No ‘secret sauce’ for storage investment deals

BY RICHARD HEAP:

Investor interest in storage is growing. But there are financial, technical and regulatory hurdles to be tackled before investors enter the sector en masse.

That was the message from speakers in a webinar that we ran last month.

On 23rd July, Energy Storage Report hosted the first webinar in our Watts in Store series, called ‘Investing in Energy Storage: Powering the Global Energy Transition’. We ran this event in partnership with insurance broker Lockton, and focused on investor opportunities and risks in this fast-growing sector.

This one-hour discussion featured insights from storage and investment experts at CIT Group, EnCap Investments, Eos Energy Storage and Hannon Armstrong. We also ran a poll with our more than 200 attendees, which demonstrated some of the obstacles to such deals.

Those findings included:

  • A huge 84% of respondents said they saw higher levels of investor interest in energy storage now compared to 12 months ago: 44% said interest is ‘much higher’ now and 40% said it is ‘slightly higher’.
  • The biggest technical challenges for storage companies to overcome are understanding the degradation and lifetime of storage technologies (29%). This was followed by adapting the grid for more storage and renewables (25%); mitigating risks of failure and downtime (21%); and how to co-locate storage with wind and solar (17%).
  • 97% of respondents said these challenges were a hurdle for investors, with 41% saying they were a ‘major obstacle’. And 83% said the lack of specialist insurance is an obstacle to viability of storage investments.

These bear out the findings in the American Council of Renewable Energy’s ‘Expectations for Renewable Energy Finance in 2020-2023’ report last month.

Susan Nickey, managing director at Hannon Armstrong, highlighted the fact it said energy storage is the most popular asset type for US renewable energy investors over the next three years, ahead of utility-scale and residential solar.

She said investors would become more comfortable as established players in the renewables sector, such as Enel and Engie, bring expertise and strong balance sheets into the storage market. This is key for project financiers.

“I think there’s a lot of growth in that sector, but it is complicated,” she said. Our other speakers discussed some of the major barriers to overcome.

Investment hurdles

Tim Rebhorn, managing partner at EnCap Investments, said there is reticence about storage from utilities that don’t understand how they link seamlessly into the grid: “The regulators are very enthusiastic, but the utilities are less enthusiastic,” he said.

Utilities and investors also need to get comfortable with the diverse revenue streams at schemes, because many of these involve taking merchant risk.

“It’s difficult for debt to get comfortable with that and it’s also not easy for equity,” he said. “You have to have a very deep understanding of those markets, what the term of your investment is going to be, what your view is around how merchant markets are going to change, and how the effect of additional storage is going to affect those merchant revenue streams.”

Mike Bonafide, VP of power and project finance at CIT Group, said that the company had concluded project finance deals for behind-the-meter schemes, and had other financial structures that had worked for front-of-the-meter projects. But he said there is “no secret sauce” because every deal is different.

For developers looking to secure finance, he said proof of concept is vital.

“It helps immensely when the developer has either a pilot project with a stable operating history, or a financing takes place and the rest of the market can see it’s a stable credit,” he said. This is important given the range of chemistries and technologies that are emerging as rivals to established lithium-ion systems.

Bonafide also said federal and state incentives would be a huge help in the US.

It was a point echoed by Balki Iyer, chief commercial officer at Eos Energy Storage, who argued that an investment tax credit for storage projects could supercharge investment in the US: “There’s a massive amount of market that’s waiting to be taken,” he said.

To get insights that will help you get your share, download the webinar now.

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