There are two distinct markets that are central to a discussion of battery storage finance.

First is a broad market of different segments of creditworthy commercial customers able to access conventional financing; and second, there is a separate market of property owners and project developers seeking financing for affordable housing and community facilities in LMI communities.

In the larger commercial markets with strong utility rate structures and policies, we are starting to see significant commercial activity for battery storage that is supported by robust financing tools.

A key finance tool commonly used by independent power producers for conventional power plants is non-recourse project financing. In these transactions, the credit risk is limited to the project itself; the project sponsor is not obligated to backstop the project’s loan payments. Non-recourse project financing allows project developers that may not have large balance sheets to be able to access financing on commercially reasonable terms.

Now we’re beginning to see more battery storage projects be developed with non-recourse project financing (2). Least risky are those projects where loan payments are fully covered by payment streams under long-term power purchase agreements (PPAs) from investor-owned utilities. There is also an increasing number of projects that combine merchant revenues (non-contracted payment streams) with contracted utility PPAs. The more loan repayment relies on merchant revenues, the greater the risk and the higher the cost of financing.

In 2017, Macquarie Capital, with CIT Bank, closed on the first non-recourse project financing facility ($200 million) for a portfolio of behind-the-meter (BTM) commercial projects totaling 50 MW of battery storage systems. The projects were acquired from Advanced Microgrid Solutions and are located at commercial, industrial and government properties throughout Southern California (3).

Through the acquisition of 80 percent of the start-up Green Charge by ENGIE (a French multinational electric utility) in 2016, Green Charge now has direct access to capital markets and nonrecourse debt to build out its BTM pipeline of commercial and industrial projects and expand into utility scale projects (4).

These types of acquisitions are a clear sign of financial confidence in the energy storage market. And in the monopoly utility states without competition, large-scale energy storage projects are typically rate based, solving that financing issue. Captive customers are obligated to repay utility-scale storage projects through their electric bills.

This is also occurring in one state, Massachusetts, which is a competitive, restructured state. Massachusetts has allowed its electric utilities to rate base energy storage projects as a “non-generation asset.” (It should be noted that where energy storage projects can be financed by utility ratepayers, it can create an emerging problem of utility market power that could undermine competitive, BTM markets.)

Outside of the vertically integrated monopoly states, new energy storage market activity is dependent in large part on firm and clear regulatory signals and state and federal policies.

The most active commercial storage market is in California and is driven by a three-legged stool of high demand charges, an aggressive utility storage mandate, and the state’s Self Generation Initiative Program (SGIP) incentive.

That combination has resulted in an active market of new storage start-ups and other solar companies moving into the storage market with well-financed products and services on offer. A case in point is the partnership between Generate Capital, Sharp’s Energy Systems and Services Group and SolEd (a solar+storage developer structured as a B Corporation focused on the municipalities, schools and non-profit organizations markets). Generate Capital has been able to secure California energy storage incentives for solar+storage systems to reduce utility costs for six California public schools (5).

In commercial markets, the key to being able to finance battery storage projects rests on policy. Strong state mandates and incentives, coupled with federal incentives like the paired solar+storage investment tax credits (ITC), have opened a path for financing portfolios of storage projects. If other states want to see their storage markets develop and bring in finance players into that market, they need to implement similar storage policies. The low-income market is another finance story entirely. The dramatic success of clean energy technologies like solar PV over the last decade has largely bypassed disadvantaged communities.

Contributing to this lag in market uptake is a persistent financing gap. Solar+storage projects are vastly underrepresented in affordable housing and community facilities across the country (6). Current models of financing clean energy systems do not sufficiently serve low-income communities, if they serve them at all. That is, there is a lack of capital to invest in these systems in these markets.

Why is it that solar+storage projects that could reduce utility bills and create more resilient power systems for people who need the benefits the most (7) are unable to reliably access financing?

Many nonprofit property owners serving low-income communities are viewed by lenders as having limited cash flow to service additional debt, making it difficult to access financing for energy upgrades.

Additionally, nonprofit owners of affordable housing or community facilities have difficulty accessing solar+storage tax equity markets. Tax-exempt entities have little if any tax appetite and the tax equity investors that have purchased low-income housing tax credits (LIHTCs) for affordable housing projects have little experience with how solar+storage projects and their ITCs perform in multifamily housing.

In the case of stand-alone solar PV systems, third-party ownership and lease financing models have greatly expanded the market for solar PV by providing no-down payment, 100 percent financing. But in many instances, it has also obligated property owners to long-term leases with recurring payment escalators and unclear bundled operating, management, and financing costs—which present an especially tricky problem for LMI customers or property owners who may have little ability to absorb increasing costs. For these and other reasons, residential direct ownership of PV systems overtook solar leasing in the United States in the last quarter of 2016 (8).

To overcome some of these financing obstacles in low-income communities, in 2017 Clean Energy Group issued a report, A Resilient Power Capital Scan (9), that identifies multiple barriers to financing solar+storage technologies in low-income markets and proposes a broad range of investment opportunities that foundations and socially minded investors can use to address these barriers.

The report makes the following observations:

• There are too few completed projects in the LMI space for other interested building owners to evaluate. That lack of replicable completed projects makes scale hard to achieve.
• Property owners and advocates are still largely unaware of the economic, health, and community resilience benefits of solar+storage. This constrains demand for financing.
• There are insufficient performance data. Building owners and lenders want to be able to analyze a track record of successful project development and operation over time.
• There is too much uncertainty regarding how project pro formas compare with actual operations, information that is important in financial underwriting and structuring PPA and energy service contract terms.
• It is difficult for many behind-the-meter building-specific projects to reliably access tax credit investment.
• In general, there is a chicken-and-egg issue facing the current LMI market: Predictable access to well-structured finance is needed to justify the work of developing projects, but investors aren’t willing to commit capital without the assurance of a ready pipeline of financeable projects.