Wednesday, September 27, 2017

Southland Charges Up Battery Storage Financings


The largest non-recourse financing of energy storage assets anywhere in the world is the US$2.3 billion financing of the AES Southland project in the USA that closed in June 2017. The project included a 100 MW, utility-scale battery energy storage system located in California, a 10 MW utility-scale battery energy storage system in Arizona and two combined-cycle gas-fired power projects with a combined capacity of 1,284 MW in California. The 100 MW battery will provide capacity to the local utility, Southern California Edison, under a 20-year power purchase agreement (PPA).

Although Southland is the largest financing of an energy storage project to date, it relied heavily on the cash flow generated from the two large gas-fired power plants that were part of the portfolio. Each asset has a separate revenue stream under its own PPA, and the revenues from the gas-fired PPAs dwarfed those from the battery storage assets. Thus, the level of scrutiny for the energy storage projects in the Southland portfolio wasn't as rigorous as the lenders may require for the financing of a stand-alone energy storage project of this size.

As is often the case in project financing, the key to getting the deal done was for the project to secure a long-term offtake agreement with a creditworthy offtaker. The PPA structure that was employed in Southland, and which has emerged as the dominant model in California, is a classic tolling agreement. Under this structure, the project receives a large capacity payment and a small, variable operation and maintenance payment. As would be the case with a conventional power tolling agreement, the utility-offtaker is responsible for supplying and paying for the input, in this case, charging electricity. In return, the utility has the right to charge or discharge the battery as it sees fit, 24 hours a day, 7 days a week. The project company has the obligation to ensure that the battery meets certain minimum efficiency standards (which can be fixed or decline over the life of the contract) and availability requirements, and to discharge the battery at a certain rate. Failure to meet these requirements leads to a reduction in capacity payments.

The Southland project did not have a fully-wrapped EPC contract for the battery systems. It remains to be seen whether lenders in stand-alone energy storage financings will require a fully-wrapped, turnkey EPC contract or will get comfortable with a separate supply agreement between the battery manufacturer and the project company. Whether or not the EPC contract is fully wrapped, an area of focus will be the scope and duration of the warranty for the battery. Based on what we have seen, a warranty covering performance for a period of 10 years appears to be market for lithium-ion technologies.