Addressing Risk, Preserving Profitability in the Storage Sector: Navigating the Intricate Web of Risk Management, Revenue Structuring, and Insurance

November 14, 2023

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Ascend Presents

For the renewable energy storage industry to continue to grow and thrive, decision makers must address risk while preserving profitability. Doing so, however, requires an understanding of the intricate web of risk management, revenue structuring, and insurance in the storage sector. The evolving industry landscape demands innovative solutions, adaptability to emerging challenges, and collaborative efforts among diverse stakeholders. At the Ascend Summit 2023, Adam Hise, Managing Director of Storage Risk Solutions at Ascend Analytics, moderated a panel that delved into these topics. The panelists identified specific markets of emerging interest such as NYISO, PJM and ISO-NE, but focused primarily on existing opportunities in ERCOT, CAISO, and SPP. Panelists included Andy Galen, Renewables Strategist at Nephila Climate; Ken-Ichi Hino, Executive Director of Energy Storage at UBS; and Christopher Giuffre, Chief Strategy Officer and Co-Founder at USQRisk.

Key Takeaways

  • The storage industry must evolve to better shift risks among stakeholders, which necessitates a strong understanding of existing and future risk.
  • Maximizing the value of tax credits within the capital stack remains an intricate and multivariate process for project owners.
  • Insurers play a critical role in bringing storage projects online, especially in terms of addressing inefficiencies in traditional project financing.
  • Project developers must adapt and diversify to navigate the rapidly evolving nature of the industry, as well as the potential for unpredictable macroeconomic and legislative outcome
Left Image: Dr, Gary Dorris, CEO, Ascend Analytics and panelist, Ken-Ichi Hino, Executive Director of Energy Storage, UBS; Right Image: Adam Hise, Managing Director of Storage Risk Solutions, Ascend Analytics, with Dr. Gary Dorris, CEO, Ascend Analytics

Shift and Preserve Risk

Efficiently managing and transferring risks in the renewable and energy storage sectors emerged as the central theme. Panelists agreed that the industry must evolve and adapt to better shift risk among stakeholders, thus enabling storage investors to lay off downside risks while preserving profits from high volatility conditions. This involves not only understanding and addressing existing challenges, but also preparing for new, emerging risks.

Shaping Risk for Storage Projects: A Unique Challenge

The panel emphasized that the intricate mathematical challenges involved in shaping risk for storage projects set them apart from traditional renewable projects. As the saturation of ancillary services creates more opportunities for storage in arbitrage, innovative risk management strategies will be required. The strong optionality of storage provides many structuring and hedging opportunities.

Evolving Needs for Risk Transfer

The needs for risk transfer have shifted, reflecting changes in the industry landscape. Factors like the interest rate environment, the desire for certainty, and evolving tax equity dynamics have reshaped the industry's risk profile. These changes have created a demand for new financial products and solutions, such as 'revenue shortfall insurance.'

Tax Equity Transfer Complexity

One challenge lies in maximizing the value of tax credits, introducing tax equity or preferred equity into the capital stack while ensuring that investors see the necessary financial security in a project to find the investment appealing. This process is intricate and multivariate, with project owners balancing tax equity partnership investment value in the step-up in the ITC basis, as well as monetizing depreciation with a limited pool of investors, the costly terms they require, the complexity of the structure, and the worsened, back-levered debt terms.

Christopher Giuffre, Chief Strategy Officer & Co-Founder, USQRisk, guest speaker at the Ascend Summit

The Critical – and Evolving – Role of Insurers in Project Development

Ascend Summit panelists agreed that insurance plays a critical role in managing revenue risk. They discussed how different types of insurance, including property/casualty, business interruption, and credit wraps can address various aspects of risk, from technical challenges to market and regulatory factors.

A question arose about whether insurance underwriters are exposed to weather risk and whether this serves as a hedge within their portfolio. While weather risk exposure exists, the panelists emphasized the large size of insurance portfolios, as well as the fact that insurers face no requirements to directly 'hedge' storage revenue risk. Instead, insurers underwrite risks directly on their balance sheets instead of hedging with negatively correlated positions.  

Panelists identified the evolving role of insurers as crucial in getting storage projects online, noting that products like revenue shortfall insurance help address inefficiencies in traditional financing, thus promoting the growth of renewable and storage projects. Financing for storage has typically been on the extremes of the risk/return profiles. Merchant projects retain upside, though at higher lending costs and exposure to downside risk, while tolling agreements lock in returns while losing potential upside. The insurance industry brings tremendous risk management experience and serves as an important piece in the middle ground between contracting and full merchant exposure.

Opportunities from More Physical Participation

The shift toward more physical participation in energy arbitrage creates opportunities for offtakers. Renewable IPPs, corporations, and other groups exposed to load-side risks or owners of renewable assets can benefit from the optionality that energy storage can provide to a portfolio.

Meeting Upcoming Challenges: Diversify and Adapt

Panelists identified the need to manage concentrated exposure as a significant challenge due to the scarcity of capacity, geographic and structural variability, as well as the need for inherent diversification. They noted strong developer interest in diverse projects, particularly those with sooner Commercial Operation Dates (CODs).

Ascend Summit panelists also highlighted the relationship between higher revenue guarantees and higher premiums. Key considerations included the need to balance risk and reward through a diversified portfolio, as well as identifying the minimum level of certainty required. All panelists ultimately agreed that, given the rapidly evolving nature of the industry and the potential for unpredictability in outcomes, stakeholders in the storage sector must prepare to adapt to changing macroeconomic and legislative shifts.

About Ascend Analytics

Ascend Analytics, an innovative leader at the forefront of the energy transition, offers advanced software and consulting services that capture the evolving and real-time dynamics of energy markets. The company provides its customers with optimized and comprehensive decision analysis that covers everything from long-term planning to real-time operations in the electric power supply industry.

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