The Art of Financing Battery Energy Storage Systems (BESS)

Elgar Middleton has extensive debt and equity experience in arranging finance for BESS portfolios, having closed three market-leading transactions in the UK in the past 18 months totalling more than £600m. Our experience covers bankable revenue structures (such as merchant vs fixed / floored optimisation arrangements) and bankable technical arrangements including around BESS duration, warranty length, cycling limits, and degradation curves.

The Climate and Net Zero….

The lowest hanging fruit of the energy transition has long been recognised to be the decarbonisation of the electricity sector, which has been satisfied by a large increase over the past c.20 years of intermittent generation capacity, predominantly wind and solar.

The ever-increasing intermittent generation supply and a move away from large steady state carbon generating power stations create a more volatile energy market, with increased imbalance potential arising from sudden changes in the weather. Unforeseen low wind and low temperatures in the winter can lead to soaring intraday wholesale market (WM) and balancing mechanism (BM) prices when demand massively outstrips supply, or alternatively the prices can swing downward when there are unexpectedly milder conditions and/or strong winds – even giving rise to significant periods of negative pricing due to the surplus of supply versus demand. All of this leads to increased volatility and wider pricing spreads for each MWh bought or sold. The sudden and unpredictable supply / demand imbalance suits BESS which can deploy during periods of high demand at peak prices or receive a premium when there is high supply and negative prices. Over the past 3 years this had led to a huge increase in the deployment of BESS in the UK from under 1GW online at the end of 2020 to 4GW by the end of 2023.

Capacity Market and Ancillary Services

WM and BM revenues are examples of energy trading revenues: participation in a market that (in theory) balances supply and demand in each period to give the best deal for consumers.  The supply of electricity needs to be reliable as well as cheap, giving rise to further opportunities for BESS assets that less sophisticated zero-marginal cost generators (such as wind or solar) might bypass. For instance, the UK seeks to manage a degree of safety margin by awarding Capacity Market (CM) contracts through the National Grid’s Electricity Transmission System. These contracts are awarded on either a one- or fifteen-year basis and provide stable revenues for BESS.

Not only are BESS well suited to responding rapidly to supply and demand imbalances through energy trading but they can also help manage the stability of the grid through frequency response contracts, which in the UK, fall under the umbrella of ancillary services. The current suite of products includes Dynamic Containment (DC), Dynamic Moderation (DM) and Dynamic Regulation (DR). Together these services provide system control services to maintain the grid within 50 Hz +/- 1%, and some (particularly DC) are well suited to BESS given its ability to respond very quickly (sub 1 second) to ensure small deviations from the target frequency do not develop into larger issues. NGESO is responsible for the award and management of these services.

There are some subtleties around the awarding of these contracts, including the time period for which these contracts are held and when they are contracted relative to the delivery of the service, but one important point is that these are in general remunerated on a £/MW basis – unlike energy trading revenues which are remunerated on a £/MWh basis. So (again in general – the experience of specific assets in specific market conditions may vary) shorter-duration or degraded older assets (i.e., assets with lower MWh-to-MW ratios) might expect to see a greater share of their revenues coming from ancillary services rather than the WM or BM.

Dynamic Stacking

There are only limited restrictions for qualifying BESS assets on bidding for CM contracts or ancillary service contracts as well as bidding into the WM and BM in any given half-hour period. This freedom allows BESS participants to stack revenues across multiple revenue streams in the same trading periods. This flexibility increases BESS efficiency in delivering services, increases competition and in turn should reduce costs to the consumer.

In addition to the various stacked revenues relating to delivery of ancillary services or energy trading activity there is also scope for ‘churn’ as the icing on the cake. This is simply unwinding a physical contract to deliver in future (say, in the day-ahead wholesale market) prior to physical delivery (say, by taking an offsetting position in the intraday or balancing markets) for a profit. This is valuable because it allows the asset to respond to rapidly evolving market conditions at almost no marginal cost (including avoiding degradation from the charging and discharging of the asset that is necessary for physical delivery). 12-18 months ago, this revenue stream would have been seen as some sort of esoteric equity upside but is now accepted as a normal part of BESS operations and forms part of a bankable business case.

