Main Challenges in Financing Energy Storage Projects
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Risk Aversion Due to Nascent Technology:
- Energy storage technologies, such as lithium-ion batteries, are relatively new compared to solar and wind power. This lack of historical data and proven track records leads to risk aversion among fixed-income lenders and senior debt providers.
- Newer technologies, including hydrogen and compressed air systems, also face skepticism due to limited operational data.
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Complex Revenue Streams:
- Unlike solar and wind projects, which generate electricity directly, energy storage projects rely on complex revenue streams. They involve storing electricity when it’s cheap and selling it when prices are high (arbitrage), providing capacity, balancing services, and ancillary services. This complexity introduces higher revenue risk and uncertainty.
- The need for diverse revenue streams can create challenges in demonstrating predictable cash flows to lenders.
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Technology Risks:
- Lenders focus heavily on technology risks, including battery degradation, safety issues like overheating, and the reliability of equipment over time.
- Securing performance guarantees or warranties from technology vendors helps mitigate these risks.
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Operating Risks and O&M Costs:
- Energy storage projects require experienced operators to ensure they operate within defined limitations. The cost of maintaining and replacing batteries can be unpredictable.
- Lenders require O&M agreements and sometimes O&M reserves to ensure sufficient funds for maintenance and potential capital expenditures.
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Structuring Debt Financing:
- Energy storage projects often require more customized financing structures compared to traditional renewable projects. This includes considerations for potential cost increases and delivery delays during construction.
- Fixed-price EPC contracts are preferred but not always available, leading to additional diligence on split EPC contracts.
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Market and Policy Frameworks:
- The absence of stable policy frameworks and long-term offtake agreements can deter lenders, as these provide essential revenue certainty.
- Evolving regulatory environments, such as changes in tax credits, can impact financing opportunities and create uncertainties.
These factors contribute to the complexity of securing project financing for energy storage projects but are gradually being addressed through innovative financing models and policy advancements.
Original article by NenPower, If reposted, please credit the source: https://nenpower.com/blog/what-are-the-main-challenges-in-securing-financing-for-energy-storage-projects/
