Financing Energy Storage: A Cheat Sheet

By:  Dr. Chris Wedding, Managing Partner

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The energy storage market is kind of like the Loch Ness Monster — It’s rarely seen. It’s said to be huge. And many think it’s not real.

If you’re like us, you have dozens of articles and reports on energy storage (and other topics) starred for reading later. But “later” never seems to arrive with the free time you needed to read about this high potential market.

As such, we’re providing this “Cheat Sheet for Energy Storage Finance” based on our work as buy-side and sell-side investment bankers experienced in both energy storage venture capital and project finance.
I’m also including some perspectives from my panel last week at the UNC Cleantech Summit entitled “Financing Energy Storage.”

Thanks to Greentech Media, GTM Research, Utility Dive, Bloomberg New Energy Finance, Bloomberg, McKinsey & Company, i3 (Cleantech.com), Lazard, Energy Storage Association, PV Magazine, Rocky Mountain Institute, Renewable Energy World, and Energy Storage News for their great work that helped us compile this research.


The Market Opportunity

Big picture: The rise of energy storage is expected to mirror the giant leap that the solar sector took between 2000 and 2015 (link).

For those of you who rode the solar roller coaster like we did, you might want to get that amusement park seatbelt and whiskey ready. You may need them.

Global Market
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• 125 GW (305 GWh) — Projected market by 2030 (link)
• ​1,000 GW — Market growth by 2038 (link)
• $100B — Investment expected between 2016 and 2030 (link)
• 8 countries — 70% of the anticipated storage capacity expected in U.S., China, Japan, India, Germany, U.K., Australia, South Korea (link)​

​Global Energy Storage Deployment Forecast: 2016-2030E (GWh)
Source: Bloomberg New Energy Finance

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U.S. Market 
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• 35 GW — New energy storage additions expected by 2025 (link)
• $4B -- Cumulative operational grid savings by 2025 (link)
• 167,000 — New jobs by 2025 (link)
• $3.1B — Revenue expected in 2022, up from $440M in 2017 (link)
• 21 — States with 20+ MW of energy storage projects proposed, in construction or deployed (link)
• 10 — States with pipelines greater than 100 MW (link)
• Leading state markets -- California, Hawaii, Texas, New York, Maryland, Massachusetts; details below
• California (2013, 2017) — Mandate of 1,800 MW by 2024 for the state’s big utilities (link)
• Oregon (2015) — Mandate of 5 MWh by 2020 per utility (link)
• Massachusetts (2017) — Statewide target of 200 MWh by 2020 (link)
• Maryland (2017) — First U.S. state tax credit for energy storage; 30% of the cost of a customer-sited installation; $750,000 per year available; available 2018 to 2022 (link)
• New York (2018) — Initiative to deploy 1,500 MW of energy storage by 2025; NY Green Bank could commit $200M for storage-related investments; New York State Energy Research and Development Authority to invest $60M in storage pilots and activities (link)

This September 2018 headline from Bloomberg sums it up well on the residential front: “Residential Energy Storage Surging, No Longer Just a ‘Cool Toy’” (link) Their impetus was two-fold:

• Q2 2018 residential energy storage installations exceeded large-scale battery installations at the utility level (first time ever)
• ​Q1 2018 residential battery installations jumped 9x versus Q1 2017 (link)

​U.S. Quarterly Energy Storage Deployment (MW)
Source: Greentech Media

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​U.S. Energy Storage Internal Rate of Returns for C&I
Source: Greentech Media

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​U.S. Annual Energy Storage Deployment Forecast: 2012-2022E (millions of dollars)
Source: Greentech Media

​U.S. Residential Energy Storage Deployment (MWh): 2013-2018
Source: GTM Research

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Technology

• 95%+ — Lithium-ion’s market share for energy storage technology choice (link)  
• 75%+ — Lithium-ion battery prices decrease since 2010 (link)
• #2 — Rank for flow batteries in energy storage technology choice; flavors include those based on vanadium or zinc bromide; they will gain market traction for their use in long duration discharge scenarios (link)

Angel & Venture Capital Finance

We’re just in the first inning of this game. And for a guy who prefers basketball (born in Kentucky and living in North Carolina), that’s saying a lot.