Optimised and Arbitrage Trading

There is usually a separation between asset owners and asset operators, as there are very different barriers to entry in owning a BESS asset compared to trading power in the regulated electricity markets. As the various revenue streams and asset classes are better understood there have been a number of trading counterparties establish themselves in the marketplace: some of these are inhouse teams of the big utility companies while others are bespoke nimble trading platforms which have joint ventured with a larger corporate to provide bankable products. The range of products has evolved such that ten-to-fifteen-year Optimisation Agreements (OA) now exist with offerings for both fixed price and a floor plus an incentive pass through arrangement to align the interests of an asset owner or financier and an optimisation trading counterparty. Optimisers operate within technical parameters set from time-to-time by asset owners. While a CM contract and OA floor cannot fully protect senior debt it does underwrite a significant degree of market protection, although senior debt providers still need to assume some market risk to participate in the BESS sector.

There is no doubt as the trading platform optimisers evolve there is almost certainly going to be some divergence in performance as those with the most agile platforms will adapt to maximise arbitrage revenues between the physical and virtual markets across both the WM and BM. Many contracts that we see used for debt-financed transactions recognise this optimiser performance risk by ensuring that asset owners have the right to replace the counterparty where performance is poorer than had been advertised.

Duration, Warranty, Cycling, and Degradation

BESS assets are more technically complex than many of the assets that come across the average UK project finance lender’s desk. This nascent market is rapidly adapting to several somewhat unpredictable factors and its impact on both senior debt cover ratios and equity IRRs. The four key technical parameters of duration, warranty, cycling and degradation impact both the project economics and the risk profiles for lenders and asset owners.

BESS duration first began commissioning at one hour in the UK market, but two hours is now the norm. This reflects that historically the ‘buy low, sell high’ approach that underpins arbitrage business models has become increasingly viable as costs have fallen and wholesale market volatility has increased. This trend now means that some of the newest systems now benefit from four-hour duration to offer even greater trading flexibility. Higher storage duration has a non-linear impact on both capital expenditure and revenues so careful analysis is required to ensure it can be properly evaluated from an equity IRR perspective.

Similarly, warranty duration, correlated to senior debt gearing, needs to be considered over various time periods to find the optimum solution between equity IRR and senior debt gearing. Our experience is that the warranty period is often the constraint for prospective BESS lenders and hence paying for an additional warranty at the back end of the expected asset life can ‘pay for itself’ through increased debt capacity – although again this will depend on the cost of the product and the broader warranty package on offer, where there is as yet limited convergence on a market standard offering.

The cycling strategy is a function of the local market dynamics and the optimiser’s deployment plans and there are various conflicting viable solutions in the UK, typically between one and two full cycles per day. Again there are equity and senior debt considerations, as a higher cycling strategy may quite possibly suit both equity and senior debt, given increased revenues, but this comes at a cost (increased degradation) which is non-linear and potentially conflicts with either the cell manufacturer’s warranty package or, for less extreme increases in cycling, with the lenders’ base case – meaning that the cashflow projections late in the asset life become less reliable. These conflicts are often resolved by limiting annual cycling which needs to be included in the equity return calculations. Another option, popular with lenders but not always with sponsors and not always required, is some kind of upside-sharing approach that de-risks lenders. The principle is that if outperformance comes about from higher cycling than base case, then this should pay down debt at the back end of the project where the cashflow forecasts are now less reliable.

