By Philippe Hartley, principal at Clean Financing
The challenge in financing energy storage is getting someone else to own it. Cost and availability of financing, in general, are directly tied to risk. The ample amount of capital looking to invest in energy 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. Each of the numerous ways to use batteries 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 United States to help developers make sense of a battery application. None of that guarantees anything.
“Estimating the savings of an energy storage project is typically based on the historical interval usage data of customer,” Energy Toolbase’s COO Adam Gerza said. “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.”
None of this leads to eager third-party financiers.
Users and vendors are assuming the risks.
For those reasons, most C&I energy storage projects currently being 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 third-party financing. Big and small industry names are financing their own product and engineered solutions. Energport, for example, sells designed and engineered systems using the batteries of Chinese manufacturer Gotion (Guoxin). According to its U.S. director of sales, Bobbie Muñoz, Energport offers five-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 ten-year, 70% version, with a $2 million project cost ceiling on those leases.
“We’re quite flexible in our terms,” Muñoz said, to interest those prospects not willing to pay cash or finance through C-PACE.
Tabuchi Electric America targets large commercial installations. Its U.S. 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 kWh energy released by the installation. Donnelly shares that peak shaving is the most sought out application right now for Tabuchi, and its funding will be tailored to that application.
Applying the ITC
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 PPAs improves the feasibility.
“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,” said Tim Kubes, who runs sales for Britestreet’s PPA.
Will there be third-party funders in the future?
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. Marciano reports that he has helped “a couple dozen deals” get done.
“They’re not cookie cutter and tax investors are still getting comfortable with [storage],” he said. 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 $4 billion of investment in energy storage in the United States 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 pin-stripes.
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 third-party financing solutions. Small to medium commercial “does not have enough fat” to deal with all the complexities that investors have to face, according to 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 added, “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 third-party financing will ever scale. His colleague Scott D’Ambrosio, VP sales and integration, said that a lot of time these deals don’t pencil. Nonetheless, Energy Toolbase strives to expand the functionality and reliability of its scenarios, enabling values (such as depth of discharge, charge and discharge times, or demand triggers) to flow through its 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 “1,000, 2-kW systems delivering instant energy simultaneously to a 2-MW 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, Gerza said, 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, third-party funding would then most likely blossom. But that is tomorrow.
Philippe Hartley is the Managing Director of CleanFinancing.com, a commercial funding agency. (firstname.lastname@example.org).