Battery Storage Investments Set to Rise but Challenges Remain

Funding in new European battery energy storage systems is set to rise by 2030, but challenges with grid connectivity, bank financing and the use of power purchase agreements (PPAs) remain a concern for investors, market participants told ICIS.

The battery sector in Europe is set to attract more than €4bn a year by 2030, investors told ICIS.

Projects face several challenges including slow grid connection, integration with renewable assets, and the role of banks in funding, added a European investor.

Antoine Pavageau, associate director in the infrastructure team at Fitch Ratings told ICIS: “Fitch would analyse whether the new units could trigger integration issues into the older system and expects these issues to be addressed within a few months of adding the new units, but we would discuss that point with technical advisers.”

Bracewell’s Ro Lazarovitch told ICIS that other hurdles exist. “At the same time the development timeline of these projects is not getting any better – grid connections are a massive challenge and a lot of people who thought they could develop a project quickly are now realising how long it really takes.”

Lazarovitch said more and more banks are entering or wanting to enter the battery storage space which he sees as “both a challenge and an opportunity to financing in the project finance space”.

“Especially European banks are rapidly transitioning away from financing carbon intensive sectors and battery storage is seen as one of the new, green sectors they should be participating in. The larger number of players is obviously an opportunity,” said Lazarovitch.

A second investor said banks entering the battery sector funding space give developers funding options, but more flexibility is needed in terms of loan lending and duration.

“However, many of these banks do not have experience in this space and are used to writing large cheques. The time and effort required to get familiar with a project and agree financing terms, combined with the relatively small financings for standalone projects in the UK creates a challenge,” explained Lazarovitch.

The Role of PPA/CfD

The role of PPAs and contracts for difference (CfD) could be crucial for revenues in the coming years, several funding officials told ICIS.

Storage projects do not have PPA per se but have what we call ‘route-to-market’ agreements, and that route to market agreement can be fully merchant or come with floor pricing, added Lazarovitch.

The route to market agreement is where you effectively hand the operation of your battery to a third party, and they operate the battery on your behalf using a computing system to bid for the provision of services to the grid or to sell and buy electricity from the grid, he added.

“Other providers will offer floor pricing guaranteeing certain revenue, but that also comes with trade-offs in terms of your upside. Of course, financing will be easier where the floor pricing ensures you are able to repay your loan,” stressed Lazarovitch.

Revenues resulting from capacity contracts or ancillary services, or power sold at a fixed price can provide a degree of stability. Having said that, the services and revenue mix is a decision for the asset manager, Pavageau pointed out.

CfDs in the context of battery storage are primarily available for coupled projects, which include both a generation element, such as solar, and battery storage, said Lazarovitch.

“It is possible regulators will put CfDs in place, but we are not aware of that at the moment and cannot say for sure,” added Pavageau.

Article originally published in ICIS European Daily Electricity Markets on August 22, 2023.