When assessing the creditworthiness of energy storage projects, lenders consider several key factors to evaluate the risks and potential returns. These factors include:
Key Factors for Assessing Creditworthiness
- Technology Risks and Performance Guarantees:
- Lenders rely on independent engineers to assess technology risks, such as capacity degradation and safety issues, particularly for lithium-ion batteries.
- Performance guarantees, equipment warranties, and operations and maintenance (O&M) agreements are crucial to mitigate these risks. The guarantees should be assignable and provided by creditworthy entities.
- Construction Risks and EPC Structure:
- Projects with a split EPC (Engineering, Procurement, and Construction) structure require additional lender diligence to manage increased risk exposure.
- Fixed-price turnkey EPC contracts are preferred to shift construction risk from the project company to the contractor.
- Operating Risks and O&M Agreements:
- Lenders evaluate operating limitations and O&M costs, requiring agreements with experienced operators to ensure projects operate within established limits.
- O&M reserves may be necessary for potential maintenance costs.
- Revenue Streams and Market Conditions:
- Lenders assess the stability and predictability of revenue streams, such as offtake agreements or merchant revenues.
- Favorable market conditions, including regional incentives and policies, can enhance project viability.
- Project Valuation and Financial Models:
- Energy storage project valuation involves complex considerations due to diverse design and operational variables.
- Project economic models help evaluate financial viability, incorporating factors like discounted cash flows, expenses, taxes, and financial accounting.
- Tax Incentives and Regulatory Environment:
- The availability of tax credits, such as the Inflation Reduction Act’s provisions, can significantly impact project financing by reducing costs and increasing accessibility to development capital.
- Location and Market Dynamics:
- Project location affects revenue models and market structures. Different regions offer distinct opportunities for energy storage, with varying compensation for attributes like capacity or ancillary services.
Original article by NenPower, If reposted, please credit the source: https://nenpower.com/blog/what-are-the-key-factors-lenders-consider-when-assessing-the-creditworthiness-of-energy-storage-projects/
