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Where’s your floor at? The blueprint for ESS success
April 8, 2024
Where’s your floor at? The blueprint for ESS success
William Godfrey & Eden Yates

William Godfrey, CEO of Twist, and Eden Yates, Market Lead at Cling Systems, highlight the challenges and opportunities in Energy Storage Systems (ESS), emphasizing the importance of a stable pricing floor and streamlined financing. They offer tools to drive investment in ESS.

By William Godfrey, CEO, Twist & Eden Yates, Market Lead, Cling Systems.

1. Introduction

The growth (and challenges) of the electrification of mobility takes up alot of attention. Widespread adoption of Electric Vehicles (EVs) requires a production process that is refined and perfected through hard-won experience. Widespread EVs need convenient charging infrastructure. There is much work to do. There are other bright spots that deserve attention. Namely, Energy Storage Systems (ESS) and the significant growth that sector has. A growth that is tied to maximizing the potential of renewables, and by extension, energy security. The International Energy Agency highlights this in its World Energy Outlook 2023, (page 39):

“Scaling up battery storage would be crucial in most cases to improve the alignment of solar PV output with electricity demand patterns and system needs.”

As with EV and battery manufacturing, it comes as no surprise that China has achieved dominance in ESS deployments at scale. BNEF’s 2H 2023 Energy Storage Market Outlook states that the country is “solidifying its position as the largest energy storage market in the world for the rest of the decade.”

Globally, that same BNEF outlook puts cumulative energy storage capacity by the end of 2030 at 1,877 GWh. And yet, a significant problem to be solved is adequately planning for end of life management for ESS owners, operators, and integrators. Circularity for some of these companies is an issue to be solved later, in say 10 years. A default response is that warranty covers any immediate concerns.

We make the argument that it should be a more pressing matter, that is key for unlocking investment today. Very few companies could offer a 10 year solvency plan. For financial institutions, ESS owners must offer simulations of these negative scenarios whereby these organizations still take little to no financial risk. It’s a more pressing matter that needs good preparation and reliable partners as soon as possible. Free flowing institutional capital will need to know their floor and pricing for their forwards curve. The concept of this pricing stability is particularly appropriate for assets that pass into a secondary market.

We make the argument that these issues are critical. To unlock investments now, asset operators must prioritize this financial and environmental risk management. In a market where ten-year solvency forecasts are uncommon, owners of ESS must showcase their ability to navigate adverse scenarios with minimal risk exposure for investors. Requiring the implementation of redundancy measures through the forging of dependable partnerships.

Investors, from venture capitalists to traditional banks, seek assurance in the form of defined risk thresholds and predictable forward pricing. Something that for these new technologies is nascent. Beyond the value to lenders, it’s crucial for ESS owners to time their assets move into secondary markets, as this can boost margins significantly.

In this paper, we will talk through how focussing on these processes not only protects investments, but also projects a market image of stability and reliability. It is key to attracting a broad spectrum of investment.

2. Say hello to the secondary market

The secondary price stability of assets creates a foundation for growth and innovation. The introduction of a floor price for batteries is a critical step towards fostering a more stable, sustainable, and innovative market. It helps to mitigate the risks associated with rapid technological changes. The costs of recycling and the development of a secondary market provides a foundation for the long-term growth and sustainability of the battery industry. Banks and lenders taking first of a kind risk without historical data need to have improved monitoring and more dynamic financial products.

The secondary market has the potential to shield them from value loss. Value loss due to existing stock or assets they own becoming overtaken by technological advancements.

The UK Department for Business & Trade unveiled its long awaited battery strategy late last year. Alongside the inherent environmental benefits, it also acknowledged (page 52) that circular flows mean the battery’s economic value can be “kept within the UK economy while reducing our dependence on others for critical minerals” - energy security again rising in importance.

3. But what is a floor, really? And why is it important in a macro context?

The battery value chain is seeing rapid shifts with technological advancements, environmental concerns, and evolving market demands. With this context in mind, the following definitions - on floor pricing and other areas - are particularly relevant for those in the ecosystem. Either for building or investing in battery assets.

