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Time has come for battery storage finance, Moody's finds


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Time has come for battery storage finance, Moody's finds

The risks and financing approach of battery storage projects are "broadly akin" to those of conventional power plants, while the technology is "credit positive" for owners of intermittent renewable-energy generation and grid operators, Moody's Investors Service said in a new report. Financing battery storage projects, rather than building them on companies' own balance sheets, "is something whose time has come," Rick Donner, a vice president at Moody's, said in an interview. "There will be more project finance opportunities."

Certain revenue models are superior in Moody's view. Facilities with contracted revenues, such as AES Corp.'s 100-MW battery array in Long Beach, Calif., which is underpinned by a 20-year power purchase agreement with Edison International's Southern California Edison Co., are the "most credit positive for storage projects," according to the report, released March 19. The project is the first phase of the planned 300-MW AES Alamitos Energy Battery Storage Array, part of AES's natural gas-fired Alamitos Energy Center. The $2 billion transaction backing the project, which closed in July 2017, "has the potential to help lenders become more comfortable with battery storage operations and technology," Moody's added.

Indeed, Mitsubishi UFJ Financial Group Inc., a lead investor in the Alamitos project financing, has said it is eyeing additional energy storage investments, while AES, NextEra Energy Inc. and other big developers have proposed increasingly large battery storage projects, including facilities hybridized with wind, solar and gas generation. As companies begin to convert their gigawatt-sized pipelines into delivered projects and prices continue to decline, Moody's is preparing to assign ratings, including for standalone storage projects, something it has not done to date.

Risks of value stacking, gas displacement

In contrast to its positive view of facilities with contracted revenues, projects purely focused on the merchant power market are "weakest from a credit perspective," the report said. Moody's also sees greater cash flow risks for projects that combine contracted revenue with various merchant revenues. Although some economists have pointed to the benefits of tapping various battery value streams in addition to contracted revenues, such as income from ancillary services, the ratings agency is less upbeat on the practice. "This is because the additional uses could change the project's operating profile for which it was designed and increase the risk of faster degradation," Moody's explained.

Moody's expects the cost of lithium-ion batteries, which it calls "the technology of choice for grid-scale energy storage," to fall to roughly $100/KWh between 2020 and 2022, from around $200/KWh today. Including balance of plant components, the agency estimates the current total installed cost of batteries at $400/KWh, with an electricity generation cost of about 13.3 cents/KWh, assuming 3,000 cycles per battery. Developers, however, clearly see prices tumbling in the next few years, as recent battery-backed renewables bids to Xcel Energy Inc. in Colorado indicate.

Could the emergence of battery storage as a means of managing intermittent wind and solar generation ultimately undermine natural gas generation? "Probably in the long run," Donner said. But battery storage represents more of a "lost opportunity" for gas than a "negative per se, at this juncture," he added.

GTM Research recently identified a nearly 10,000-MW gas peaker "displacement opportunity" for batteries in the next decade. In recent decisions, regulators in some states, including Arizona, California and Washington, have favored batteries over gas to meet future system needs.