There’s little doubt that Stem has been the big winner, with almost $300M invested to date. With its focus on artificial intelligence, aggregation of distributed batteries, and managing demand charges for commercial customers, it makes sense.

We’ve also seen a host of energy storage companies get gobbled up by bigger giants eager to get a headstart in the battery game. Enel bought Demand Energy. Wartsila snatched up Greensmith. And Aggreko consumed Younicos. See a longer list here.

No one knows what other innovations will make it to market, but we can guess that they will make storage easy and beautiful, take advantage of multiple revenue streams, serve more than one customer, and be loved by utility giants for the grid problems they’ll help solve.

Here some other statistics for your next dinner party:

• $5.9M — Average valuation of energy storage startups (mostly very early stage), per Angellist (link)
• 100s — Number of energy storage investment opportunities: N=275 (Crunchbase); N=324 (Angellist); N=889 (i3) ​

Corporate and Venture Capital Activity: 2013-2017
Source: i3 (Cleantech.com) ​

​Top Energy Storage Venture Deals: 2016-2017
Source: i3 (Cleantech.com)

​Project Finance

The scale of investments in energy storage project finance will continue to dwarf venture capital investments in the sector.

It’s also worth noting that non-recourse financing -- i.e., no corporate or personal guarantees necessary — is on the way. Three big project developers have won this unique benefit of the project finance model: Powin | RES | Green Charge.

However, limitations to quicker market expansion for battery project finance revolve around these investor considerations:

• Revenue certainty -- “Show me the multi-year contract.” — Revenue has often depended on a spot market (e.g., ancillary services in the PJM market). But investors need the kind of 10-year capacity contracts available in some parts of California.

 

• Revenue diversity -- “Are you ‘stacking benefits’?” — Energy storage projects are unique in their ability to serve multiple masters. However, technology, warranties, policies, and investor requirements (e.g., covenants in loan agreements) often limit projects’ opportunities for multiple revenue streams.

 

• Technology bankability -- “Lithium is king: 95% of the market.” — Surprise! But it’s still easy to be confused by the 70+ battery technologies out there and their tempting “shiny object” headlines, like electronic sirens in a modern day Odyssey.

 

• Strong warranty -- “How big is your balance sheet?” — Big vendors like LG Chem, Samsung, Panasonic, and Tesla have enough data to provide performance and full-wrap warranties. It’s easier for the buck to stop at these behemoths than at an exciting new startup.

 

• Creditworthy offtaker -- “Will I get paid?” -- It’s not unique to energy storage, but the number of offtakers that want energy storage solutions is much larger than those with long credit histories and strong credit ratings. But as you know, the lack of the latter is not the same as a high risk project.

 

• Scale -- “Is the sector big enough to be worth my time?” — If it’s too niche, mainstream investors won’t touch it. But things are changing quickly on this front.

 

• Backup power — “That’s a nice psychological benefit. But there is no real ROI.” — Most residential batteries are sold for backup electricity. However, solar self-consumption and the provision of grid services are two additional ways for these systems to generate stronger ROIs while also providing resilience for the 1% of the time that there are grid outages.

Here some other fun facts for your quiz later:

• 10-20% — Target Internal Rate of Return (IRR) for equity investors in energy storage projects (based on conversations with developers, vendors, and investors, plus research from GTM here and here)
• 8+ — Number of companies providing financing for residential energy storage installations (link)

Economic Values for Energy Storage
Source: Rocky Mountain Institute

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13 Types of Value from Energy Storage
Source: Rocky Mountain Institute

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Stacking the Benefits of Energy Storage
Source: Lazard

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Conclusion

If you’re looking for a Blue Ocean Strategy play in clean energy, something with few competitors and new customers, then the time is nearing when you might be late to the party.

But don’t run away crying and defeated just yet.

With $100B of expected investment in the sector over the next 12 years, “the cup runneth over” with opportunities, whether your cup of tea be VC-stage innovation with hundreds of possible winners to choose from, or perhaps project finance targets for lower risk and much bigger capital deployment.

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Shout out to Thomas Kelley for the cool Volts photo.