Although these concepts are applicable in numerous areas across finance and the financial markets, for now we’ll discuss them in the context of energy storage and Special Purpose Vehicles (SPVs) used to run batteries.

4. SPVs and Battery Inventories = Most Valuable Players

SPVs are separate legal entities created for specific projects. When applied to battery inventories, an SPV can own the inventory, allowing investors to fund the inventory without being directly involved in the main company's finances. This can offer tax benefits, reduce financial risk, and improve the project's bankability. It means that legally the assets are separate from the company, and that their earnings and worth can be protected.

Setup

An illustration of how it works in practice is above.

Offtaker scenario

How Twist and Cling collaborate.

Even the best laid plans for SPVs need to be rigorously tested for negative outcomes. Typically this is referred to in the industry as a “redundancy process”. There are difficult and easier ways to go about them - outlined below. Banks naturally need to perform ongoing credit checks on the offtaker and backup services to keep a live log of the outcomes. With the right early indicators, banks would naturally like to avoid a difficult process.

With the right early indicators, banks would like to avoid the difficult scenario if possible. Like any nascent market, ensuring collaboration, professionalism, and trust are pivotal and necessary conditions to survive. In the next section we outline some tangible steps that can be taken

5. Collaboration (and professionalism) in a new market

In the evolving market, the key to collaboration lies in what's termed as condition and market monitoring. This approach involves a communal effort to track and interpret a range of market indicators and trends. Paying attention to these indicators means asset values can be calculated and futures shifts can be anticipated. One approach for simulating this is executing sales of various assets within a facility, each at differing stages of health, to validate their collateral worth.

For some assets that are never sold outright this can offer banks peace of mind. This approach, while informative for newer asset types, introduces considerable upheaval and is only a snapshot of the broader calculation required.

An ideal model would go beyond this initial experiment and account for numerous factors such as supply and demand dynamics, technological advancements, regulatory policies, market penetration and adoption rates, cost trends, supply chain vulnerabilities, environmental and sustainability considerations, competitive landscape, geopolitical factors. A detailed discussion of all of that is beyond the scope of this article.

Successfully completing market monitoring not only improves processes. It establishes working relations, and ultimately trust. It also sets a precedent on pricing and means the lender has some indication of, in their language, whether they are winning or losing. The floor provides the foundation for financial security.

Machine learning models stand out as potentially revolutionizing market mapping and providing key pricing insights. This is vital for institutional financiers, who find the traditional reliance on historical data for forecasting new products and their residual values increasingly untenable. This creates a bottleneck in funding and adoption.

Effectively tackling the environmental crisis requires addressing these restrictions, to get more projects funded faster. Utilizing every available resource, from government incentives like credits or schemes to collaborative efforts in developing advanced price tooling.

6. Conclusion, and how Twist and Cling Systems can help

About Twist

Twist streamlines asset-backed lending by connecting financial institutions with asset owners, offering tools for project initiation, simulation, and monitoring. Leveraging AI to integrate IoT, payment, and market data, it enables real-time simulation of environmental and economic metrics, simplifying complex financing for new asset types and business models.

About Cling Systems

Cling Systems is establishing the circular platform for batteries worldwide. Powered by supply and demand data, Cling’s focus is on trading, tracing, and transporting li-ion batteries, with a particular focus on second life and energy storage.

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Both Cling and Twist want to see more investment being deployed into battery projects and the true potential of energy storage to be realized. Realizing that vision requires project finance and patient capital, enabled by monitoring and the appropriate off-take arrangements.

If you’re investing or building in ESS projects, and want to ensure that you have the tools to monitor collateral risk, have willing partners that can execute trades at pace, then please do get in touch. We’re open to exploring projects.

It’s a blueprint that is fundamental to the success of the energy storage ecosystem.

https://www.twist.eco/

https://www.clingsystems.com/

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