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Banking Batteries: Debt financing grid-scale battery storage projects

Investment in grid scale battery storage projects in the United Kingdom experienced a surge in investment in 2016 as developers looked to take advantage of attractively priced firm frequency response (FFR) contracts and the enhanced frequency response (EFR) tender. Since that initial wave of investment the prices achievable through providing FFR halved as supply outstripped demand for these services. As a consequence, developers of battery storage projects have had to become more sophisticated in their approach to creating a viable business case for their battery storage assets.

We are now seeing a second wave of battery storage projects in various stages of development. According to market data there is around 1.3 GW of energy storage in the UK which has been through the planning process and is in possession of a grid connection offer. A further approximately 5.7 GW of battery storage has obtained planning but is yet to obtain a grid connection. If these numbers are correct and even half of these projects are developed then it would mark a significant increase in the amount of grid scale battery storage deployed in the UK.

One significant barrier to converting these potential projects into fully developed and operational battery storage assets is the availability of debt finance.

Similar to the situation which developers of post-subsidy UK solar and onshore wind projects have found themselves in over the last couple of years, developers of battery projects have come up against banks and other institutional lenders who have (beyond a couple of notable exceptions) been reluctant to make debt finance available for new storage projects. Unless the proposed battery storage project has successfully bid into the Capacity Market and been awarded a longer term contract, that battery storage project will, generally, not have any certainty over the price payable for the supply of its electricity and will instead be operating on a fully merchant basis without contracted revenues. Such projects will be required to demonstrate to potential lenders that there is a viable financial case for the project operating as a merchant facility.

There have been a number of market developments in the area that have improved the bankability of new battery storage projects in the UK. One big change since 2016 has been the ever increasing contribution of renewable energy to the energy mix in the UK. 2020 saw record levels of energy derived from renewable sources and significant periods of time where there no energy from coal derived sources on the electricity grid in Britain.

This increased supply of energy from renewable sources has in turn served to increase the volatility of pricing for the supply of electricity. 2020 featured periods of negative pricing with a frequency that suggests that such instances are likely to become more common place. Whilst the last few weeks of 2020 and first few days of 2021 have seen high power prices due to the inclement weather and low wind generation. Whilst, the National Grid also launched Dynamic Containment in 2020 which has opened up new frequency response services in which battery storage projects can participate. In addition, over the last few years, service providers have developed increasingly sophisticated algorithms to create software which enables the owner of a battery project to be more active in charging and discharging a battery with increased frequency to maximise revenues.

Whilst the changes in electricity generation over the last few years have strengthened the case for grid scale battery storage, banks and other institutional lenders will need to be comfortable with the specific project that comes across their desk.

There are a number of factors that could be taken into account by a developer of a battery storage project, to improve the bankability of the project:

  1. Scale: Market sentiment around new battery storage projects would appear to be “big is beautiful”;
  2. Duration: The market view seems to be that the optimum period of time over which a lithium-ion battery is able to discharge is moving to longer duration;
  3. Power Purchase Agreements (PPA): Certain electricity suppliers, such as EDF, are offering contracts which offer a price floor for the energy supplied under the PPA;
  4. Location: The location of a battery will impact upon initial capital costs and ongoing operating costs;
  5. Co-Location: Co-locating the project with an onshore wind farm or solar farm could improve the economics of both the battery storage project and the wind or solar farm; and
  6. Relationships with contractors: Enabling a more streamlined approach to contractor service delivery and cost savings.

Looking ahead, with increasing reliance on intermittent generation (wind and solar primarily) it would seem a certainty that there will be an increasing need for energy storage to ensure that there is sufficient electricity available at all times to balance the grid and meet demand. As the need for energy storage continues to grow it seems likely that the market will become more accepting of energy storage as an asset class. At such time we would expect debt finance to be more readily available to energy storage projects which may at a point of time in the future be considered a core infrastructure asset by the wider investor community.

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