Balancing long-term asset value involves aligning flexibility and capital structure with lifecycle and market factors
As battery systems age, the asset owners and investors often have to continuously revise their operational and financial strategies to ensure they make the most of the prevailing market conditions. At the same time, investors in projects also need to be continuously monitoring the assets evolving risk profile, which can differ significantly depending on the stage of the battery’s life – for example, at the outset, there will be regulatory or technical risk, while later, merchant risk, for example, can become more prominent. Finally, at the end-of-life stage, asset owners and investors have to give careful consideration to the next phase, which could involve decommissioning, recycling, repowering.
Regulatory or technical risks at the beginning of a project could include an as yet unsecured grid connection or a still to be determined design for the scheme. At the start of a project, equity investors may be required to commit 100 per cent of the capital, with lenders’ involvement confined to providing a bridge loan, for example. Generally speaking, it will be equity investors making the biggest contribution at this stage. Banks are more likely to get involved with a project once there is contracted revenue in place.
Later, during the midlife of a project, merchant and operational risk may be mitigated by perhaps including revenue floors or tolling contracts that could be a route to market for an asset or a portfolio. Then, with regard to end-of-life considerations, options may include augmenting the asset, or a decision may be taken to replace modules, for example.
Given the multiple challenges that exist during each phase, Tamarindo insight director Ben Cook spoke to Rohit Kumar, a director-investment banking sustainable finance (EV and Battery Sector) at Standard Chartered Bank – and a speaker at this week’s Battery Asset Management Summit UK & Ireland – to get a steer on what the key considerations are at each stage of the battery’s life and examine how long term asset value should be balanced with changing market opportunities.
How does risk evolve throughout a BESS asset’s lifecycle?
Rohit Kumar: Key risks across the lifecycle phases of a battery asset include permitting, grid connection, and capex escalation in early stages; construction delays and cost overruns; technology performance and market volatility during commissioning; and merchant price exposure, battery degradation, and regulatory shifts in steady-state operations, with additional risks in warranty enforcement and repowering costs at the end.
How do the various stakeholders adapt their operational and financial strategies throughout the lifecycle?
RK: Throughout the business lifecycle, developers focus on product development and scaling, equity investors provide funding and strategic guidance, and lenders offer debt financing to commercialize and optimizers enhance operational efficiency,. Each stakeholder adapts their strategies to align with their core value add and stage of involvement.
When it comes to midlife operational adjustments, what modifications could be considered?
RK: During midlife operational adjustments, businesses should focus on process optimization, technology upgrades, and cost management to improve efficiency. Enhancing talent development, and scalability ensures sustainable growth. Additionally, implementing risk management, performance metrics, and market adaptation help maintain competitiveness.
Moving on to end of life considerations, there are different options such as decommissioning, recycling, repowering, what’s your view?
RK: At the end of an asset’s life, options include decommissioning, recycling, and repowering. Augmenting the site to meet increased market demand is a viable option, leveraging existing management and operational teams. If degradation is an issue, repowering by replacing specific components can extend the asset’s life. Additionally, performance guarantees and insurance can mitigate certain risks enhancing refinancing opportunities.
How should long term asset value be balanced with changing market opportunities?
RK: Balancing long-term asset value with changing market opportunities requires aligning operational flexibility and capital structure with the asset’s lifecycle. Geographic exposure, market evolution, technology choices, investor objectives, and end-of-life strategies all shape how that long-term value is sustained.
Are there any areas of the lifecycle where there is significant potential for improvement?
RK: Yes, there are significant areas for improvement throughout the lifecycle of a battery asset. Potential exists with policy reforms and the maturation of power markets, to allow batteries to serve in multiple use cases.
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