Lenders show increased interest for energy storage

Investors have shown an increased interest in financing large-scale energy storage projects in the UK as the growing number of proven at-scale schemes has boosted lenders’ confidence.

Despite a need for large scale energy storage, securing finance has previously been a barrier to adoption, Pacific Green states in a new report. The application of project finance mechanisms to battery energy storage projects has so far “been patchy” but confidence in the market is growing, the report shows.

However approaches to revenue generation remain a key concern for lenders.

Large scale battery energy storage systems, which have effectively utilised financing schemes, have provided a blueprint, Pacific Green said. The organisation secured £123.5 million in November 2023 to build a 249MW / 373.5MWh array in Kent.

As a relatively novel technology, lenders have been less forthcoming to back projects, however the Sheaf Energy Park project attracted investment from NatWest, the UK Infrastructure Bank and legal advisor Gowling WLG.

Unlike generating assets, revenue is more complex for storage projects because they do not create a commodity, which has been an obstacle for securing finance. There are other stackable revenues streams that investors are becoming more comfortable with.

Emily Sidhu, director in the banking and investment team at UK Infrastructure Bank (UKIB), explains that the main barrier to the project financing of BESS projects relates to revenues.

“There are different markets that batteries can sell into – capacity market, wholesale market, balancing mechanism and ancillary services – so there are different ways of making money, but it also means there is potentially higher revenue risk when compared to traditional renewable technologies that have contracts for difference, for example, and therefore more revenue certainty. So there’s a lot of volatility in the revenue and that’s why you’re seeing a more limited pool of commercial banks coming into the space.”

The report adds that a “lack of understanding” around large-scale projects had made risk-averse financiers cautious. This has been exacerbated by limited predictability of profit forecasting of battery storage assets.

Jacob Lloyd, managing director, structured finance at Natwest, said the number of lenders in the energy storage has grown in recent years as the number of proven projects has grown. He said: “The liquidity and appetite will clearly increase, but there may not be more project financing.”

He suggested there was likely to be fewer total financings, but more larger projects will attract investment as the number of large batter projects rises.

The Sheaf scheme in Kent, used a “reverse engineering” approach, Pacific Green chief executive said. “We began by asking ‘What is financeable? What’s going to get a tier one bank comfortable through full visibility, and confidence in the project returns?’” Scott Poulter explained.

“Only then did we start to price up the project with our suppliers and counterparties. We turned the traditional approach on its head and in doing so could offer the investment community the certainty it needed on supply chain matters.”