Financing Energy Storage Deployment: What Are the Options?
The Energy Storage Association (ESA) has an energy storage vision of 100 GW by 2030 and that goal is right on schedule, even with the economic downturn and global pandemic. The growth is primarily comprised of large grid-connected stationary storage, utilizing lithium-ion batteries fueled by their continued price declines.
Growth has occurred throughout the United States but the Wood Mackenzie energy storage report cites New York, Massachusetts, and the PJM region as the areas of continued growth. Despite all of the energy storage deployment, though, financing energy storage projects can be a mystery, clouded in uncertainty: how does money get to businesses and projects?
The energy storage financing challenges were highlighted by Leyline Renewable Capital CEO Erik Lensch at the September 25, 2020 Solar Power International Conference on a panel entitled “Overcoming Barriers to Financing Storage.” According to Erik, the top three financing barriers are the lack of long-term contracts, the need for project off takers, and performance guarantees. But there are a number of factors that make energy storage projects attractive, such as the fact that there may be fewer permitting/interconnection risks associated with stand-alone battery storage systems when compared with large solar projects that have multiple landowners and a large footprint.
On February 10, 2021, the Energy Storage Association held a webinar entitled “Financing Energy Storage Development: Matchmaking in a Rapidly Growing Market” to provide more details on how developers line up financing – despite the challenges – and how investors decide which energy storage projects should be funded. Erik Lensch was one of the three panelists in this webinar along with Deanne Barrow, Senior Associate at Norton Rose Fulbright and Himanshu Saxena, CEO of the Starwood Energy Group.
Erik Lensch opened the discussion outlining the $150 million investment portfolio Leyline Renewable Capital received from Newlight Partners for development stage capital of renewable energy projects throughout the United States. Investments have ranged from $500,000 to as much as $50,000,000. LRC acts as a bridge loan provider getting developers over the financial hurdles they may face until institutional investors participate in funding. In other words, the company closes the bridge for early-to-mid-stage energy storage developers and then exits the market at the start of energy storage construction. LRC defines their target market as developers that have a portfolio of mid-stage projects, where they need capital to fund costs such as permitting and interconnection expenses, supporting the advancement of the projects to make them “shovel ready” in the eyes of the long-term owners.
Erik talked about his firm’s recent partnership with Momentum Energy Storage Partners, an energy storage developer in Columbus, Ohio and how Leyline’s funding will support projects across the United States including deals underway in Pennsylvania, New Jersey, PJM and the Texas ERCOT region.
Following Erik, Deanne Barrow outlined both equity and debt financing models for energy storage projects as well as some particular financial models that she has seen in her work. Deanne discussed the particular challenges both equity partners and development partners have finding one another. For developers, choosing the right equity partner depends on three critical factors: control, timing, and project sale. Timing depends on project maturity. Control includes what a developer wants to give up in terms of equity control. And project sale refers to when investors exit.
Finally, Deanne talked about three financing structures that are unique in her energy storage corporate work. These three structures include equipment vendor financing, that may offer a deferred payment schedule; modular architecture which allows financing parties to take back collateral in a default scenario, and thus reduce the financing costs; and finally, a more complicated real estate spin off for a development pipeline.
Himanshu Saxena was the final panelist for the webinar. He talked about the fact that the revenue model for energy storage is still early stage and not yet mature. He also emphasized the scarcity of capital available for the development phase and the importance of funding that Leyline Renewable Capital provides to move projects along. He concluded with the evolution of storage assets themselves; the fact that RFPs are looking for long duration battery storage at 8-12 hours for load shifting as opposed to the 4-hour energy storage projects a few years ago.
All of the panelists are bullish on energy storage project financing but it does require understanding of the new revenue structures that are available and an ability to be nimble.