As cost declines and regulatory support boost demand for battery storage, project finance emerges as a viable financing option

Moody’s Investors Service has released an assessment of the current status of battery technology as it relates to large-scale grid application. According to the report, energy storage is increasingly emerging as a viable project finance opportunity.

“While the developing technology presents some unique challenges, especially regarding operating risks, we view the financing approach of a battery storage project to be broadly akin to many of the risks associated with financing a conventional power project,” says Rick Donner, a vice president and senior credit officer at Moody’s.

The growth of renewable energy from solar and wind technology has led to a proliferation of intermittent generation entering the grid. Emerging battery storage technology is credit positive for grid operators, as it will become a key element in managing stability. Battery storage can help integrate renewables into the grid, and can also support natural gas “peaking” facilities, which take longer to power up fully.

Due to their emission efficiency and scalability, lithium ion batteries have become the technology of choice for the energy storage sector, and developers have seen significant cost reductions over the past decade. If current trends continue, lithium ion battery costs will drop to around $100 per kilowatt hour by 2020-2022 from around $200 per kilowatt hour today.

In addition to falling costs, regulatory support is driving volume growth in the energy storage market, which is projected to show a nine-fold increase from 2017 to 2022. The California Public Utility Commission, for example, has adopted the nation’s most ambitious storage procurement mandate of 1,325 megawatts of storage by 2020 for the state’s three investor-owned utilities.

“Hawaii, Massachusetts, New York, Maryland, New Jersey, Oregon and Nevada have also adopted storage mandates and regulations,” says Donner. “At the federal level, the 30% Investment Tax Credit remains available for energy storage, provided it is coupled with renewable generation.”

While some battery storage installations have been sponsored and financed by utility companies or grid operators on their balance sheets, others have been financed on a project finance basis, sometimes in conjunction with the financing of another generation source like a natural gas plant or solar installation. Much like other power projects, a primary determinant for using the project finance model for battery storage is the visibility and predictability of the revenue stream.

From a credit perspective, using a contracted revenue model is the least risky approach for a battery storage project, whether standalone or built in conjunction with other technology. The merchant revenue model, in which the market determines revenues, brings volatility and regulatory risk to a project. A combined contracted and merchant revenue model allows battery storage projects to make extra money by providing ancillary services outside its contract, but implies greater cash flow uncertainty and increases a project’s operating risk profile.

Key points:

  • Battery storage technology is credit positive for owners of intermittent power generation and for grid operators. Battery storage is emerging as a tool to boost electric grid reliability. The technology can help to integrate renewable energy resources into the grid and make them more like base-load generation, thus helping to reduce greenhouse gas emissions.
  • Lithium ion has become the technology of choice for grid-scale energy storage. Lithium ion battery prices continue to decline, making the technology more pricecompetitive than others. Technical advantages include a fast response time, a long cycle life and minimum energy loss in charging and discharging the battery.
  • Regulatory support and declining prices are driving volume growth. Regulatory support takes the form of energy storage mandates in several states, including California, Massachusetts, New York and Hawaii, which will help drive nine-fold growth in energy storage from 2017 to 2022, according to projections.
  • Lithium ion technology is proven, but alignment of operating design and operating profile is key to meeting expectations. The key technological and operational issue for battery storage is whether the system is actually operated in accordance with the way it was designed to operate.
  • Differing revenue models pose different credit risks for battery storage projects. A contracted model is the most credit positive revenue model for a project, followed by one that combines contracted and merchant elements, or “value stacking.” The weakest from a credit perspective is a pure merchant model.
  • Opportunities for financing battery storage on a project basis are growing. Although some features of battery storage are unique, we view the risks and financing approach of a battery storage project to be broadly akin to many of the risks associated.