ERCOT glut of battery storage projects for sale, but financing market evolving to support buyers willing to take risk
ERCOT has blossomed into a buyers markets for standalone storage as it has increasingly been flooded with available projects, while questions remains around financing for merchant storage projects, said multiple market participants interviewed for this story.
At present, NPM's queue data shows 133 storage projects totaling 15.66 GW of interconnection applications in ERCOT. There are also 558 applications, with no IA, totaling 89.32 MW.
LevelTen Energy said in a report earlier this year that buyers have shifted their focus to more advanced projects with a COD date no later than mid-2025 and are targeting metropolitan regions, where ancillary prices are anticipated to hold up against greater competition.
The sentiment in the market is that project finance exists for merchant projects, but only under limited circumstances, while tolling contracts, which have just recently been introduced in ERCOT, are only making things slightly easier.
Merchant storage projects are getting financed through equity, debt and tax equity, but the equity component is considerably higher given the merchant component, said one industry participant.
“There are many equity investors willing to buy merchant, some for trading, some for firming (or maintaining output from an intermittent power source for a required length of time) and some for matching,” added Andrew Waranch, founder of Spearmint Energy, whose firm acquired a 900 MW portfolio of BESS assets in ERCOT, known as Nomadic, with a forecast timeline of reaching NTP on its first project in early 2024 and commercialization within 12-18 months, back in March.
Storage projects getting debt financed have to have a good nodal location, access to ITC transfer/tax equity and a trading team who can effectively capture revenue, added Waranch. Other industry sources point to a strong track record also being necessary to raise financing.
Broad Reach Power announced a USD 435m debt financing in July supporting six standalone projects in ERCOT and one project in CAISO. The financing, arranged by Deutsche Bank, was to support late-stage projects as they were all under construction and expected to commercialize by the end of the year through 1Q24. Separately, Jupiter Power announced a USD 70.4m construction and term loan facility to supporting two projects, spread across 160 MW/320 MWh.
Tolling contracts are relatively new to ERCOT, but in other markets such as CAISO, the contract structure is more tenable. One industry source said that lenders are willing to provide debt service coverage ratios as low as the 1.2x-1.3x range, cheaper terms relative to merchant, and attract more equity investors.
However, another developer said in ERCOT, tolling contracts were usually in the five-year range as opposed to other markets where they might be as long as 20 years.
Jupiter, a portfolio company of Blackrock Alternatives, through a fund managed by its Diversified Infrastructure business, signed a tolling agreement on its operational 100-MWh Crosset I storage asset in West Texas with Hatch EQ. The agreement would require Hatch EQ to provide a “fixed multiple-year revenue” stream to Jupiter in exchange for the right to dispatch and collect market revenues for the project.
The Inflation Reduction Act of 2022 introduced an investment tax credit (ITC) of 30% for standalone storage, which was considered transformational for the sector. The IRA also enabled transferability in tax credits, where storage projects have become natural players for these type of transactions since the “revenue profile is harder to underwrite in traditional tax equity structures.”
The Buy-In
This past summer, the like of Granite Source Power, Hexagon Energy, Recurrent Energy, UBS Asset Management, Cypress Creek Renewables and Balanced Rock Power are actively selling portfolios of projects in ERCOT.
Transactional flow has been slow, but a few deals have cleared in recent weeks. Samsung C&T agreed to sell and develop 15 projects in Texas to Sunraycer Renewables, including 2 GWh spread over 9 battery storage projects, with the balanced being solar. Advanced Power also sold its paired Oriana Solar project—slated to being construction in 1Q24—to Sabanci Renewables.
Spearmint Energy’s chief development officer Peter Rood said a lot of the projects being shopped that they have come across lately have not executed interconnection agreements (IA), making commercialization assumptions a high risk.
“There is a very high risk that CODs will slip, if the IA is not yet executed given the uncertainty due to lack of transmission service provider transparency and unpredictability of delays in completing interconnection studies and finalizing IAs,” added Rood.
*This story was originally published exclusively for NPM subscribers last month.
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