Storage winning battle for investor confidence

Investment in energy storage has grown substantially in recent years, but the sector has not always been an easy sell to investors.

Bloomberg New Energy Finance reported in January that global investment in the sector more than doubled from $2bn in 2017 to $4.5bn in 2018. This then slipped 20% to $3.6bn invested in 2019, and $3.6bn again in 2020.

Meanwhile, according to figures published by Mercom, in the first quarter of 2021 battery storage companies raised a total of $994m in venture capital funding across 13 deals. This compared to $164m across six deals in Q1 2020.

As the energy storage industry continues to mature and refine its investment processes, we expect to see a rise in financing deals once more. Even so, the industry has experienced several hiccups when it comes to financing.

Reticence recedes

One such obstacle is the fact that storage is unique as an asset class, particularly in the way it generates revenue.

Speaking in a recent panel staged by the US Energy Storage Association (ESA) at its annual conference, Thomas Byrne, CEO and co-founder at CleanCapital called storage “a fundamentally different asset class with wildly different revenue models” when compared to other renewable energy sectors. As a result, investors have felt uncomfortable with the risks associated with storage developments and have been reticent to plough in their money.

Byrne added that storage has features that make it more challenging than other asset classes. For example, he highlighted how it is difficult for investors to enter the sector if they lack in-house expertise. He said those who are “successful in storage are those who built a team in-house”.

However, as the industry has begun to establish itself, more and more expertise has been developed and thus the industry has become less challenging for investors.

Another issue that has hindered energy storage investment relates to the issue of organising revenue streams. Speaking on the ESA panel, Deanne Barrow, senior associate at Norton Rose Fulbright said developers “try to lock in a revenue stream for each service which means you'll have multiple revenue streams and multiple contracts”. As pioneering energy storage deals are completed, though, there has been a “robust evolution of performance guarantees” which has solved the problem.

Remaining hurdles

The panel showed there are still some hurdles to clear before some investors will take the plunge and enter the storage market. One issue is hesitancy among investors when it comes to financing new battery technology. It’s important that investors feel secure with the guarantees provided by software providers, but this is not always the case.

Byrne said there was a perceived liability regarding new software start-ups who develop innovative storage technology as there is no long-term certainty.

Generally speaking, there is a reluctance to be the first to invest in a technology. This means that, even though investor interest in energy storage is on the increase, most of that interest is currently directed at lithium-ion batteries, which has been commercialised and is therefore considered more reliable.

But there is considerable optimism regarding the future financing of storage.

Development-stage financing, construction debt financing and equipment vendor financing are just some of the investment methods that have become more prevalent in relation to storage in recent times.

We’re also seeing larger projects reach financial close and giga-factories becoming commonplace. Financial innovation is needed in the development of these types of investments and contracts.

In addition, greater security for investors is being created by the development of insurance products for new storage technology, as Barrow highlighted.

Byrne also noted that, in the US, the Department of Energy was “a powerful tool in 2010-2012 in getting solar and wind financed” and could have a similarly beneficial impact on storage. He pointed to a bill recently introduced in the US to overhaul and simplify tax credits and provide a 30% investment tax credit for energy storage.

Investors have already surmounted many barriers to investing more in storage – and they will have more to negotiate as the sector shows it is an attractive asset class.