Energy storage finance: Gauging risk

Energy storage finance: Gauging risk

Energy storage finance: Gauging risk 150 150 Batteries International
Energy storage technology — seen by many as the final piece in the global energy transition puzzle — requires significant financing. Attracting investment, depends largely on understanding and quantifying the associated risks, says Michael Wilkins from credit risk ratings firm Standard & Poor’s.

Risk assessment — the key to making energy storage commercially viable

September 27, 2016: Power generation from renewable resources has increased its presence across the world’s energy grids in the past decade. Moreover the cost of this electricity is reaching — or has reached grid parity — in many countries.

However, full dependence on renewable energy sources is limited due to the unpredictable supply of natural resources. Large wind projects, for example, typically generate more energy at night when demand is low.

Energy storage is crucial to unlocking the full potential of renewable energy as it helps to balance the natural intermittency in supply.

In the case of wind power, energy storage can play a key role in load levelling by storing low-cost electricity until demand, and, therefore prices increase during the day.

Without such storage, renewables are unlikely to account for a majority share of a country’s power generation mix. This is particularly pertinent given leading estimates which predict that the world will need 150GW of battery storage if it is to double the share of renewable power generation by 2030.

Prompted by the declining price of battery storage technology, the need for greater energy security and relief for aging electricity networks, a growing number of governments are starting to show enthusiasm in energy storage.

Recent figures from the UK National Infrastructure Commission, for example, estimate that the country could save £8 billion ($11 billion) per year through the incorporation of smart power with a mix of interconnection, energy storage, and demand flexibility.

A number of key government policy initiatives designed to encourage the uptake of storage are coming into play all over the world. For instance, in California legislation stipulates that investor-owned utilities must procure 1.3GW of energy storage by 2020 — coinciding with the state’s target for achieving 33% of power from renewables.

Elsewhere, Puerto Rico was one of the first jurisdictions to require that renewable energy projects include storage as a means of short-term load balancing. Policies that require the implementation of energy storage alongside renewable energy are likely to become the norm as they ensure that renewable energy projects do not add to the current strain on networks through intermittency.

Recent mergers and acquisitions point to this structural shift in global energy systems.

Earlier this year, energy giant, Total SA approved a $1.1 billion takeover of Saft Groupe, a producer of energy storage systems. The move represented the biggest acquisition of an energy storage provider to date.

At the same time, many new and innovative technologies are emerging causing the energy storage market to expand.

These developments are widely seen as following a similar trajectory to solar and wind power projects in their need for both government and private sector financing.

Much like renewable energy projects, energy storage presents high upfront costs and a fairly long payback period.

However, unlike renewable technologies, which primarily rely on predictable and fixed structures financed through debt, equity or PPA (power purchase agreements), energy storage has the potential for multiple-use applications, enabling various revenue streams, and potentially shortening payback periods.

Energy storage offers a world of opportunities for investors; it also presents significant challenges.

Although the costs associated with energy storage technology are declining rapidly, they are still relatively high.

Moreover, energy storage projects have implicit risks. The associated financial and technical implications need to be identified and assessed. For energy storage projects to become commercially viable, investors must be satisfied that the systems they are investing in are able to store and deliver the quantity of energy required at any given time — and at the right price to ensure a satisfactory level of return.

At S&P Global Ratings, six main factors contribute to our view of a project’s credit risk profile: planning, construction, operations, resources, counterparties, and the market.

Highlighted below are some of the most important considerations investors should take into account when assessing energy storage projects:

Planning risk 

Project planning risk is relatively low down on our agenda for energy storage compared with that in renewable energy assets. This is because storage modules are typically smaller than wind turbines or solar panels, often able to fit into standard shipping containers, and are therefore unlikely to face similar opposition to their aesthetics and implementation.

Construction risk 

In general, storage projects, such as battery modular units, are classified as simple building tasks that require minimal construction on site. Construction risk is therefore relatively low. However, risk does emerge when interfacing such assets with other projects, such as solar or wind, because there is limited practical experience of this in the market.

This is why one key credit factor that contributes to construction risk is technology.

Operations risk 

When we assess a project’s operations phase stand-alone credit profile (SACP), we first determine its business risk profile, which we call the operations-phase business assessment. The OPBA can be thought of as a measure of how risky a project’s operations are. It ranges from a scale of 1 (lowest risk) to 12 (highest). To arrive at the OBPA value, we assess market and performance risks, both key factors.

Asset class operations stability 

Our assessment of asset class operations stability indicates the risk that a project’s cashflow will differ from expectations as a result of it being unable to meet the services or products.

Energy storage on a large-scale requires highly sophisticated technology that encompasses complex electrical components and interlinkages between these components and sometimes other infrastructure outside the project. Initially, it is likely we will assign asset class operations stability a high score (indicating higher risk) until a track record of operational stability is established.

Resource risk 

Battery storage projects, if used for generation purposes and supplied by a single variable renewable energy source, will face resource risk, which, in our opinion, is one of the biggest risks in renewable energy systems. This is mainly due to renewable power purchasing agreements which stipulate that suppliers are only paid for the volumes delivered.

Assessment of resource risk is aimed at determining whether the raw material will be available in the quantity and quality needed to meet production and performance expectations.

Market risk 

Our view of market risk reflects the extent to which a project is exposed to market changes. For example, in the case of energy storage projects our analysis of regulatory support and predictability, barriers to entry, delivery cost relative to peers’ and transmission access would help us determine whether a project is able to compete in the market with its competitors given general economic trends.

Counterparty risk 

Reliance on third parties to make payments or perform under a wide range of agreements — such as revenues, construction and equipment supply — is a common feature in project finance. For energy storage projects, equipment counterparties, that deal with interconnection issues, in particular will be a key focus of our assessment.

The relatively few players in the battery storage industry, and equipment providers in particular, are not easily interchangeable.

Some larger players have entered the market recently, but many of the advancements seem to be coming from smaller players, which may expose projects to their credit risk.

Technology performance 

Assessment in this area predominantly focuses on the extent to which a project may face operating challenges, based on the technology deployed. More specifically, the previous performance of the system, equipment, and material, as well as how its design addresses site-specific challenges are scrutinized.

In most project finance cases, when looking at a project’s technology track record, we would expect to assess it as commercially proven because we would expect most projects to use off-the-shelf technology.

However, that type of technology is not yet the norm for energy storage projects, given that the sector is relatively new and evolving rapidly.

Michael Wilkins is managing director for infrastructure finance at S&P Global Ratings

Michael Wilkins is managing director for infrastructure finance at S&P Global Ratings

Unless the storage technology has a proven track record, with large amounts of industry data demonstrating a good operating performance at a similar scale and under similar operating conditions, technological performance is likely to be assessed as negative until more data is available.

It is without a doubt that energy storage is likely to become one of the most essential contributors to efforts to decarbonize the power sector. It is a rapidly evolving area showing encouraging rates of price decline, which is bringing it toward large-scale commercial viability.

Right now, the risks are abundant as the industry goes through the early stages of transition.

But these risks will reduce over the next few years as the technology becomes a mainstream participant in the power sector.