Australia's renewables drive powers a 'golden rush' of big battery bets

Investors in Australia’s battery energy storage industry are taking advantage of the chaos on the spot markets. They have been emboldened by Australia’s efforts to expand its renewable energy infrastructure.

Investors in the sector are now funding projects that do not have a fully-guaranteed long-term revenue. The first two battery projects exposed to the market this year were funded.

As the demand for renewable energy grows, analysts say that more flexible financing will make money available in this sector.

This demand is aided in part by Australia's rapid expansion of its solar, wind and coal generation capacities and the closure of coal-fired plants. It is aiming to achieve 82% renewable energy goals by 2030.

Analysts say that Australia's spot markets are designed to provide real-time signals of demand, which helps drive investment. Volatility in pricing makes arbitrage more attractive - selling at higher prices and charging lower ones - because it is more attractive.

Operators charge batteries when energy costs are low by purchasing power. If they are negative, the operators can be paid to charge. When they are high they can discharge the power, and earn a profit on the difference in price between what they paid and what they sold.

Other markets around the globe rely on centralised payments to ensure that capacity is available for sudden fluctuations in demand, or long-term contracts that provide a steady income for the power generated over many years.

According to Paul Martin, the regional head of project financing at Mitsubishi UFJ Financial Group (MUFG), only a few short years ago, projects involving battery energy storage systems without long-term contracts in Australia were entirely funded by government assistance and equity.

According to Clean Energy Council in Melbourne, since 2023, price fluctuations and falling battery prices have led to A$12.6billion ($8.4billion) of BESS investment. Australia is Asia-Pacific’s largest BESS outside of China.

In Australia, negative wholesale prices are more common. When supply exceeds demand, generators will pay to avoid a shutdown. This creates opportunities for battery operators who charge to earn money, according to Zhi Qin low, senior manager of Baringa Partners.

Martin stated that BESS projects could secure up to 100% merchant risks. This refers to the financial exposure of projects wholly dependent on market earnings.

MUFG is part of a group which provided A$722 Million in financing for Supernode BESS Project, a Queensland-based project that has one of Australia’s largest storage facilities.

GOLD RUSSH

One developer who focuses on renewables in Australia and BESS noted that "the gold rush" is now underway in Australia. Banks are showing a strong appetite for BESS funding and are more willing to consider different revenue models.

Developers and analysts agree that the shift toward merchant revenue can speed up battery builds, but it also increases financing costs and puts more risk on investors.

Investor returns may be higher for long-term investments, but so are risks. This is especially true if policy changes weaken incentives.

The developer explained that the leverage is limited if you are looking to bank an unfunded project or one with very low cash flow. According to CEC data, Australia is building 44 batteries that have a combined capacity of more than 10 GW as part of its renewable strategy. The country is racing towards a goal of 19 GW in 2030, which would be three times higher than the current 3.1 GW.

Utilities also look to use old coal plants for battery projects in order to tap into the existing grid connections. Batteries are placed near data centers to ensure reliable power as demand is expected rise after a long period of stagnation.

MARKET EXPOSED FINANCING

Investors are more interested in long-term contracts because they are rare.

Martin stated that "substantial pools of debt and equity investment capital are actively seeking to be deployed."

This dynamic forces investors to differentiate themselves based on their risk appetite.

According to the CEC, nine projects totaling more than 2,51 billion dollars in capital expenditures were funded during the first half of the year. This is a 23% increase from the year before.

Commonwealth Bank of Australia led the financing of the first phase of the 250MW Bungama BESS Project being built in southern Australia by Amp Energy, backed by the Carlyle Group. The project was funded entirely by its revenue generated in the market.

Neil Fraser, CBA’s renewables director for the region, said that "the percentage of capacity accepted by banks as merchant cash flow has gradually increased".

George Prassas of Aurora Energy Research, an analyst, said that the project Bungama in New South Wales and the 250 MW Calala BESS were the first to receive merchant financing. However, the funding method was also explored for other projects during the past year.

Jean-Marie Verrier is the regional renewables director at Sumitomo Mitsui Banking Corp (SMBC). He said that most battery projects are based on long-term contracts, which include some exposure to the market.

SMBC is one of the lenders on the Calala 250-MW project. The project will earn 60% of its revenues from the market, and utilize Tesla's Autobidder real-time trading platform.

Fraser, from CBA, said that arbitrage would become more important in the future as volatility was expected to rise. ($1 = 1.5006 Australian dollars)

(source: Reuters)