Regulatory risks play a significant role in impacting the financing of energy storage projects. These risks arise from uncertainties and changes in regulatory frameworks, which can affect the economic viability and bankability of such projects. Here’s how regulatory risks influence financing:
Types of Regulatory Risks
- Classification and Market Participation: Regulatory bodies like the Federal Energy Regulatory Commission (FERC) and regional transmission organizations (RTOs) are grappling with how to categorize energy storage—whether as generation, transmission, or a hybrid. This classification impacts market participation rules and remuneration for stored energy services.
- Remuneration Mechanisms: Regulatory frameworks often lack uniformity across different markets, affecting how energy storage is remunerated in wholesale electricity markets. This uncertainty can make it difficult for investors to predict revenue streams, thereby increasing risk.
- Interconnection Rules: There is ongoing debate over which interconnection rules apply to large energy storage devices. Clarifying these rules is crucial for ensuring that project developers can predict costs and operational requirements.
Impact on Financing
- Risk Perception and Allocation: Project finance is about allocating risk. Regulatory uncertainties can make it challenging to secure financing because lenders need clear financial models and risk mitigation strategies to ensure repayment.
- Revenue Stream Uncertainty: Changes in regulatory policies can alter the revenue streams for energy storage projects. For instance, the absence of clear rules on remuneration can make it difficult for lenders to evaluate the project’s financial health.
- Operational Risks: Lenders also assess operational risks, including the need for secure permits and site usage rights. Regulatory changes can impact these operational aspects.
Mitigation Strategies
- Policy Support: Governments can mitigate these risks by implementing supportive policies that provide a stable framework for investors. For example, a cap and floor scheme can ensure a minimum return on investment for certain energy storage projects.
- Bankability Reviews: Lenders often require a bankability review of key contracts, such as power purchase agreements (PPAs), to ensure they are robust enough to support debt service.
- Blended Financing: Using public capital as a risk cushion or providing partial credit guarantees can attract private investors by reducing their exposure to regulatory risks.
By addressing these regulatory risks through policy clarity and innovative financing models, it becomes more feasible to secure the necessary funding for energy storage projects, which are crucial for a low-carbon energy transition.
Original article by NenPower, If reposted, please credit the source: https://nenpower.com/blog/how-do-regulatory-risks-impact-the-financing-of-energy-storage-projects/
