Risk Mitigation Strategies for New Energy Storage Technologies
1. Due Diligence and Independent Engineering Reports
Lenders conduct thorough due diligence on technology risks, often relying on reports from independent engineers to assess project performance and compliance with offtake agreements. This includes evaluating the project’s ability to meet commissioning and minimum performance requirements.
2. Performance Guarantees and Equipment Warranties
Project companies can secure performance guarantees and equipment warranties from technology vendors. These shift technology risks away from the project company and provide assurances to lenders that equipment will perform as projected. This is particularly important for addressing capacity degradation and safety issues like overheating in lithium-ion batteries.
3. Operations and Maintenance (O&M) Agreements
Lenders require O&M agreements with experienced operators to ensure projects are operated within operational limits. These agreements help manage maintenance costs and prevent project degradation.
4. Supply Chain Diversification and Risk Management
Developers mitigate supply chain risks by diversifying suppliers, avoiding single-country sourcing, and considering substitute materials or recycling technologies. They may also use inventory management systems and negotiate contractual guarantees for performance metrics from service providers.
5. Tariff and Duty Compliance
Developers must comply with tariff and duty obligations and may use hedging arrangements to protect against price fluctuations. Contracts should include provisions for managing changes in tariff or duty rates.
6. Portfolio Financing
Lenders can reduce risk by financing portfolios of projects rather than individual projects. This spreads risk across multiple projects, reducing dependence on any single one.
7. Regulatory Certainty and Support
Mitigating regulatory risks involves seeking interpretive guidance or combining energy storage with stable generating assets. Government support mechanisms, like tax credits or auction systems, can also help ensure revenue stability.
By implementing these strategies, lenders can better manage the risks associated with new energy storage technologies, facilitating project financing and contributing to the growth of the energy storage market.
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