Financing the future

What makes the financing Advanced Microgrid Solutions received recently for a set of battery storage systems in California so unique is not that it innovates structurally.

As West Owens, vice-president for finance and strategy at the battery storage developer, put it, there is “nothing fancy” about the $200 million of equity Macquarie Capital provided last August to acquire 50MW of its storage systems; or the long-term senior-secured debt CIT Bank committed at the end of March to back that portfolio, in what ended up being one of the largest battery deals to get financing from a commercial bank to date. In fact, he describes these deals as “straight-down-the-fairway project finance structures”

But while the financing is relatively run-of-the-mill, the projects it is backing are state of the art. Overall, Macquarie and AMS will deploy 75 to 125 Tesla Energy Powerpack 2 lithium-ion battery systems at commercial and industrial sites in Los Angeles and Orange County, in California. These systems will provide power for customers including California State University, Long Beach and real estate developer Irvine Company. 

Crucially, local utility Southern California Edison has also agreed to buy power from the batteries. It was the contract with blue-chip utility SCE – which Owens says was priced on a levelised cost of electricity basis – that clinched the deal. “They [AMS] proved their business model by being one of the first companies to secure a contract for a battery storage project,” William Demas, Macquarie Capital’s senior vice-president for power, utilities and renewables, points out.

STACK ’EM UP

That anchor contract with SCE becomes particularly important when you consider that battery projects generate revenue in non-linear ways. At our recent Berlin Global Summit, 56 percent of respondents at an energy storage panel cited lack of revenue stream visibility as the main obstacle to investing in the nascent sector (see p. 45). 

Owens says the software systems AMS has developed allows its projects to provide different services for varying types of customers. He calls this “revenue stacking” – generating multiple cash streams from a single asset. “How you drive maximum value to batteries is being able to go after multiple revenue streams, meaning I don’t build a battery solely to do peak shaving [or] backup generation,” Owens explains.

As an example, he points to cell towers, which were first built to service singular carriers. Over time, developers realised they could contract more than one carrier to use a single tower, increasing the value of the asset. Most energy assets, in contrast, are “very set in their returns,” Owens notes.

Batteries are different, though. One type of revenue stream they can generate is from selling the capacity a battery can store to a utility. In the Macquarie-CIT deal, this revenue stream comes in the form of SCE’s 10-year contract to buy power from the 50MW of systems. According to Owens, this portion of the revenue stack is what is attracting the largest number of investors at the moment. “Of course, they are always going to want to take the utility revenues, because they’re the most risk-averse bag of capital you could possibly pick up,” he says.

There are also enterprise revenues, which Owens says AMS is the most excited about. These comprise services marketed to commercial and industrial customers that use large amounts of power for operation. Owens explains that a lot of battery storage companies focus on peak shaving, or using batteries during maximum power demand to avoid overloading grids. The software AMS uses allows batteries to provide demand management and renewables integration as well.

And finally, Owens says AMS can contract its batteries to draw “market-based” or “merchant-type revenues”. This is more in the energy efficiency realm of services, where AMS provides time-of-use management, frequency regulation and demand charge reduction to customers. He adds this may be the least developed revenue stream out of the three, but it is “certainly one that has some of the highest potential in the long run”.

GREAT EXPECTATIONS

There is no questioning the growth potential for battery storage. Ask any infrastructure investor or energy financier what the most promising trend in the industry is and the answer is almost always storage.

Owens says that is because batteries are the “missing link” for electricity as a commodity. Any other industry, from food to clothing, can store its product. Technology has finally reached a point where electricity can be stored, managed and used at the intervals it is needed. As investors increasingly get comfortable with technology risks and understand how money can be made off these assets, capital will continue to pour in.

The US Energy Storage Association reported the US market grew 284 percent last year, representing $812 million of investments in the sector. According to market research firm IHS, the US will be the largest energy storage market in 2017 and will account for 43 percent of global installations between 2012 and 2017. The firm projects that the sector will continue to grow and by 2022 there will be over 40GW of installed storage capacity.

“When you have large infrastructure investors, both from the equity side, such as Macquarie, and from the financing side, such as CIT, validating a technology in a commercial structure as we’ve done, that should be a pretty decent signal to the market that this is a real asset class. We believe this is a great emerging sector that’s going to attract a lot of capital in the next few years,” Macquarie’s Demas argues.

What is more, storage has the potential to tap the capital markets in ways US renewables could not. Owens believes part of the reason for that is because storage projects can be developed outside complicated US tax equity laws, unlike wind and solar projects. He explains that renewable projects are dependent on tax credits that can vary by state and are phasing out over the next three years at the federal level.

“We’re never going to have the complications largely associated with tax equity, which gets into very complex structuring,” Owens asserts. “We’re able to do very straightforward cashflow-based financing structures. Project equity, senior-secured debt, the types of projects that quite frankly infrastructure investors and others like to do.”

That is good news for AMS, which is already working on a second contract with SCE. In April, AMS also closed a deal with retail giant Wal-Mart to install behind-the-meter batteries at 27 locations in Southern California, part of the pipeline backed by Macquarie and CIT. Furthermore, the company is working to prove the revenue stacking model by signing more contracts with enterprise customers.

All in all, Owens is confident about the sector’s prospects: “The capital is definitely available, and if you’re able to get attractive returns with high credit quality – and you’re building the systems in the right way – then these are going to be financed.”