With lithium-ion batteries raising ESG-related concerns, investors are increasingly seeing value in long-duration storage
How to add storage to your renewables portfolio
Do you have a sufficient amount of storage in your renewables portfolio? If not, you are probably not getting the most out of your assets. Upping investment in energy storage is becoming an increasingly urgent priority for wind and solar operators and investors.
- Wind and solar industries need storage to get most from assets
- But there is uncertainty about how to integrate storage into portfolios
- Recent panel discussion sought to address these issues
Do you have a sufficient amount of storage in your renewables portfolio?
If not, you are probably not getting the most out of your assets.
Upping investment in energy storage is becoming an increasingly urgent priority for wind and solar operators and investors.
It’s not hard to see why. Wind and solar power is not available all of the time, so in order to maximise the effectiveness of wind and solar projects, the addition of energy storage facilities is vital to ensure power is saved and used at times when resources are low.
As a result, many wind and solar businesses and investors are anxious to add storage to their portfolios.
But what’s the best way of doing this?
Given the relative infancy of the storage industry, there are questions about the most effective way of integrating storage assets, as well as concerns about the associated financial and technical risks.
At the recent ‘Energy Storage Symposium’ session at the Financing Wind North America conference – hosted in partnership with Lockton Companies – a group of industry experts tackled these questions and addressed these concerns.
The session was moderated by Nate Hudson, senior vice president of Lockton Power at Lockton Companies, and included a panel consisting of: Joan Fang, principal at Ares Management LLC Infrastructure & Power; Justin DeAngelis, partner, sustainable infrastructure at Denham Capital; Nicholas Magliocco, head of energy storage & hydrogen procurement at ENEL; and Sara Graziano, partner at SER Capital Partners.
Topics covered included the impact of merchant risk – that is, the financial risk posed by moves in exchange prices – discount rates (in other words, the capital cost and expected rate of return of investments), the most effective way of adding storage to a portfolio, and the biggest risks faced when financing projects.
Below we bring you some of the highlights from the panel’s discussion – you can watch the entire session here (this content will be available outside of the paywall until Monday).
What portfolio diversification opportunities do storage assets offer?
Sara Graziano: “Energy storage is a very unique asset class. I call it the ‘Swiss Army Knife’ of the power grid because it can provide any service really that the grid needs better than any other resource. And the trick is then to figure out, for any particular project, how you are going to commercialise it. How are you going to optimise it? You can probably only hedge one attribute [of the storage] or maybe one attribute at a time that it can provide, and then you still have merchant exposure potentially with those other attributes and have to figure out how to manage and balance all of that.”
Joan Fang: “Battery storage has become increasingly more palatable for investors from a discount rate perspective. And when you think about some of the most attractive storage assets that we've seen come online, those assets are trading close to our solar standalone trades. So, people are assuming very little risk premium for storage assets. I also think it’s really interesting to see how quickly the investment community has come to embrace storage. One, because I think we all understand the potential for storage, including capturing all these multiple revenue streams, but two, the excitement to be the first investor in the space and be able to claim a stake in the ground here.”
Which are the most effective ways to add storage to asset portfolios?
Nicholas Magliocco: “A big attraction for us is the possibility to combine energy storage to renewable energy power plants, because this new hybrid alternative can make the project more resilient by providing multiple services in addition to what the renewable energy plants, like solar, wind, can provide to the system, which also results in lowering the risk of the whole project. From internal tests at Enel, we found that integrating storage with other assets can provide a 30% cost reduction compared to a standalone storage project. So, we see bundling energy storage projects as a big advantage.”
Justin DeAngelis: “I agree. But that’s not to say there’s not an investment opportunity in standalone storage. There's 1,800GW of wind and solar installed globally already right now, so we see this increasing opportunity where there's a high penetration of renewables. And that’s why we have developed hybrid solutions. If you think about the energy transition, hydrogen is maybe the next holy grail, but battery storage in the near term is going to be significant.”
What are the biggest risks you need to manage when financing these projects and how do you mitigate them?
Sara Graziano: “A main challenge we have faced is that a lot of the financing providers are not as well educated on the market and on the value proposition for storage. This process is not as simple as something where you can do ‘P x Q’ on a spreadsheet. Another major barrier is the insurance requirements. When you're dealing with lenders you're dealing with the insurance market, which is also not necessarily as well educated about energy storage and has maybe had a couple of bad experiences. It’s great that financing providers are very interested in doing something new and innovative, but the market has just not caught up yet and is still a work in progress.”
Joan Fang: “Right now, I think that the financing market is treating financing storage as though they're financing solar or wind. Generally, the banks come up with a [debt service coverage ratio] and say, okay what can I lend against that cash flow? But I think the challenge here, especially for a project that's maybe more exposed to ancillary revenues, there's a wide variation between what different consultant curves show. So, if you're financing and your bank is underwriting to the high end of that ancillary service curve, and you have very tight covenants and a very tight cash trap, there’s a risk that you could get caught between a rock and a hard place almost out of the gate.”
What needs to happen in order to facilitate greater investment in energy storage projects in the next 12 to 24 months?
Nicholas Magliocco: I think conducting our own tests to study the performance and degradation of these newer and alternative systems is key because no one really knows what’s going to happen in five to ten years from now, just like [the situation] we had in the solar industry. For Enel, we made a decision a couple of years ago to focus on one type of battery chemistry, which is lithium iron phosphate batteries over lithium manganese cobalt oxide batteries for several reasons. One of them is that it’s more cost effective but at the same time also provides higher safety, which is key to show lenders that you are adopting a lower risk technology. From our perspective, we are very open to innovation and new technologies, but, honestly speaking, in the short and medium term, we only see lithium-iron technologies.
Image (clockwise from top left): Sara Graziano (SER Capital Partners); Nate Hudson (Lockton Power); Joan Fang (Ares Management); Nicholas Magliocco (ENEL); and Justin DeAngelis (Denham Capital).