Happy New Year! Welcome to the latest edition of FairGreen where we talk about LDES commercialization in the context of the energy trilemma.
This newsletter is packed with insights on LDES manufacturing, financing and deployment.
LDES Procurement Tenders
Our anchoring question today is: can LDES procurement tenders be made more accommodating of the risk profile presented by non-LIB LDES?
There have been a few major LDES procurement tenders in the last 4 years:
3 in the United States
1 in Australia
1 in the United Kingdom
The tender in Australia was a competitive tender in that its objective was to optimize cost-efficiency, quality and capability. The rest were either non-competitive or a mix of the two structures with a strategic focus of promoting the deployment of specific LDES technologies.
The table below summarizes the outcome of those major procurement tenders.
Insights
Risk mitigation
The core element of classic project finance models is risk allocation. This entails identifying, quantifying and contractually assigning risks to the party best suited to handle them. Risk allocation is typically used in the financing of bankable assets.
Non-bankable assets, typically new technologies, require a level of risk socialization which involves spreading risk across various stakeholders including ratepayers, taxpayers and system operators. A good example of risk socialization structures in the US is revenue guarantees for infrastructural projects like toll roads developed through public-private partnerships. As expected, a hybrid structure of risk allocation and risk socialization reduces barriers to financing access for new energy storage technologies.
An energy storage system (ESS) project typically faces 3 blends of risks, namely:
Technology: probability that the major equipment will not meet their specified performance and reliability
Revenue: probability that the market will not avail sufficient revenue streams to allow the monetization of the ESS’s capabilities
Construction: probability that the project might face construction delays leading to financial penalties in the form of liquidated damages
Each of the 3 risks determine the anticipated level of profitability of an ESS project over its lifetime. The table below shows how the 3 risk types are usually addressed in different types of procurement tender models and the impact of such mitigation measures on the LDES technology selected for a project.
Allocated risk falls on the project special purpose vehicle (SPV) which consists of the project sponsor (developer) and equity investors. In turn, project SPV mitigates the various risks through contractual agreements with the other parties involved in the project as follows:
Technology risk mitigation: performance guarantees backed by the equipment OEMs
Revenue risk mitigation: long-term contracted revenue agreements with offtakers
Construction risk mitigation: liquidated damages coverage provided by the engineering, procurement and construction (EPC) party which should cover the liquidated damages levied by the offtaker in the event of project milestone delays
This classic risk allocation structure works well for mature technologies with defined risks. However, non-LIB LDES technologies which typically possess non-validated risk profiles become less competitive in tenders as the needle moves from the risk socialization to the risk allocation end of the spectrum.
To spur the growth of investment in non-LIB LDES projects, it is imperative that more risk socialization schemes be created to provide a more favorable environment for debt financing. Such a more robust risk socialization scheme is dubbed the “Regulated Availability and Technology Backstop“ model. The table below shows the mechanisms that support the model.
Notably, construction risk remains allocated to prevent unnecessary delays in project timelines. Site-specific engineering risk (inherent in many mechanical LDES projects) is better addressed under technology risks.
Conclusion
Risk socialization is being introduced to competitive LDES procurement tenders but its application has been limited to revenue risk mitigation so far.
This partial application favors LIB LDES and puts non-LIB LDES at a disadvantage since the latter is typically overexposed to technology risk.
Expanding risk socialization to cover most aspects of technology risk will promote the growth of commercial LDES deployments.
Stay tuned for the next edition which shall dive deeper into the Regulated Availability & Technology Backstop model focused on increasing non-LIB LDES deployment.
In Case You Missed It
Join the Global LDES Commercialization Forum on LinkedIn for further discussions on LDES commercialization with the global LDES community: [Link to group]
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Until next time :)