Evolution of the Senior Debt Market

When Elgar Middleton first began seeking senior debt for BESS in 2018 there were at most two debt funds willing to consider financing the new asset class. Having now closed three quite different structures there are over twenty senior lenders in addition to a range of debt funds able to finance UK BESS. The approach of different lenders to sizing fixed vs variable revenues, views on floors vs fixed revenue, and debt maturity have hugely different outcomes for sponsors. Unlike solar and onshore wind, one size does not fit all; some lenders will size over twenty years (and factor in a full cell replacement programme), and others don’t require any fixes or floors. More broadly, different lenders make different assessments of both the type of revenues that they class as contracted (most classify ancillary services as merchant, but some classify these as contracted or somewhere in-between the two) and the level of contracted revenue that they require to lend over different time horizons. All of this offers maximum flexibility for a sponsor depending on its key drivers with lots of possibilities to contemplate.

Co-location of solar and BESS

Having financed a mega £500m solar and BESS pipeline in the UK there is huge debt appetite for this combination. Solar and BESS complement one another well, when solar is dispatching there is limited expectation that BESS will be dispatching and so the grid can be shared. This gives a material saving on both time (given the current state of the grid connection queue) and cost with minimal impact on revenue.

The benefit of solar provides a high degree of revenue certainty, which is key for lenders who require a certain level of contracted revenue across the assets taken together; a solar asset with a fixed price PPA with an investment-grade counterparty (or, for newer assets, a UK government-backed CfD) may be largely or wholly contracted, allowing a more merchant approach to be adopted on the BESS. There is also additional downside protection when looking at the assets together, partly from diversification of revenue streams and partly from lenders taking comfort from excess solar cashflows at the end of the asset life being used to support lending against the BESS.

Taken together, this enables a co-located scheme to achieve higher gearing and take a more aggressive optimisation strategy to further enhance equity IRRs while also providing lenders with strong cover ratios. This results in material interest rate margin savings for a co-located scheme versus standalone BESS. We see this effect irrespective of the technical or contractual arrangements for the solar and BESS and so is worth pursuing even on physically separate portfolios of assets (where the cost savings are less material, but the financing benefits are still there).

Bringing it all together

Elgar Middleton has extensive knowledge of, and experience in financing, co-located BESS, standalone BESS, BESS duration, warranty duration, cycling, degradation, floors, fixes as well as the various stacked revenue streams and the interaction between all these factors. For each transaction we will work with the sponsor to develop a bespoke financing strategy and analysis to evaluate a customised physical system and the revenue profile to optimise the structuring of equity IRR and senior debt gearing.

Elgar Middleton completes the refinancing of a 130 MW 22 site solar portfolio in the United Kingdom

Elgar Middleton is delighted to have advised Arjun Infrastructure Partners on the financing of 22 solar PV farms, totalling 130MWp, in the United Kingdom.

The twenty two operational solar projects all benefit from UK ROC subsidies of varying vintages.

Elgar Middleton advised Arjun Infrastructure Partners throughout the financing process which had some complexities as the portfolio is one of the UK’s more established solar portfolios.

Following a funding benchmark exercise NatWest Bank was appointed to provide over £100 million of long-term non-recourse debt and ancillary facilities and worked diligently with Arjun to close the transaction in a timely manner.


Foresight reach financial close on the RCF financing for their ITS Fund

Elgar Middleton are pleased to have advised Foresight Group LLP (“Foresight”) on the RCF financing for their ITS Fund.

The Foresight ITS Fund was established to provide a diversified real asset investment portfolio for retail investors. The Fund has been investing for over 10 years in mainly UK situated infrastructure assets, including renewable energy generation, telecommunications, forestry, social infrastructure, and biomethane refuelling.

The RCF provides additional capital for the expansion of the existing portfolio investments and will also provide Foresight greater liquidity during their acquisitions of new portfolio investments.

The facility was provided by Hamburg Commercial Bank AG.

Elgar Middleton was exclusive financial advisor to Foresight on this transaction.

Cero Generation completes the financing of their Larks Green BESS project

Elgar Middleton are delighted to have advised Cero Generation (“Cero”) on the financing of their 49.5 MW (99MWh) Larks Green Battery Energy Storage System.

Cero was able to leverage the strengths that stem from co-located projects to obtain a robust financing solution.

