16 February 2023 Ron Erlichman Energy and Infrastructure

Key takeaways on energy storage financing from Projects & Money 2023

Ron Erlichman, Linklaters’ Head of Energy & Infrastructure in the Americas and a partner in the firm’s Chambers Global Band 1-ranked Projects and Energy practice, moderated a panel on financing energy storage at the Projects & Money conference in New Orleans on January 25, 2023. The panel discussed what is expected to be a more robust stand-alone storage financing market, important tax equity considerations as a result of the Inflation Reduction Act (IRA), regulatory concerns, and the anticipated road ahead for the stand-alone storage market in the United States. 

We’ve pulled out the top five key insights from the discussion:

  1. The IRA and resulting storage investment tax credit (ITC) will help to create more options for capital allocation in stand-alone storage projects. The creation of a storage ITC results in a much greater degree of flexibility in respect to the allocation and sequencing of the capital stack allocations for stand-alone storage projects. While the debt markets have continued to open up for these projects, the availability of an ITC and secondary market transferability creates significant optionality for projects.
  2. The use of ITC and debt on storage will vary depending on the ISO/RTO but overall will offer more flexibility for risk allocation. The model for each storage project will determine the appropriate risk allocation between the capital providers. Portfolio debt financing will have a different structure if consolidated cash flows are taken into consideration, as opposed to a single project where cash flows from contracted revenues and certain market participation economics will shape the underwriting and risk allocation.
  3. Supply chain issues continue to exist but appear to be improving; interconnection remains a challenge. Regulatory risk — tariff, cybersecurity, etc. — continues to exist, but there are no imminent threats of enforcement actions specific to the energy storage market. Unfortunately, supply chain constraints continue to persist. However, the market should see some improvement in the supply chain later this year. Interconnection constraints, in particular in certain ISOs, and significantly higher costs for facility impact study improvement remain relatively unchanged.
  4. The focus on ESG commitments will not decrease and should draw corporates into the tax equity market. It seems unlikely that the corporates who have made large carbon neutrality and ESG commitments will be able to achieve their commitments during the time frames announced through conventional methods, i.e. power procurement. This will likely result in an increase in corporate interest in the tax equity market, which would open up market opportunity for storage assets, even if indirectly through corporates taking market share in the solar and wind market.
  5. Demand for storage will increase, which will result in an increase in production. For developers who need to recycle capital and grow quickly, these new sources of capital will allow them to be more efficient in the development of stand-alone storage projects and scale their platform much faster. This increase in development will require a significant ramp up by suppliers and manufacturers, which many have been anticipating and have indicated that they are preparing to respond. On a long-term basis, the increase in demand and scale will result in market efficiencies with respect to battery and, potentially even more importantly, other necessary project equipment production.

Linklaters is at the forefront of the market advising on the development and financing of complex, large-scale projects, highly structured transactions, and mergers and acquisitions in the energy and infrastructure sector across the globe, particularly in connection with renewable and carbon transition projects. The firm was recently recognized with IJ Global’s Climate Adaptation Award and Americas Renewable Energy ESG Award, IJ Investor’s Americas Conventional Power and Grid Infrastructure Deal of the Year Award, PFI’s Americas HydroAgen Deal of the Year Award, and IFLR Europe’s Project Finance Deal of the Year Award. Learn more about our global practice.