by Julian Spector
June 04, 2019

Energy storage still lags behind solar in the availability of capital to fund projects, but new models are evolving to finance and own systems.

Project financing for storage has made for a recurring topic in the pages of Greentech Media, because the inherent complexity of energy storage makes it harder to finance than a simple generation asset. The business cases keep evolving, and often require sophisticated dispatch controls to make any money. Investors still crave more certainty about storage revenue before they’ll front the cash.

"The broader industry is very comfortable with solar financing, as long as you’re using Tier 1 hardware," said Carl Mansfield, vice president for system solutions at NantEnergy, formerly of Sharp SmartStorage. "With storage, there are more moving parts. If you’re not dispatching it right, it doesn’t really matter if you have Tier 1 hardware; it’s not going to generate value."

And so, fronting the cash for storage development requires a bit of creativity.

This week in Storage Plus, we'll break down the ways companies large and small are self-financing, as well as the dynamics of tapping third-party financiers.

Small company, self-financed

Young energy storage startups face an uphill battle to convince financiers of their staying power. At this stage of the market, the operating lifetime of a storage asset typically exceeds the number of years the startup supplying it has existed.

That disjoint gives large energy conglomerates a structural advantage, as we discussed last week in the commercial storage context. Smaller, younger companies nonetheless can structure their deals to compensate for their relative youth.

New York-based developer Convergent Energy + Power, founded in 2011 and now staffed by more than 25 people, assures customers by putting its own capital on the table. The company has raised more than $70 million in equity, and spends most of that on its own projects.

“There are huge companies that build, own and operate,” CEO Johannes Rittershausen said in a recent interview. “As far as I know, we’re the only independent storage developer that does it this way.”

Convergent specializes in large-scale commercial and industrial batteries that save money for a host customer through savvy dispatch based on market signals.

Besides the U.S., the company has 26 megawatts in operation in Ontario, Canada, tapping the demand-management opportunity created by that province’s Global Adjustment fee. Its projects there include the largest C&I system in North America, and a recently announced joint venture with Shell New Energies that will kick off this summer with 21 megawatts across two Shell refineries.

Self-financing allows Convergent to pitch an alignment of incentives with its large industrial customers. The host should trust the developer to be as creative as possible in creating value with the project, according to this argument, because the developer’s own capital is on the line for the battery’s operating lifetime.

“If we’re going to be creating value with these things, it should be our money,” Rittershausen said. “We’re going to be here with our money in this thing for the long term.”

Back in 2016, Convergent tried third-party non-recourse financing for standalone storage projects. It worked with SUSI Energy Storage Fund I and CJF Capital to finance a 5-megawatt and a 7-megawatt project.

That approach worked for those cases, but the legal process to finalize the contracts proved to be lengthy and complex, Rittershausen said. The cost of capital is slightly higher for Convergent to finance its own projects, but going it alone allows for a faster turnaround from customer acquisition to commercial operation.

The question that emerges is this: Why don’t more small storage companies choose to self-finance?

The answer may be that it’s just harder than it sounds.

The case of Advanced Microgrid Solutions is instructive. The startup launched with a high-profile contract to supply C&I batteries in utility Southern California Edison’s territory, but over the years ran into difficulty managing working capital over the multi-year development process.

AMS eventually brought in Macquarie Capital to finance and own a fleet of C&I batteries with a $200 million fund, taking the financial burden off of the startup. Ultimately, AMS pivoted away from project development to focus on software to economically dispatch grid assets, distancing the company further from the task of project finance.

AMS competitor Stem similarly raised funds from third parties to develop small C&I projects, and also found its way to a more software-focused business model.

Besides those two, it’s hard to find a small, standalone storage developer that hasn’t been acquired by a national or international energy conglomerate. That means there aren’t many candidates for small-scale storage self-financing, but more could appear as the market grows in the coming years.

Large company, self-financed

The incumbent energy majors don't have the same appetite for risk as the nimbler startups, but they bring a lot more capital to the table.

The ability to tap massive internal balance sheets offers a major advantage to players like Enel and Engie, which bought their way into U.S. storage development. Wood Mackenzie analysts concluded that these sorts of companies are poised to lead the U.S. non-residential storage market in a recent report on that segment.

"Customers and financiers are more comfortable working with them, given confidence that such companies will be around to honor 10-, 15- and 20-year contracts," Brett Simon and Michelle Davis wrote in the March report

Several U.S. utilities and independent power providers have built storage businesses of their own, including Con Edison Solutions, NextEra and AES.

The benefits described above of speed and agility from self-financing apply for the bigger companies, but their cost of capital will tend to be lower. This is one of those strategies where companies either have the balance sheet to pull it off or they don't.

Third-party financed

Those companies that cannot or do not wish to finance projects themselves must look to third-party financiers.

Some firms are willing to round up serious capital to own the long-term revenues from storage assets, as AMS found with Macquarie, and Stem found most recently with the Ontario Teachers' Pension Plan.

Financing portfolios of storage projects gets easier if the systems fit a template for customer qualification, project structure and pricing, said Mansfield, who focuses on C&I solar-plus-storage at NantEnergy. It saves time and effort to apply qualified new projects into a previously vetted performance guarantee framework, rather than drafting a new guarantee for every new project.

NantEnergy is something of a hybrid between small and large company. It's the product of billionaire Patrick Soon-Shiong's acquisitions of zinc-air battery maker Fluidic and Sharp's C&I SmartStorage unit. That arrangement combines the financial backing of Soon-Shiong's Nant business empire with "the ambition and goals of a startup," Mansfield said.

The business takes a similarly hybrid approach to financing, tapping third-party capital as well as internal corporate equity.

"It comes down to cost of capital and the management of the asset," Mansfield said of the choice between internal or external financing.

Finding an external financier can lower the cost of capital, but it adds complexity to the deal and typically cedes operational control to the third party. Depending on how the contract is structured, it could rule out new operational strategies that would generate greater margins as new value streams arise.

"We understand the technical risk of underperformance better than third parties," Mansfield said. "We can tune risk to our favor internally."

That understanding will be the key to unlocking cheaper and more widespread third-party financing.

Financiers need to see more examples of storage projects generating investment-grade returns. But they also need more avenues for interrogating the business case of a given storage project. The storage developer pitching it will always have an interest in making its projected returns look good.

"It’s migrating to a greater degree of comfort than historically, but still, they really need to understand the technology risk," Mansfield said of third-party financiers. "There is a general concern in verifying that projected models from vendors are actually achievable."

For his part, Mansfield prefers taking a "cynical and pragmatic" view when modeling his potential returns, rather than setting expectations too high.