How Germany’s DAL finances large-scale batteries
pv magazine: What role does the financing of battery energy storage systems play for you?
Peer Günzel: For about two years, we, at DAL, have been working on financing large-scale battery [energy] storage systems. We approached this topic cautiously from the outset, due to the risks involved. Previously, these projects were only remunerated for [grid] primary control energy or as part of innovation [clean energy] tenders, and they were largely ignored. Due to significantly lower investment costs and the fact that it’s now possible to make money through energy trading, entirely new investment cases for battery [energy] storage systems have emerged in recent years. Nevertheless, the question remains whether this arbitrage [charging from the grid when electricity prices are low and dischraging when they are high] will work as intended in the long term. Cash is generated largely from the, hopefully cheap purchase of electricity and the more expensive [subsequent] sale of electricity. Since the speed and scale of battery [energy] storage expansion is unclear, it’s very difficult to estimate how long the battery [energy] storage systems will be able to generate … planned arbitrage profits which are sufficiently high to cover not only operating costs but also [finance] interest and repayments.
How do you deal with this uncertainty?
We put a lot of work into it and used many electricity price studies from various providers as a basis. After we encountered a situation where, from one day to the next, a provider of such electricity price studies reduced its compensation expectations for these storage systems by 30%, we decided to take a closer look at our risk parameters. Why? Because, of course, if we had based the financing on the old yield forecast for this battery [energy] storage system, we would have run into difficulties with our financing structure.
What was the reason why the provider of electricity price studies reduced its revenue forecast by 30%?
This was, essentially, simply a change in the market assessment by the provider, who didn’t reveal his cards exactly. If it had been 3% or 5%, it would have been understandable, because that can be [caused by] market mechanisms. But when even those who have studied the situation intensively can be off by 30% in their forecast, you quickly come to the conclusion that, as a bank, you’d actually prefer to have a tolling agreement [when a battery is leased to a third-party for a fixed fee] in place, for example, in order to set up solid and, in some cases, long-term, reasonable financing. This gives the operator, and thus also the bank, a certain degree of security for the revenue from the battery [energy] storage system.
But you finance not only when you have a tolling agreement but also when you market the energy storage as fully merchant, meaning you rely on current market revenues. How do you manage the risk in that case?
Exactly. We’re financing that too. We apply significant risk discounts to the projected returns from the earnings appraisals. This means that we apply a further double-digit percentage reduction to the [already] conservatively forecast earnings. We only contribute enough debt to this financing to ensure a sufficiently solid debt service coverage ratio [the ability of a borrower to make its repayments]. This provides an additional buffer to absorb any market price fluctuations.
This means the investor needs more equity. How long is the typical financing term?
We see terms of up to 10 years. They’re usually a bit shorter, whether through a cash sweep or a dividend lock, where dividends can no longer be paid to equity investors if certain parameters are breached. This can be done either as early repayment at the end of the loan or in the form of an additional savings account, where an additional cash reserve is saved.
Are fully merchant projects a discontinued model in the medium term because, although revenues are currently very high, they could settle at a lower level in a few years’ time?
Personally, I’m skeptical about whether we’ll see fully merchant projects in the future, once the demand for these energy storage systems is increasingly met and everyone has the same operating model. If everyone buys cheap and sells expensively, supported by AI [artificial intelligence], at some point they won’t be able to realize arbitrage anymore. In my opinion, this makes the fully merchant approach difficult in the medium to long term.
Do you have enough insight into your customers’ profitability calculations to be able to say whether it is more worthwhile for them, under the given conditions, to become fully merchant, to live with less debt and shorter terms; or to enter into a tolling agreement?
Full merchanting is, of course, very lucrative for anyone currently investing. With tolling agreements, you simply have significantly lower returns. Of course, those who assume the price risk are rightfully compensated for it, even if they have other options than a project developer to minimize the risk. But tolling agreements provide price certainty, especially from the perspective of the financing bank. On this basis, they can finance things they might not otherwise, and with more leverage.
Large photovoltaic power plants are now almost always planned with storage. What is the financing like?
These large photovoltaic projects are now predominantly being planned or built with storage because the issue of negative electricity prices will be very relevant over the next one, two, perhaps even three years. If I, as the operator of a photovoltaic system, want to conclude a PPA, it is more attractive for the PPA offtaker if I can distribute the electricity relatively evenly throughout the day. For example, I can fill a four-hour storage unit at midday and then make the electricity available in the evening, at night, or early morning. This allows me to achieve a higher PPA price.
Will these energy storage facilities, then, simply be co-financed under the same conditions as the photovoltaic project?
Yes, they are co-financed. This is then a complete project financing. Regarding the proportion of debt, one needs to take a closer look. The higher the PPA price, the more debt a bank can generally provide.
Given the current market situation, it’s difficult to conclude PPAs that finance photovoltaic systems. Do you currently see any projects where PPAs are successfully concluded by adding a battery?
We’re still in the initial phase. There are already the first developers and projects underway … These are important. Unlike in the past, the offtaker will no longer want to bear the risk of negative electricity prices. This has led to a complete rethink. However, if I transfer the risk of negative electricity prices from the offtaker to the producer, the producer will, of course, also have to consider how to handle this. This is not yet standard for PPAs.
From pv magazine Deutschland.
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