September 21, 2023

FROM THE CEO: These 3 Shifts Are Changing Investment in Clean Energy & Storage Project Development 

Our CEO Chris Taylor shares his takeaways for investors on how to adapt to shifts in energy storage and clean energy project development financing.

Clean energy investing in the U.S. has undergone a step-change, due both to unprecedented federal support and increased urgency to mitigate global climate change. Last month, the @American Clean Power Association (ACP) released data showing that policy changes, including the U.S. Inflation Reduction Act, has led to the announcement of private investments totaling $271 billion in domestic clean energy projects and manufacturing facilities over the past 12 months. The energy storage sector is one of the top industries experiencing that investment boom: the U.S. Energy Information Administration projects that more MW of storage will be built in the U.S. in 2023 than any other resource type, excepting solar.

As we continue to see a record amount of money poured into clean energy, I am hopeful that clean energy investors will stay up to date on the nuanced shifts that are greatly influencing energy storage financing. Three items come immediately to mind:

  • Rising Interest Rates: Interest rates are at a 22-year high, which is a milestone that carries major implications for fundraising and private capital. Often, this means that investors will flock to income and credit securities, making fundraising a challenge. Despite the high-rate environment, funding continues to flow into clean energy, but it is changing the way in which equity vs. debt will be used for building projects. Additionally, executing projects on time becomes more critical with construction debt financing now more expensive. My takeaway: Investors should invest in developers that can skillfully utilize leverage without endangering project returns, and developers need to interconnect and execute projects more efficiently than ever to protect returns.
  • Changing Parameters for Tax Credit Monetization: Although the Inflation Reduction Act (IRA) was signed into law one year ago, there remains a lack of clarity around provisions of the legislation and additional guidance is needed from the IRS on how tax credits will be used. In particular, the development of the tax credit transferability market has been complicated by the wait for IRS guidance and complex initial guidance, which is making deal execution much slower than was originally anticipated. At the same time, the volume of available tax equity is likely to be dwarfed by the number of projects seeking to use it. The IRA will fulfill its promise to unlock greater, sustained investment in clean energy projects only if the rules are clarified quickly and in a manner that allows efficient capital deployment. My takeaway: Investors, developers, and regulators all need to work together to accelerate the workability of the transferability model and accelerate the market for credits.
  • Increasing Merchant Asset Track Records: The current level of long-term contracting for energy storage will only support a moderate level of deployment, well short of the 10+ GW needed each year to decarbonize the power system. Gigawatts of batteries are now conducting merchant operations in ERCOT and CAISO. Investors and lenders have an opportunity to refine their approaches to valuing energy market revenue streams and evaluating the associated risk, perceptions of which may appear overly cautious in the rear view mirror. In addition, there’s innovation to be had in the deal structures that can finance merchant storage. My takeaway: Investors need to stay on top of asset performance track records and update their priors to avoid missing out on significant upside potential in a maturing storage industry.

Financing is key to driving the clean energy transition and building a future in which reliable energy is delivered without carbon pollution. Now more than ever, investors need to adapt quickly as they evaluate companies and teams to maximize the impact of every dollar of equity.