This week we have seen another interesting recent example of big banks becoming increasingly comfortable with debt finance for projects that are built on a merchant-revenue model.
Lloyds, HSBC and NIBC have agreed to lend Greenfrog £100m to build out a 220 MW portfolio of distributed flexible gas peakers in the UK. It’s a similar story for energy storage where Santander have recently announced they are providing financing for grid scale batteries.
Distributed flexible gas peaking assets and energy storage look to be key technologies to help the UK energy system decarbonise over the near-term, facilitating the integration of more variable renewables and deal with peakier demand driven by electrification (e.g. electric vehicle uptake).
There are subtle differences between the investment cases for gas peaking plant and energy storage assets, however they have a commonality which sets them apart from other classes of energy asset investment. Other energy assets such as renewables or larger scale thermal generation can benefit from long-term revenue streams, but contracting revenue far ahead of time can be challenging for gas peaking plants and energy storage assets. This can be seen in the recent Capacity Market auctions clearing at low prices, in limited opportunities to hedge production in the wholesale market, and in National Grid’s movement away from long-term bilateral contracts for Ancillary Services. These factors mean the level of merchant risk attached to such projects can increase significantly.
As banks get increasingly comfortable with these types of distributed asset classes and the associated risks, focus will shift to ensure the assets are coupled with the most relevant optimisation solution. Portfolio owners and operators will need to ensure they have technical solutions in place to maximise profit opportunities for complex portfolios of assets – close to real-time and across different markets.
These shifts make for an exciting future for distributed flexible assets and the businesses able to unlock value from them.
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