Over the last 3 years, more and more battery projects have been built, either projects combining...

 
 

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Over the last 3 years, more and more battery projects have been built, either projects combining solar and battery on the same site or standalone battery projects. There is limited track record on the lifetime of batteries. Renewable developer Enso Energy is developing a Battery Energy Storage Systems ("BESS") in the UK of 50MW/200MWh. The UK is a highly volatile electricity market with 8GW of offshore wind additions expected over the next decade, coupled with thermal retirements. The assets will be located North of the B6 boundary, a key power flow bottleneck for energy flowing from grid-scale renewable generators in Scotland and demand centres in England. The grid is experiencing stability issues in the area and National Grid is aggressively procuring ancillary products through auctions, which are very suitable to BESS (e.g. capacity market, balancing services, and frequency response). Enso Energy is currently engaged with two counterparties (BP and Fortum) who have indicated interest in providing hedging and route-to-market services and is on track to have 100% of the capacity contracted for the first 10 years of operation. The hedging contracts will provide a minimum revenue guarantee per MW installed, as well as a sharing mechanism of excess revenues. The excess revenues will come primarily from arbitrage on electricity markets (capturing intraday volatility, buying when prices are low and selling when they are high), but will also stack up other revenues (capacity market, balancing services and frequency response. The assets will also receive capacity market revenues. Overall, contracted revenues (i.e. revenue floor and capacity market revenues) represent c. 45% of total revenues in the base case for the first 10 years, while it is expected that revenues will be mostly merchant (c. 97%) for subsequent years. The assets are currently at planning development stage with energisation planned for December 2024. Grid connection rights and planning consents have been granted and site are secured via 30-year lease agreements. The batteries will be procured and installed by Sungrow. Sungrow will also sign a 20 year O&M contract and provide a 20 year warranty for the performance of the batteries. The batteries will have a design life of 20 years. Preliminary assumptions include an annual load factor of 35-40% and 1 cycle per day. Capex is 200m. transaction costs 2m. The client is requesting 65% of construction costs to be financed by debt. Your bank has been invited to provide indicative debt structuring terms: what debt sizing DSCR can you propose? -The market consultant will provide a central, a downside and an upside high scenario for arbitrage revenues. The Base Case model provided by the client is base on the central scenario. Which scenario will you use for the sizing of debt? - What amortization type and tenor do you propose? - PROJECT FINANCE ASSIGNMENT - You are working for an established European Bank having liquidity for financing in Euros, USD, AUD and GBP. For Case Studies 1 & 2, please identify/address points a) to g). Remember that you are a banker therefore you should describe and analyse the bank's interests. a) Parties to the project financing: please list the parties and the role(s) they play in the project. Gather information on their credit standing and track record/ experience in relation to the role they will play in the project. b) Contractual relations: please draw a chart of the contractual structure highlighting the different contracts between the different parties. c) Show a table with sources of funds and uses during the construction phase d) Cash flows: please indicate circulation of cash between parties during operation and the order of priority you believe is adapted to this project for the usage of revenues received, i.e. the ideal cash waterfall to protect the bank's interests. e) Risk matrix - mitigation through contractual and financial structure. 1) List the main risks related to the project 2) Indicate which counterparty bears which risk and which contract allows transfer of risk and 3) For risks that are not fully transferred and thus taken fully or partially by the lender, list possible mitigants. f) Possibility to take securities: please describe the applicable security package g) Conclusion: opportunity for project financing or not? Please say whether you would lend to this project on a non-recourse or limited recourse basis and more importantly why. If you decide to lend, what are the main terms of the loan agreement you are proposing to your client? You may accept the terms proposed or make an alternative proposal to your client. Highlight what are the major risks (3 max) faced by this project. Over the last 3 years, more and more battery projects have been built, either projects combining solar and battery on the same site or standalone battery projects. There is limited track record on the lifetime of batteries. Renewable developer Enso Energy is developing a Battery Energy Storage Systems ("BESS") in the UK of 50MW/200MWh. The UK is a highly volatile electricity market with 8GW of offshore wind additions expected over the next decade, coupled with thermal retirements. The assets will be located North of the B6 boundary, a key power flow bottleneck for energy flowing from grid-scale renewable generators in Scotland and demand centres in England. The grid is experiencing stability issues in the area and National Grid is aggressively procuring ancillary products through auctions, which are very suitable to BESS (e.g. capacity market, balancing services, and frequency response). Enso Energy is currently engaged with two counterparties (BP and Fortum) who have indicated interest in providing hedging and route-to-market services and is on track to have 100% of the capacity contracted for the first 10 years of operation. The hedging contracts will provide a minimum revenue guarantee per MW installed, as well as a sharing mechanism of excess revenues. The excess revenues will come primarily from arbitrage on electricity markets (capturing intraday volatility, buying when prices are low and selling when they are high), but will also stack up other revenues (capacity market, balancing services and frequency response. The assets will also receive capacity market revenues. Overall, contracted revenues (i.e. revenue floor and capacity market revenues) represent c. 45% of total revenues in the base case for the first 10 years, while it is expected that revenues will be mostly merchant (c. 97%) for subsequent years. The assets are currently at planning development stage with energisation planned for December 2024. Grid connection rights and planning consents have been granted and site are secured via 30-year lease agreements. The batteries will be procured and installed by Sungrow. Sungrow will also sign a 20 year O&M contract and provide a 20 year warranty for the performance of the batteries. The batteries will have a design life of 20 years. Preliminary assumptions include an annual load factor of 35-40% and 1 cycle per day. Capex is 200m. transaction costs 2m. The client is requesting 65% of construction costs to be financed by debt. Your bank has been invited to provide indicative debt structuring terms: what debt sizing DSCR can you propose? -The market consultant will provide a central, a downside and an upside high scenario for arbitrage revenues. The Base Case model provided by the client is base on the central scenario. Which scenario will you use for the sizing of debt? - What amortization type and tenor do you propose? - PROJECT FINANCE ASSIGNMENT - You are working for an established European Bank having liquidity for financing in Euros, USD, AUD and GBP. For Case Studies 1 & 2, please identify/address points a) to g). Remember that you are a banker therefore you should describe and analyse the bank's interests. a) Parties to the project financing: please list the parties and the role(s) they play in the project. Gather information on their credit standing and track record/ experience in relation to the role they will play in the project. b) Contractual relations: please draw a chart of the contractual structure highlighting the different contracts between the different parties. c) Show a table with sources of funds and uses during the construction phase d) Cash flows: please indicate circulation of cash between parties during operation and the order of priority you believe is adapted to this project for the usage of revenues received, i.e. the ideal cash waterfall to protect the bank's interests. e) Risk matrix - mitigation through contractual and financial structure. 1) List the main risks related to the project 2) Indicate which counterparty bears which risk and which contract allows transfer of risk and 3) For risks that are not fully transferred and thus taken fully or partially by the lender, list possible mitigants. f) Possibility to take securities: please describe the applicable security package g) Conclusion: opportunity for project financing or not? Please say whether you would lend to this project on a non-recourse or limited recourse basis and more importantly why. If you decide to lend, what are the main terms of the loan agreement you are proposing to your client? You may accept the terms proposed or make an alternative proposal to your client. Highlight what are the major risks (3 max) faced by this project.