Grid-Scale Storage and Capital Markets

The fuel behind storage deals

Since KBCM’s first capital raise for a battery storage company in 2017, KBCM has been helping developers and investors achieve a variety of goals. From standalone and PV-plus-storage projects to battery asset- and entire-platform sales, KBCM addresses its clients’ capital needs through all project stages and market conditions. How? “In addition to putting $2.5 billion of our balance sheet to work all across the storage space, we've also been increasingly busy providing M&A advisory servies to developers, IPPs, and investors,” Bailliet said.

Additionally, Bailliet identified the Inflation Reduction Act (IRA) as having a positive, cyclical impact on the storage market in two ways: through its extension of both the Investment Tax Credit to standalone battery storage, and production tax credits to manufacturers of battery cells and modules. “Eventually, we’ll have more domestic manufacturing of battery cells,” he added, “which will unlock not just 30% but 40% ITCs for storage.”

Capital counterweights

While creative financings, M&A strategies, and the IRA may be creating a lucrative tailwind scenario for the storage market, Johnson asked about the offsetting headwinds KBCM sees today. Bailliet explained the three key factors impeding projects from coming online:

Supply chain issues. Despite closing the delivery timeline gap considerably over the past year, delays in manufacturing, equipment delivery, and construction are pushing all projects back.

Cost and availability of capital. With the base interest rate tripling over the past year, everything is more expensive now, from supplies and equipment to labor and capital. Some traditional tax equity investors have been pulling back from the market. Furthermore, Basel III recommendations for banks to reserve capital against tax equity commitments may increase the cost of tax equity and decrease its availability, making it increasingly difficult for battery storage developers to access capital markets for projects ready for construction.

Sequencing timelines. Combined, the trickle effect of supply-chain issues and market inhibitors creates an additional challenge in the capital markets arena: capital cadence. Bailliet explained why his team is especially focused on this important function of capital provision and advisory roles. “As we look to raise capital for developers, we need to think through the transition to the next investor(s),” he said. “You need to synch up the timing of equipment orders, deposits, and down payments so you don’t lose any time on these projects as you transfer ownership or bring in an investor.”

Storage technology sweet spots

Despite all these hurdles, battery storage projects are coming online, and Johnson asked “which ones” and “how are they being financed”? Lithium deals in standard one-, two-, and four-hour applications represent the bulk of the deals KBCM sees on the market today. More recently, iron or other types of composite materials have emerged as well. To date, non-Lithium ion chemistries are generally financed with equity until they prove to be bankable.

“As we look at long-duration,” Bailliet added, “we’re starting to see a little traction in things like compressed-air storage, both domestically and abroad. As those technologies come out … we need to consider how they utilize battery storage from a commercial standpoint.” Off-take structures need to be in place, he explained, further emphasizing the importance of sequencing. “All parties need to come together at once to make these work over time.”

Broadening developer landscape

Enter the need for renewable infrastructure development — compressed air and hydrogen storage solutions are not yet compatible with solar, wind, or hydro systems. With increased popularity among newer storage technologies, KBCM is seeing more diversified developer expertise and higher risk tolerance in recent deals. However, with consideration to the insurgence of larger, more capitalized energy entities (e.g., oil and gas companies) over the past five years, Johnson asked, “How does this impact the competition for development capital?”

Scale matters

Having a big balance sheet has a competitive advantage beyond the benefit of writing a check to procure equipment and get a project online more quickly. “It certainly provides a lot of flexibility on the financing front,” Bailliet points out. “Bigger players are able to start construction on balance sheet and solve for debt and tax equity during construction, which smaller players aren’t able to do.” So, how are smaller developers getting their projects online?

Innovation = higher returns

Different markets, project stages and equipment life cycles all determine what form of capital best suits a developer’s needs. Bailliet noted that KBCM has been leading the charge in standard construction and term financings for battery storage projects once they achieve the Note to Proceed (NTP) or Commercial Operations stage. For deals ranging from early-stage to pre-NTP, however, developers, investors, and capital providers are getting more creative in their approach.

For example, per Bailliet, a proliferation of investors moving earlier into the development cycle has shifted KBCM’s M&A focus, from historically selling assets and platforms to raising increasingly more development capital for clients. “Two years ago … there were maybe four or five go-to investors we’d approach for clients looking for development capital,” he noted. “Today, that number is probably closer to 15 to 25.”

Value stacks of storage

So, what exactly does that revenue breakdown and performance look like for developers or investors? Bailliet spoke about the differentiators and interplay between two primary revenue streams (in addition to capacity) in the storage market.

Energy arbitrage. Due to extreme energy volatility and/or system (“node”) location, the exchange of energy commodities can offer extraordinary returns in high-demand markets. The Electric Reliability Council of Texas (ERCOT), for instance, has yielded payback periods of less than three years, unlevered, compared to 20 years for an average storage project.

Ancillary services. Unlike arbitrage, ancillary services are not location-specific but available statewide. From their clients’ perspective, Bailliet sees a focus on “reg-up and reg-down” technologies; those providing the ability either to add or reduce power generation on demand. These revenues stem from grid stabilization and load functionality rather than commodity prices and buy-sell strategies that capitalize volatility.

A cannibalization paradox

But no two markets — or even revenue streams within a single organization — are equal. While it makes sense for a model to combine revenue sources, using one revenue stream can cannibalize the other, which raised an interesting point. “As we integrate more storage and effectively reduce volatility in the system,” Johnson asked, “how does that impact capital allocation and how do you see project developers evolve as they approach the tipping point of diminishing early-stage gains?”

With regard to energy arbitrage, Bailliet says we’re a long way from that tipping point. “When you consider the issues with transmission constraints, congestion, and load pockets relative to overall [PV-plus] renewable deployment today,” Bailliet said, “you’re going to need a lot more standalone storage to offset and balance the grid.” In the meantime, commercialization strategies and asset monetization play an important role in curbing cannibalization risks.

The equity exodus

In summary, Bailliet recognizes the storage market is where solar was a decade ago — in its infancy with vastly different markets and applications across a gamut of players ranging from pure-play battery storage developers to solar-plus-storage developers and independent power producers (IPPs). What levels their playing field is having access to creative capital alternatives and advisory services to differentiate their individual endeavors.