Financing challenges specifically affect battery energy storage systems (BESS) in several key ways:
1. Technological Novelty and Performance Risks
- BESS technology is relatively new and evolving, leading to concerns from lenders and investors about system performance, reliability, and longevity. There is a lack of comprehensive operational and failure data compared to more mature renewable technologies like solar and wind.
- Warranty providers and manufacturers are often recent entrants without a long-established track record, increasing the perceived technological and operational risk.
2. Revenue and Market Complexity
- Unlike traditional renewable energy projects that have more predictable revenue streams (e.g., power purchase agreements or contracts for difference), BESS projects have a fragmented and volatile revenue stack. Batteries can generate income from multiple markets such as the capacity market, wholesale electricity market, balancing mechanism, and ancillary services, but this diversity also leads to revenue uncertainty and higher risk.
- Revenue volatility makes lenders and senior debt providers risk-averse, limiting the availability of attractive project finance packages. This results in loans with lower gearing (less debt relative to equity) and stricter covenants, which can increase the cost of capital.
3. Limited Access to Low-Cost Capital
- The current pool of investors willing to finance BESS projects tends to be risk-tolerant but with limited capital availability, such as venture investors or specialized funds. This contrasts with the large-scale capital from institutional investors like banks, pension funds, and insurance companies, which seek lower risk and stable returns.
- To scale BESS adoption to the levels required by net-zero targets, involvement of low-risk capital providers is essential, but this requires risk mitigation measures and more mature financial models tailored to BESS projects.
4. Supply Chain and Supporting Infrastructure Risks
- BESS projects depend on supply chains that are partially consolidated and still maturing, leading to uncertainties about cost, availability, and quality of battery cells and components.
- Supporting infrastructure, such as grid integration and regulatory frameworks, is also evolving, creating additional project risk.
Summary
Financing challenges for battery energy storage systems stem from their novel technology status, complex and uncertain revenue streams, limited access to stable, low-cost capital, and supply chain risks. These factors cause lenders to be cautious, resulting in less favorable financing terms that impede large-scale adoption and deployment needed for energy transition goals.
Original article by NenPower, If reposted, please credit the source: https://nenpower.com/blog/how-do-financing-challenges-specifically-affect-battery-energy-storage-systems/
