How to Make a Storage Project Bankable

Energy storage energy systems will evolve into a market of the same size or standardization as renewable energies.
Published: Fri 08 Aug 2014

Energy storage systems (ESS) provide a number of benefits which the renewable energy sector and finance industry have recognized and their interest in these solutions are growing in momentum.

However, the foundations for the commercial adoption of energy storage systems are still shaky and must be developed. These include supportive legislation, standardization and business models which are all critical when it comes to the bankability of energy storage projects. It is this bankability that will attract private sector investment on a much larger scale.

“The business models for energy storage systems that we see today are not yet bankable from a non-recourse financing perspective, as pointed out by players in the financial industry. A lot of work has to be done, but we can learn from other sectors like solar photovoltaics, to avoid the same mistakes and be faster in some aspects.”

This is according to Matthias Jäger, Head Risk Advisory & Services, Allianz Climate Solutions GmbH, who spoke to Engerati about what makes an energy storage project bankable.

Improving bankability

Sustainable business models and well-established companies with references which span over a long period of time is mainly what financial institutions are looking for, explains Jäger. He suggests that during the early developmental stage of technologies, financing institutions like KfW are important.

In addition to this, sufficient standardization including guarantees and warranties will also help to improve bankability. Jäger says his is unsure as to whether there will be a similar standardization to the development of photovoltaics over the last few years.

The reason why projects are not currently bankable is mainly because sustainable business models for non-recourse financing have not yet been provided.

Political insecurity is also a large threat to bankability. For instance, retroactive cuts of feed-in tariffs for renewables in Spain, Czech Republic, and Bulgaria led to the collapse of these markets.

Jäger points out that investors and banks need sufficient regulatory certainty to provide a long-term reliable framework for secured cash-flows. According to Jäger, the current business models in the German market are generally not suitable for non-recourse / project financing for the following reasons:

  • Small-scale storage systems for households, for example, in combination with photovoltaics, have access to very limited recourse financing. While it is a cost-saver, there are no self-sufficient business cases. The first success of the KfW Speicher Programme saw around 8000 storage systems installed since May 2013.

  • Medium-scale systems, for instance, for captive power consumption in industry or grid services for electric utilities-only a small number of pilot projects that are highly subsidized such as Schwerin of Wemag AG built by Younicos, are partially financed by the innovation programme of the German Federal Ministry for the Environment. These provide reserve power.

  • Large-scale storage systems, for example pumped hydro, do not show sufficient technical potential in Germany. Large-scale storage systems such as pumped hydro, suffer under grid fees and the decreasing spread of the peak and base load prices for electricity.

  • At the moment, there is no coherent regulatory framework (in Germany) to provide long-term targets and financial incentives for large storage solutions as actors on the electricity market (similar to EEG)

  • Insufficient standardization and missing track record of companies on the market

Project leaders still face numerous challenges

Project leaders still face a number of obstacles. In Germany, currently the spread between peak and baseload decreases because of the high impact of photovoltaic during the peak hours at noon. In addition to this, grid fees for large scale storage systems in Germany are treated like consumers and have to pay grid fees for the energy they store, which decreases the rate of return of those projects. Some pumped hydro storage may even be shut down by their owner because of low profitability.

Currently, small households are the only group which have a (small) incentive to build storage systems as part of the KfW Programme.“Only a small number of projects are being realized by electric utilities at the moment but additional subsidies are required,” explains Jäger.

So what needs to change?

To make energy storage system projects more financially viable, Jäger suggests the following:

  • Technical standardisation for quality criteria, tests, safety standards, certifications. Lessons should be learnt from other sectors like photovoltaics and wind. For instance, projects should aim for a module design qualification and type approval, as well as a module safety qualification, and quality management certificates

  • Show a reasonably long track record

  • Find business models with secured cash-flows

Jäger says that financial institutions are watching the energy storage market and hope that future development is similar to that of renewable energy sources. However, they are unwilling to finance (non-recourse) yet because of the aforementioned obstacles-missing business models being the biggest issue.

“Eventually, financial institutions may create departments to finance storage systems (similar to renewable energy). They may also decide to finance on a more individual project basis if there are only a small number of storage projects.”

The future of energy storage

Even in the absence of project finance, there may be an increased interest for storage systems for small households as prices for storage systems will decrease and electricity prices for households may increase, predicts Jäger.In Germany, experts expect that storage systems will grow from 10,000 in 2014 to 20.000 in 2015.

He goes on to explain that some pilot projects with a higher storage capacity (and excluding stand-alone projects); will be realized by electric utilities.

On islands, a combination of regenerative power sources and storage systems will become an alternative to diesel generators. Projects will include regenerative power source and storage systems. Cash-flows will have to be secured by long-term PPA, explains Jäger.

Says Jäger, “While energy storage system projects will develop over time, it is not clear whether they will evolve into a market of the same size or standardization as renewable energies.”