KeyBank MD discusses first mover advantage towards banking storage

In a recent conversation with NPM, Aaron Klein, Managing Director with KeyBanc Capital Markets’ Utilities, Power & Renewables Team, outlined the group’s history and strategy, and spoke on topics such as the bankability of stand-alone storage and the impacts of the Inflation Reduction Act.

The renewables lending arm of KeyBank was launched in 2007 out of the utilities coverage group. “When we decided to get into renewables, we created the project finance capability within our underwriting team that was doing those large corporate utility loans,” said Klein.

The group sits within both KeyBanc Capital Markets and KeyBank National Association. As a result, “our business model is structured much more like the bulge brackets versus others in the project finance world,” he said. “We originate and execute M&A/advisory engagements ourselves, then all the products from both the KeyBanc Capital Markets side, and the KeyBank N.A. side, roll up through us acting as industry coverage and the relationship manager.” He believes this presents a strategic advantage as underwriters can speak both languages.

And just as the bank was an early lender in the broader renewables space, it seeks out a first mover advantage within the industry. “Most recently that's continued into storage and now from traditional front-of-the-meter, to behind-the-meter smart grid applications.”

In the last 18 months alone, KeyBank has committed USD 2bn of its own balance sheet to either solar + storage or standalone storage projects, participating in a total of 19 deals ranging from fully contracted to fully merchant. Klein and his team see battery storage as proven, bankable technology, and as such viewed the sector as “an opportunity to lean in, get smart and have a first mover advantage.”

The most recent such deal was announced earlier this week. KeyBank is leading the construction and term debt financing of Amp Energy’s 61 MW community solar and 6.5 MWh battery energy storage portfolio of 13 projects across Massachusetts and New York.

Recent standalone storage financings by the bank include the USD 174.6m Jupiter Power secured in April for six projects in ERCOT, and the USD 219m Plus Power secured from a group led by KeyBank and Mizuho Securities late last year to support its 185 MW/565 MWh Kapolei Energy Storage project in Hawaii. Utility Hawaiian Electric has signed an offtake agreement with the project.

When asked about the differences between banking contracted storage and pure merchant projects, Klein explained that “each have multiple layers that you have to take into account, but some of the generalities are going to be merchant tends to be less levered, tends to be higher pricing, and depending on how much merchant you want, you see some differentiation between some of the banks. Then there's also a second tier of capital you can go to like the non-regulated lenders in the space.”

Klein points to the states where it is easier to figure out monetization as the strongest markets for storage. “California [is attractive], because they have the RA market, the need from the CCAs and PG&E, the duck curve, and the new customer base, there's strong demand building a case there for development and for financing. ERCOT also has a huge need, but you have the risk of taking merchant.”

Beyond storage and traditional renewables, Klein and his team are looking at opportunities in newer technologies such as fuel cells, carbon capture, hydrogen, other forms of storage and electric vehicle support infrastructure, but have yet to ink deals in any of these sectors.

Regarding the Inflation Reduction Act, Klein believes it is fantastic for the industry as it provides a clear signal to invest over the long-term, but that it could exacerbate some growing pains in the short-term.

As it relates to storage specifically, he is concerned something “similar to what we saw play out immediately with EVs, where we've seen upstream supply try to increase their cost to capture as much of that value as they can. We expect to see a tug of war through the supply chain, especially as the supply chain is constrained and manufacturers/suppliers have pricing power. On the other hand, these constraints coupled with some of the new incentives in the IRA, are creating the right environment for more onshoring of the manufacturing/supply chain as it continues to grow and evolve to meet demand.”

Lastly, Klein and his team are particularly “excited for the detachability of the ITC. We believe, and have said for a very long time, that tax equity has outsized power in the overall capital stack. We look forward to seeing that right sized and corrected. [Detachability] will simplify structures, eliminate friction costs, and decrease cost of capital.”

*This story was originally published exclusively for NPM subscribers last month.


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