Several big banks that recently provided capital or advised on financing for nearly 150 large- and commercial-scale battery storage projects planned across the United States, mostly in Southern California, are preparing to build on those initial forays with follow-up funding to fuel the spread of stationary battery installations.

"[We are] very excited about battery storage," Beth Waters, managing director of project finance in the Americas at Mitsubishi UFJ Financial Group Inc., or MUFG, said at an Oct. 12 event in San Francisco hosted by the American Council on Renewable Energy. "I look at it as market-disruptive, wonderful [and] important. It makes things more efficient and it's only good that will come to the industry."

MUFG, a lead investor in a $2 billion deal to finance AES Corp.'s Southland repowering project, which includes 1,284 MW of natural gas-fired generation and 100 MW of energy storage contracted by Edison International subsidiary Southern California Edison Co., is now eyeing additional energy storage investments. "It was a good toe-dipping exercise for both the banks and the institutional [investors]," Waters said of the AES deal, "because it had very large, billion-dollar tranches in each market for them to get exposed to what this [technology] is."

Several speakers at the conference noted that demand for energy storage project financing currently lags behind investor appetite. MUFG, said Waters, is open to investing in "large standalone" projects as well as portfolios "with wind or solar or gas." But the nascent storage-plus-generation market "reminds me of the old days with solar. We were all waiting for projects to finance but they weren't of a size big enough for us."

The missing piece

"It just seems like we are very early," said Rob Sternthal, president and founder of CohnReznick Capital Markets Securities LLC. "There's a lot coming. There's a ton of money raised. ... But it just feels like we are on the verge." CohnReznick, which advised distributed energy storage project developer JLM Energy Inc. on a $25 million financing announced in September, anticipates raising much more money for energy storage projects soon "because you are just starting to see it really take shape," Sternthal said.

"It's really demand for capital that's the missing piece right now," added Rhys Marsh, director at CIT Group Inc.'s energy storage finance business, at the event. "As projects that are really ready for project finance come to market, I think they are absolutely going to find supply of capital."

Focused on what Marsh calls "esoteric project finance," the bank in March led a $200 million debt financing deal for 50 MW of behind-the-meter storage at more than 100 commercial and industrial sites in the West Los Angeles Basin. Advanced Microgrid Solutions, which sold the portfolio of projects to Macquarie Group Ltd.'s corporate advisory and investment arm in August 2016, is installing the systems under a contract with SoCalEd to boost reliability in the region, which has been affected by the closure of its San Onofre Nuclear Generating Station. Touted as "the world's first fleet of hybrid-electric buildings," the projects rely on lithium ion batteries from Tesla Inc. and software from Advanced Microgrid Solutions.

A dozen value streams

The bank is "looking forward to funding more opportunities in the storage space that put capital to work," Marsh said. "Where we really are seeing the most opportunity for pure-play storage financing is behind the meter because that really is a very unique value," he said, pointing to the ability of such projects to reduce utility demand charges for property owners while also providing grid services.

"Whether it's a capacity product or load-following or frequency regulation, there's a dozen different value streams you could create from software and battery combinations from behind the meter," Susan Kennedy, CEO of Advanced Microgrid Solutions, said at the conference. "The markets for those [products] provide the contracted revenue streams that back up your financing." Those markets, however, "are still very volatile and very immature," she added.

One of the hurdles to combining storage with solar is an IRS restriction on qualifying storage for the federal investment tax credit. Current rules require at least 75% of the battery charge to come from solar power in order to qualify. “Right now the [investment tax credit] is starting to outlive its usefulness and it needs to be changed in order to attract energy storage to be paired with solar,” Kennedy said.

Under the current rule, storage systems that are entirely charged by solar "have the highest benefit to the developer," according to a recent study by the National Renewable Energy Laboratory, although they "may not provide the highest value to the system as a whole."

Ultimately, the study found, "a [solar] plus storage power plant represents a new class of generation resource that needs to be better evaluated in terms of system planning and operation to maximize its benefits as continued reductions in price drive increased deployment."

Given that uncertainty and the relatively small size of energy storage projects to date, Bank of America Corp. has not yet funded an energy storage project, said Jack Cargas, the bank's managing director of renewable energy finance. The bank, however, is "looking hard at it," he said, noting that an internal study is currently underway. "We do expect to be doing it."