Dive Brief:

• Battery storage is increasingly emerging as a project finance opportunity, according to a new report from Moody’s Investors Service.

• Despite some of their unique characteristics, battery storage projects present risks that are “broadly akin” to many of the risks associated with financing a conventional power project, the report says.

• The key risk from a credit perspective, according to Moody’s analysts, is whether or not the battery storage facility is operated in accordance with the battery’s design parameters.

Dive Insight:

The Moody’s report notes that the viability of battery storage systems is increasing as costs continue to fall, efficiencies improve, and regulatory support grows.

To assess the cost of electricity from a battery storage system, Moody’s used a price of $400/kWh for a fully installed battery system and divided it by approximately 3,000 cycles per battery – roughly 300 charge-recharge cycles per year over a 10 year life span – to come up with a cost of about 13.3 cents/kWh. That is still higher than the average cost of electricity in the U.S., but Moody’s says storage will become more competitive as costs continue to fall.

Storage also is enjoying regulatory support from several states, including California, Massachusetts, New York and Hawaii, which the report says will help drive nine-fold growth in energy storage from 2017 to 2022.

Project finance has been widely used by independent power producers for years to build conventional power plants. One of the benefits of the finance tool is that it is non-recourse, that is, it isolates the credit risk to the project so that it does not flow back to the project sponsor. That gives smaller companies and developers wider access to financing because they do not need a large balance sheet to develop a project. On the other side of the equation, the project needs to have a revenue stream sufficient to meet the debt payments. The more certain the revenue stream, the lower the cost of financing can be.

To date, there have been few project-financed battery storage deals. Moody’s expects that to change as the technology becomes more widespread and more widely understood, though it could be several years before a significant number of storage projects enter the bond market.

One exception is the $2 billion financing for AES Southland that closed last summer. The project comprises a 1,284 MW combined-cycle gas plant with 100 MW of battery storage. The financing includes $1.475 billion of senior secured notes, a $492 million senior secured term loan, and a $350 million equity contribution from AES. At the time, AES said it was the largest non-recourse financing for a battery-based energy storage project.

In the report, Moody’s uses the Southland deal as an example of a contracted asset that would present potential lenders with a low risk profile. AES has a 20-year power purchase agreement with Southern California Edison for the project that it won through a 2014 competitive solicitation.

Moody’s puts a merchant project on the other end of the risk profile and cites the projects that were built in the PJM Interconnection after the RTO changed its rules for frequency regulation. Many of those projects were built on a merchant basis, using the sponsors’ balance sheets. The market collapsed, however, when PJM put a cap on fast responding frequency regulation, imperiling the income streams for many of the projects.

In the middle of that risk spectrum are projects that combine both contracted and merchant revenues. For instance, when a battery is not providing contractual services, it can provide ancillary services to the grid and make extra money. But Moody’s notes that the overall cash flow is less certain than with a contracted project, and the combination of uses opens a project to other risks. For instance, the additional uses could change a project's operating profile and increase the risk of faster degradation.

“That is the key insight of the report,” Swami Venkataraman, a senior vice president at Moody’s and one of the authors of the report, told Utility Dive. “There can be a mismatch between how a battery system is designed and how it is used. That can create a credit risk that is generally different than what we see in power plant finance.”

But, as the report notes, the technology of battery storage itself, lithium-ion chemistry, is generally well understood and is not considered new or unproven technology. And although the use of battery storage systems in utility scale applications to date has been limited, investors should become more comfortable as the number of deployments continues to grow.