Elgar Middleton advised Cero through the financing process to secure £26.3m of construction finance. The finance was provided by Rabobank, who also financed the Larks Green solar project.

The BESS project has enabled the establishment of long-term partnerships with both Canadian Solar as the lead on the engineering, procurement and construction (EPC) for the battery, and EDF as the battery performance optimiser. Together, the projects will form the UK’s first co-located solar and battery storage project to feed electricity directly into the transmission network.

This transaction marks the second BESS financing that Elgar Middleton has closed this month and demonstrates the firm’s capabilities in structuring robust financing solutions for newer technologies such as battery storage.

DIF Capital Partners reach financial close on their 540MW co-located solar and battery portfolio

Elgar Middleton are pleased to have advised DIF Capital Partners (“DIF”) on the financing of their UK-based solar generation and battery storage portfolio.

The portfolio consists of seven ready-to build assets equating to a total capacity of 720MW of which 380MW is solar and the remaining 340MW is BESS. Elgar Middleton facilitated the senior debt financing of the first 540MW of the portfolio. The financing encompasses not only senior debt, but an equity bridge loan provided by the group of senior lenders (ABN Amro, ING, Rabobank, NAB, KFW and Lloyds) and an accordion facility to enable the build of the final 180MW of the portfolio.

The first two projects within the portfolio are under construction, with an expectation that all projects will be operational by 2025.

This co-located solar/ battery storage portfolio was acquired by DIF in November 2022, 10% is owned by ib vogt with the remaining 90% sitting within DIF Infrastructure VII fund.

TagEnergy finances the first stage of the Golden Plains Wind Farm in Victoria

Elgar Middleton is delighted to have advised TagEnergy on the financing of Stage One of the Golden Plains Wind Farm.

With all agreements now in place, building the A$2bn, 756MW Stage One development will begin early in 2023, with the project expected to start producing green energy in the first quarter of 2025. The engineering, procurement and construction work and turbine supply will be undertaken by Vestas and will feature 122 wind turbines.

Once both stages are complete, Golden Plains, which is 150 km west of Melbourne, will be Australia’s largest wind farm at 1,300 MW. It will supply sustainable energy for more than 750,000 homes and feature a 300MW battery storage facility that will add flexibility and stability to the grid.

Elgar Middleton was exclusive financial advisor to TagEnergy, the sole investor, and assisted in securing an innovative non-recourse financing package from a lending group comprising Commonwealth Bank of Australia, Westpac Banking Corporation, KfW IPEX-Bank, Mizuho Bank, Bank of China, EKF, Denmark’s export credit agency and the Clean Energy Finance Corporation, Australia’s government owned green bank.

Financial close was achieved without the need for power purchase agreements (PPAs) and reflects TagEnergy’s pioneering investment strategy as well as an increasing willingness among banks to adopt innovative approaches to funding renewable energy in the Australian market.

Elgar Middleton is excited about the future of the Golden Plains project and, in particular, its ability to assist in the decarbonisation of the Australian electricity grid for many years to come.

Federated Hermes completes the financing of a wind farm in Scotland

Elgar Middleton is delighted to have advised Hermes GPE LLP (“Federated Hermes”) on the holdco financing of its majority stake in the 144MW Fallago Rig Wind Farm (the “Project”)

Federated Hermes was able to leverage the Project’s robust contractual structure and high proportion of fixed revenues to obtain a competitive financing package. This included PPAs with EDF Energy plc and BT plc.

Elgar Middleton advised Federated Hermes throughout the financing process to secure c.£132 million of long-term non-recourse debt and ancillary facilities.

Boralex acquires Infinergy and secures a 338MW renewable pipeline in the UK

Elgar Middleton is delighted to have advised Boralex on the acquisition as buy-side financial advisor

Boralex acquires Infinergy’s interests in the United Kingdom. The transaction includes Infinergy’s portfolio of projects in development and its 50% interest in a joint venture formed with Boralex in 2017, as well as the integration of the Infinergy team into Boralex.

