech Ventures and Fortistar, along with existing investors Energy Innovation Capital and SE Ventures.

Meanwhile, Texas-headquartered Yotta Energy raised $13 million in a series A funding round with the proceeds to be used to scale its modular energy storage and solar microgrid technology. The financing was led by WIND Ventures and included follow-on investors Doral Energy-Tech VenturesRiverstone Ventures, and returning investors, EDP Ventures, and SWAN Impact Network.

Elsewhere, energy storage system provider Nostromo Energy raised $9.1 million in equity financing. The majority of the financing, approximately $7 million, was provided by Israel-based Migdal Group, one of the largest financial groups in Israel, with most of the remaining financing, around $2 million, provided by US commodities and energy trading company Freepoint Commodities.

What are the pros and cons of equity financing?

Equity financing means you have to sell a share of your company in return for capital. One of the biggest benefits of equity financing for an emerging energy storage business is that the company is under no obligation to repay any money as they have handed over a stake in the company in return for the investment. The other aspect to note is that equity financing does not place an additional financial burden on the company – there are no monthly debt repayments and therefore the company has more capital to invest in expanding the business.

However, there are significant downsides to equity financing. In return for the funding, you hand the investor a stake in your company – this means you have to share your profits and consult with the investors whenever you make a decision impacting on the business. The only way to rid yourself of the investors’ influence is to buy back their stake, but that is likely to cost more than the amount they paid to acquire it.

What alternatives to debt and equity financing are being utilised?

Last month, Canada-headquartered Switch Power reached financial close on $5.6 million of financing for the procurement and construction of part of a portfolio of behind-the-meter battery energy storage systems (BESS) that was acquired from Peak Power. The new finance included a $4.3 million equity procurement (EP) loan agreement with RE Royalties.

RE Royalties says it is the “first investor to take the royalty financing model, well proven in other industries, and apply it to the renewable energy sector”. The company currently owns 97 royalties on solar, wind, storage and hydro projects in Europe, the US and Canada.

What is royalty financing?

Royalty financing is a type of investment where investors get their money back through royalties based on a percentage of the company’s revenue. The repayment terms and the total amount repaid are negotiated at the beginning of the loan.

The income and revenue of the company determine the time taken to repay the loan, which, in turn, affects the final repayment amount. However, a cap is placed on the repayment amount during the initial negotiations.

What are the benefits of royalty financing?

The benefits of royalty financing for investors is that they see greater returns than they would with a traditional loan. Meanwhile, companies don’t have to sell an ownership stake to get the finance.

With debt financing potentially placing long-term financial burdens on your business and equity financing requiring you to give up partial ownership of your enterprise, there are signs that royalty financing is becoming an increasingly attractive proposition for emerging energy storage businesses.

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