Bonds and Financing
Energy Storage

Battery storage emerging as project financing opportunity: Moody’s

Battery storage is increasingly emerging as a project finance opportunity, although the technology “still presents risks and challenges that could affect the development of battery storage on a non-recourse, project-finance basis,” Moody’s Investors Service said in a recent report.

In the March 19 report, the rating agency said that battery storage technology “is emerging as a tool to boost electric grid reliability, which is credit positive for owners of intermittent renewable energy generation and for grid operators.”

“While the developing technology presents some unique challenges, 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,” said Rick Donner, a vice president and senior credit officer at Moody’s.

Different revenue models offer a range of credit risks

The report said that one of the most important issues in battery storage is the revenue model utilized. “This can be a merchant model, where the market determines the revenues; a contracted model where revenues are prescribed under long-term contractual arrangements; or a combination of the two,” Moody’s noted.

According to the report, from a credit perspective, the contracted model is the most positive, followed by a model that combines contracted and merchant elements, or “value stacking,” while the weakest from this perspective is the pure merchant model. The merchant model “brings volatility and regulatory risk,” the report said.

With respect to the contracted revenue model, Moody’s said, “all else being equal, long-term contractual arrangements with a creditworthy counterparty are the most credit positive for storage projects, whether the project is standalone or built in conjunction with other technology, such as combined cycle natural gas or PV solar.”

Executed power purchase agreements that have a demand/capacity charge as well as a payment covering variable costs, such as those that have been executed in California, create greater cash-flow certainty, the report noted.

A combined contracted and merchant revenue model, or value stacking, offers a greater cash flow risk than a purely contracted revenue model.

“Batteries are capable of providing a wide variety of services: time shifting renewable energy production, ancillary services, a source of capacity for the grid, on-peak/off-peak arbitrage, peak shaving etc.,” Moody’s noted. “The ability to provide multiple services is enhanced further when a number of small batteries at customer locations are aggregated into a portfolio.”

Value stacking typically includes one contracted revenue stream along with others that are merchant and less certain.

For example, when a battery storage project is not providing contractual services, it can provide ancillary services to the grid and make extra money, Moody’s pointed out. “This cash flow is, however, less certain. Value stacking not only implies greater uncertainty of overall cash flows, but the multiple uses implied by value stacking also has implications for a project’s operating risk profile. This is because the additional uses could change the project's operating profile for which it was designed and increase the risk of faster degradation.”

Opportunities for financing battery storage on a project basis are increasing

Moody’s said that opportunities for financing battery storage on a project basis are growing.

Moody’s said that a primary determinant for financing battery storage on a project finance basis, like other power projects, is the visibility and predictability of the revenue stream.

It said that a battery storage project that has a long-term contract with a creditworthy counterparty “provides a lower risk profile from a revenue and cash-flow generation perspective than one using a merchant revenue model.”

Also, “whether the storage project is standalone or part of another proven technology, like natural gas or PV solar, it is credit supportive for any project to have its revenue determined by the terms of a contract.”

Projects that have both contracted and merchant cash flows can earn extra revenues and generate incremental cash flow by offering ancillary services to the grid when not providing power under the contract, the report notes. “However, while receipt of these cash flows are positive considerations, the incremental ancillary services could impact a project’s operating profile, which might offset the revenue earned from providing these services.”

Lithium ion batteries have become technology of choice

Moody’s also noted that 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, the rating agency said. 

 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 Utilities Commission, for example, has adopted a 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,” said Donner. “At the federal level, the 30% Investment Tax Credit remains available for energy storage, provided it is coupled with renewable generation.”

New York Gov. Andrew Cuomo recently set a goal of adding 1,500 megawatts of energy storage by 2025 in New York state.

Association report on energy storage

The American Public Power Association has released a report that reviews the various types of storage technologies, the services storage can provide a utility, and the economics of deploying energy storage.

The report also details how public power utilities are implementing storage systems and how state and federal policies incentivize energy storage.