With this acquisition, Boralex now owns a portfolio of 338 MW of wind and solar power and energy storage projects in the UK, including 232 MW owned by the joint venture with Boralex and 106 MW owned directly by Infinergy.

Infinergy’s team of 9 employees will join Boralex, enabling the acceleration of project development, including projects currently being explored in the high-potential UK market. Boralex will gain from the expertise of a team that has been developing energy projects for 19 years and has successfully completed approximately 300 MW of projects in the UK.

The transaction will enable Boralex to benefit fully from the revenues and optimisation initiatives related to the future operation of projects under development and ready for construction, including the Limekiln project. A symbol of the early years of the Infinergy-Boralex joint venture, Limekiln Wind Farm is one of the more advanced projects in the agreement. In May 2022, this project received planning permission for 110 MW of capacity, enough to power more than 96,000 British households. It is scheduled to be built in 2023.

This acquisition provides Boralex the opportunity to strengthen its European presence in markets with a high potential for further development. Its strategic plan calls for doubling its installed capacity worldwide to 4.4 GW by 2025 and again, to double such capacity between 2025 and 2030.

Octopus Australia refinances 333MWdc Darlington Point Solar Farm

Elgar Middleton is delighted to have advised Octopus Australia on the refinancing of a solar portfolio in the New South Wales

Octopus Australia’s operating solar farm, Darlington Point Solar Farm 333MWdc / 275MWac is located in New South Wales, Australia and is the largest operating solar farm in Australia.

Octopus Australia secured a tailored financing package of approximately A$200m from a syndicate of banks comprising Commonwealth Bank of Australia, Westpac, Deutsche Bank and Bank of China.

We are very excited for the next period for Darlington Point solar farm and the ability for this site along to bring clean energy to over 115,000 households in Australia.

Field secures a £46m financing to build a 110MW battery storage portfolio

Elgar Middleton is delighted to have advised Field on the financing of the construction of a battery storage portfolio located in the UK

Field has secured a £46m loan from Triple Point Energy Efficiency Infrastructure Company (“TEEC”). This loan will finance the construction of an initial portfolio of four battery storage projects located in England, Scotland, and Wales. The first project has started construction and is expected to become operational this year, with the remaining three projects expected to start operations over the course of 2023.

This long-term financing with a c.19 year tenor will be drawn down over the course of the current financial year. The financing also includes a tailored ESG margin ratchet, with a discount being applied for success against a number of ESG KPIs. In addition to this margin ratchet, the loan features other innovative terms and structuring including an accordion facility to fund the build-out of at least an additional 500MWh of battery storage assets.

Field’s ambition is to respond to the global net zero challenge by installing 1.3GW of battery storage assets by 2024. This ambition is aligned with the increasing need for flexibility assets that need to be installed to accommodate the development of carbon-free but intermittent energy generators.

The commitment made by the UK government for cleaner energy is targeting that 100% of the electricity generated in the UK by 2035 should come from low carbon sources. To reach this ambitious target, the rollout of renewable energy will not only have to keep a good pace, but it will have to accelerate. According to analysis from GlobalData [1], the UK’s renewable power capacity should reach more than 110GW in 2030 while in 2020 this capacity was around 47GW – it is a 134% increase in 10 years.

This significant development of renewable energy will trigger a need for more flexibility assets to manage the intermittency. According to Aurora [2] , the UK will need to have installed 46GW of energy storage by 2035, with c.22GW likely to be battery storage (with a duration between 0 and 4 hours). As of March 2022, the total installed capacity of energy storage in the UK was 1.7GW [3], meaning that, based on Aurora’s analysis, this capacity would need to be multiplied by more than 20 over the next 13 years.

Elgar Middleton continues to support Field on its innovative battery storage portfolio. This deal is another example of Elgar Middleton’s market-leading work advising in the battery storage sector, demonstrating its ability to structure and source innovative ways of financing this technology. The UK will need a significant increase in its battery storage capacity over the coming years and Elgar Middleton is uniquely placed to help shape its growth.