Financing Commercial Storage:
Wall Street not biting, yet.
by Philippe Hartley, Founder and Managing Director, CleanFinancing LLC
The challenge in financing storage today is only manufacturers and property owners are willing to take the risk.
Cost and availability of financing, in general, is directly tied to risk. The ample amount of capital looking to invest in energy today looks for "proven and simple". Storage is neither. Utilities’ defensive tariff filings are spurring market interest in the technology, but financing is still looking at it with lab coats on, and some people feel it will be that way for a long time.
Any analysis of battery economics starts with the problem needing a storage solution. Financing options unfold from there. The numerous ways to use batteries each calls for different hardware characteristics and properties, for specialized Energy Management Systems (EMS) software, for engineering configurations and other considerations that impact the value received. Once those variables are established, then their performance must be modeled against the displaced utility power. If the model does not “pencil”, then available alternative tariffs must be researched against which to operate the storage. Leading modeling company Energy Toolbase offers 30,000 rate schedules in the US to help developers make sense of a battery application. None of that guarantees anything. Per their COO Adam Gerza, “estimating the savings of an energy storage project is typically based on the historical interval usage data of customer. But it’s challenging for developers to accurately model storage savings over the 10, 15 or 20 year term of the project, because utility rate tariffs constantly change, as does the shape of the customer’s load profile.” All that is a deterrent for would-be 3rd-party financiers.
For those reasons, most C&I storage projects currently getting built are funded by the user or the manufacturer. An end-user has all the standard options available for infrastructure upgrades: cash , credit, or Commercial PACE (C-PACE). As a C-PACE financing specialist, I arrange funding for a large number of solar/storage deals; hundreds of millions of dollars are eager to commit. For property owners it is the fastest and easiest way to get long-term capital, if they qualify. But C-PACE underwriting does not factor issues such as the IRS’ “75% cliff”, or whether the battery management system is proven over 15 years, or if the battery specs are bankable. C-PACE makes no commitment to a project’s success, beyond qualifying the contractor or EPC as being credible and compliant. The risk burden for the eventual viability of the installation rests primarily on the property owner.
Fortunately, some manufacturers are also doing their best to fill the void of 3rd-party financing. Big and small industry names are financing their own product and engineered solutions. Energport, for example, sells designed&engineered systems using the batteries of Chinese manufacturer Gotion (Guoxin). Per their US Director of Sales, Bobbie Muñoz, Energport offers 5-year C&I leases for which the host’s monthly payment is 50% of the actualized savings, whatever they are, with a buy-out option at end of term. They also offer a 10-year, 70% version, with a $2million project cost ceiling on those leases. “We’re quite flexible in our terms”, states Muñoz, to interest those prospects not willing to pay cash or finance through C-PACE.
Tabuchi Electric America targets large commercial installations, and their US sales executive Mike Donnelly tells me they will introduce C&I battery funding in the form of capital leases in Q1 of 2019. The challenge, he feels, is that most financial institutions do not know enough yet about the technology, and that “each customer has their own way of valuing that power”. That eliminates PPA models, which rely on a standardized value formula for the kW/h energy released by the installation. Donnelly shares that “peak shaving” (replacement of high-cost Time Of Use utility power) is the most sought out application right now for Tabuchi, and their funding will be tailored to that application.
Now let’s consider our old friend the 30% Investment Tax Credit (ITC), the relevance of which I confirmed with attorney John Marciano, of Akin Gump Strauss Hauer & Feld LLP. It is applicable here only in proportion with the percentage of the charge that actually comes from renewables, and only down to 75% (of 30%). So if the batteries are charged by power consisting of less than 75% renewable energy, then no ITC attribution is valid. This rule, euphemistically called “the 75% cliff”, adds complexity to engineering, cash flow calculations, and modeling.
For those who cannot take the ITC, like non-profits, the combination of PACE and PACE-backed Power Purchase Agreements (PPA) improves the feasibility. Tim Kubes, who runs sales for Britestreet’s PPA, confirms “We’ll do a PACE-backed or regular PPA for storage as part of the solar package and only if it meets ITC requirements, but we offer no production guarantee. That’s all on the production designer, and it has to model positively on Energy Toolbase.”
In storage years, it’s still early. Consider solar: it was floundering for over 60 years until net-metering in 2001. Then in 2008, when bank credit was tight as a snare drum rattling a death march, government programs provided impetus for Wall Street to develop new and inventive methods of financing solar installations. The “pay-back” calculation took a backseat, and “cash-flow” drove the deals. Business boomed.
The market segment that currently receives Wall Street attention is the utility and large industrial sector. Its requirements for cashflow-oriented financing structures for large scale projects led to a lease-oriented financing structure involving John Marciano reports that he has helped “a couple dozen deals” get done, and adds “They’re not cookie cutter and tax investors are still getting comfortable with [storage]. The key is matching battery technology with use-case and then finding credit support.” Easy for him to say… But where big money is definitely flowing is in the technology development space. Mercom Capital Group’s proprietary data points to over $4billion of investment in energy storage in the US over the 24 months leading to Q1 2018 . Hopefully this will eventually lead to increased battery system competition and new applications. Marciano sees “a decent chance that we will get the ITC for storage alone, and if we do, stand alone time arbitrage applications will explode in volume.” Now that would attract the folks in pinstripes.
Looking at the SGIP data (SGIP is a PG&E storage rebate program), the average storage system size is 193 kW. That’s the market that is crying out for 3rd party financing solutions. “Small to medium commercial does not have enough fat” to deal with all the complexities that investors have to face, says Ray Trejo, founder of start-up EPX-Group. He engineers commercial high-performance systems for that market segment, and decries the lack of standards currently in the industry. His co-founder Matt Smith adds “It’s the wild West; people will sell you on the idea of batteries rather than the engineering principles”. That’s the issue that currently keeps funders at the toe-dipping stage.
Energy Toolbase’s Adam Gerza is not certain that 3rd party financing will ever scale. His colleague Scott D’Ambrosio, V.P. Sales & Integration, says “a lot of time these deals have not been penciling”. Nonetheless, Energy Tool Base strives to expand the functionality and reliability of their scenarios, enabling values (such as depth of discharge, charge and discharge times, or demand triggers) to flow through their modeling interface as input by the client, and letting the numbers produce their own feasibility verdict.
Tabuchi’s Mike Donnelly sees the future of C&I storage as residing in intelligent storage that will bridge numerous stakeholders, with “one thousand 2kW systems delivering instant energy simultaneously to a 2mW use case.” This will create yet another scenario for offsetting storage costs, a new way to monetize the power, and this Rubik’s cube will get more complex again. Internationally, says Adam Gerza, the highest application of batteries is self-consumption; so it is in Hawaii, where the no-net-metering market forces hosts to use all of their own solar power. Should the utilities nationally continue to play dodge-ball with their tariffs, we might well find that self-consumption is our collective future. Given the comparative predictability of such a model and others discussed here, 3rd party funding would then most likely blossom. But that is tomorrow.
We just sent you an email. Please click the link in the email to confirm your subscription!