BESS financing benefitting from other clean energy segment struggles, US uncertainty, Fidra CEO says

Fidra reached financial close on the Thorpe Marsh battery energy storage system (BESS) in September last year, with new equity put in by EIG but also the UK’s state-owned National Wealth Fund (NWF). Sungrow is providing the BESS while H&MV is doing engineering, procurement and construction (EPC) and civil works.

It catapulted Fidra to become the second-largest European owner-operator by firm pipeline, as a Wood Mackenzie analyst wrote for Energy-Storage.news yesterday.

“Our focus is on very big batteries, 2-hours-plus, starting in the UK but taking that ambition and model into other European markets,” Elder says. “Our goal is 4-5GW by 2030.”

Background in ‘complex’ gas projects sets firm up well for financing BESS

“Without diminishing the risks around construction of batteries, building a gas plant is a lot harder than building a battery project. There’s a lot more complexity to it. So our experience sets us up well,” Elder says.

“That skillset sets us up well, in terms of the build but also in terms of the contracting. We’ve done multiple tolling offtake arrangements for gas projects. These are of course different technologies, but the principles are really the same in terms of how you contract for those assets and how you project finance.”

The firm is aiming for 50% of capacity to have contracted revenues over a 7-10 year period post-commercial operation (2027/28 for Thorpe Marsh). Thorpe Marsh is essentially five separate units of 280MW each. One has a toll with Octopus, two have floors with EDF, one has a floor with Statkraft, while the last is fully merchant.

“We are private equity-owned, our investors want to individually finance projects and achieve gearing which is 60-70% of capex. That requires finding the right balance on the offtake, and 50% of contracted is, for now, the key to getting to that level,” Elder says.

“The cost of debt to battery projects has clearly come down. There is a lot more appetite from a much wider group of lenders. If you have Tier 1 suppliers and offtakers and good sponsors, you’ll get a lot of bank appetite. We were two times oversubscribed for the debt. The equity market is still a bit harder to raise money in. It certainly helped having NWF come in.”

Evolution of financing, macro factors helping make BESS attractive

Elder says the offtake market is “evolving”. A lot of people talk a good game on tolling and floors, but the market is still relatively thin for people who are able to deliver reasonable volumes of tolls and floors. (That comment was included in a recent broader piece on financing in Europe, hearing from multiple owner-operators.)

Part of that fall in the cost of debt mentioned earlier is BESS warranties getting longer and more robust, giving banks comfort in lending over longer periods, as Elder said in that article.

But there are some broader macro factors that are helping make BESS an attractive avenue for capital too. One of those is that other segments of the energy market are going through a tough spell.

“There’s not a lot of offshore wind; that sector is going through a hard spell. Banks are very reluctant to finance thermal and fossil fuel projects, while new technologies like carbon capture and green hydrogen are hard to finance. But banks have to deploy money, and BESS is starting to provide that scale,” Elder says.

We asked Elder whether the change in climate towards clean energy in the US since Trump was elected for a second term has meant more money going to the European market.

“On the equity side, where there is more transferability of capital between regions, you are definitely seeing infrastructure investors keener to invest in Europe. There is no doubt that there is instability in the US in terms of policy and regulation, and that is bringing infrastructure capital to Europe in the energy transition sector.”

“It’s not just capital from the US, but capital from the Middle East and other regions that historically might have been deployed into the US.”

“I don’t think it will last forever, but in the near-term it’s giving Europe more access to capital. I think it’s a transitional thing; things will settle down next year, maybe once the mid-term elections have happened.”

Long-duration energy storage (LDES)

Elder says the company has a mixed view on long-duration energy storage (LDES). It successfully bid in one of its 280MW Thorpe Marsh BESS units to the UK’s LDES cap-and-floor scheme. That is now undergoing project review along with 76 other successful applicants (mostly lithium-ion BESS). But Elder does have concerns.

“The pros of it are that we do need LDES come the 2030s. But the cons are that if it is over-procured it will absolutely impact the amount of merchant batteries that are built. Most of the projects are lithium-ion and those will be direct competitors to the other lithium-ion projects,” Elder says.

“It’s a double-edged sword. We are concerned that the outcome could be a lot of subsidised batteries on the system which might displace merchant buildout, and that is not necessarily a good thing for consumers.

“The incumbents are rightly saying we need to look at this in a thoughtful way. Ofgem appear to be keeping their options open, and it isn’t clear how they will choose final projects.”

He says 8-hour projects (the minimum duration in the LDES scheme) won’t be fundable in the merchant market for another 5-6 years.

“Do we really need that many long-duration batteries by 2030? There’s always this risk when the government has a shiny new toy. It was a similar thing with interconnectors, some investments were not thought through, like bringing in more power from Norway before building up the grid in Scotland.”

Owner-operator Zenobe has been one of the most vocal opponents of the scheme for these reasons, with founder James Basden talking to Energy-Storage.news at the time of an open letter against it in April last year. The company has since formally launched a challenge in the competition courts.