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An Expert Discussion on Infrastructure & Project Finance in the United States

With Benjamin Grayson and Todd Alexander
Posted: 7th May 2021 11:58
The change in presidency from Donald Trump to Joe Biden has brought about notable changes for the infrastructure and project finance landscape in the United States. In this expert discussion, Ben Grayson and Todd Alexander of Norton Rose Fulbright explore some of the biggest compliance issues and potential pitfalls facing firms, as well as identifying emerging trends, strategies and opportunities.
Have there been any recent regulatory changes or interesting developments?
The Biden administration’s infrastructure plan that was announced in April 2021 included a 10-year extension to the Investment Tax Credit (ITC) and Production Tax Credit (PTC), and would broaden the scope of the ITC to include energy storage systems. As it stands today, the ITC can be applied to solar or solar plus storage systems if they are deployed simultaneously at new facilities. The plan also includes targeted grants to build or retool factories. The U.S. predominately depends on imports for materials and battery equipment. The goal of the targeted grants would be to promote U.S. battery manufacturing capacity and create an independent supply chain.
Are there any compliance issues or potential pitfalls that firms need to be cautious about?
Storage projects have a shorter operating track record than other generation technologies. Poor operational performance can jeopardise offtake contracts and subject developers to heavy non-performance penalties in certain wholesale markets. Project finance lenders and tax equity investors do not like technology risk.
For storage, the key technology risk is capacity degradation. Financing parties will look for a performance guarantee or capacity maintenance agreement under which the service provider refreshes the battery with new cells to maintain capacity at minimum levels over time.
Debt service coverage ratios for storage projects are typically more conservative than for other assets to reflect the risk of a project realising lower revenues if degradation occurs at a faster rate than what is warranted in the performance guarantee. Lenders may also want to build a reserve account into financing documents.
The creditworthiness of the performance guarantor is a major issue for battery storage projects. Insurance products are available to bolster warranty and performance guarantee providers with weak balance sheets.
How can technological infrastructure be utilised to increase resource efficiency?
Green hydrogen is an emerging technology with applications to several existing use cases.
End uses for hydrogen in the power sector include use in fuel cells or in co-firing hydrogen gas or ammonia to provide flexible generation.
Hydrogen has the potential to be a popular alternative for heavy goods vehicles seeking emissions reductions, where charging time and battery weight makes electric power non-viable. Hydrogen is currently being explored as a genuine alternative by the rail and aviation industry. The first test flight for a passenger aircraft using hydrogen fuel took place in 2021.
Use of hydrogen in refineries has grown in recent years and demand is predicted to continue increasing. Use of hydrogen in refining helps with meeting low-sulphur targets for diesel.
When combined with nitrogen, hydrogen can be used as a feedstock for fertiliser production. Ammonia can also be used in refrigeration plants, as an environmentally friendly and (relatively) inexpensively produced refrigerant. Ammonia may be a hydrogen carrier for storage or long distance transport due to greater energy density.
Have you noticed any new trends or strategies in the way projects are being prepared and financed?
Storage developers are relying on merchant revenues for an increasing part of their overall cash flows. Contracted revenues as a percentage of total project revenues are expected to continue shrinking as banks remain eager to lend and sponsors continue to pressure debt and equity providers to assume more risk. The market has shifted toward giving credit for uncontracted revenues from energy sales and ancillary services in the spot market.
There are some unique offtake structures for standalone storage facilities that are gaining traction in the market. Below is a description of some of those unique structures:
Capacity Sales Agreement: A project company receives a capacity payment (typically from a utility) that is a fixed dollar amount per megawatt. In exchange, the project company is obligated to charge its battery from the grid or discharge energy onto the grid when the battery is called upon by the grid operator. This type of agreement is common in California because investor-owned utilities and community choice aggregators need to comply with resource adequacy obligations set by the California Public Utilities Commission. The project is able to sell all other products in the spot market.
Ancillary Services Financial Hedge: Ancillary services are used by grid operators to balance the grid frequency and ensure there is enough reserve capacity to meet unexpected stress events. The project company sells ancillary services to the market at the spot price. It swaps floating payments for a fixed-dollar-per-megawatt-hour price calculated on a fixed volume of capacity for each settlement period. To establish the floating price, the swap references the market clearing price for the specific ancillary service product sold.
Demand Charge Management Agreement: This agreement is used with commercial and industrial solar customers. Power from the storage facility is used to meet peak demand at a customer’s premises, which reduces expensive fees (known as demand charges) that a utility would otherwise charge a customer for peak electricity consumption. Demand-charge savings are split between the customer and project company under a shared-savings model. Alternatively, the customer might pay a fixed monthly subscription fee in return for guaranteed savings. This provides revenue certainty for the project company, but it eliminates upside potential.
Demand Response Grid Services Agreement: This type of agreement involves the aggregation of several distributed storage facilities to form a virtual power plant that provides demand-response service to a utility in exchange for fixed payments. Demand response means shedding behind-the-meter load in response to a signal from a utility. The battery or other storage device may be used by customers for other applications when not providing demand-response services.
What impact does political and economic factors play in determining the success and viability of regional infrastructure projects?
The Federal Energy Regulatory Commission (“FERC”) and regional transmission organisations or RTOS both have jurisdiction of battery storage and have struggled with whether to classify storage as generation, transmission or a hybrid.
Projects are more likely to get financed the clearer the regulatory framework and ISO/RTO market rules for storage participation vary widely.
On 1 May 2020, President Trump issued an executive order banning the use of certain foreign-manufactured equipment in the nation’s bulk-power system, meaning the interconnected electric grid. When President Biden took office in January 2021, he suspended this order for 90 days. Biden’s suspension has been lifted, but the 2020 order is set to expire on 1 May 2021. The current administration recently issued a request for information related to grid security and grid-related imports from countries deemed foreign adversaries, which could be a signal that there could be a new and similar order issued in the coming months.
It appears a standalone battery connected to the transmission grid and injecting energy to provide voltage support would be covered by the current executive order but not batteries sited behind the customer meter or interconnected to the distribution system. If the order remains in place in its current form, it could have a chilling effect on the battery supply chain.
In 2020, there was resolution of a long-standing dispute over the PJM regulation service market. The dispute began in 2017 when a group of developers sued PJM over allegedly unfair changes to PJM’s regulation service market rules. PJM had revised its energy neutrality automatic signal for storage and other fast-responding resources participating in the regulation D market, adjusted its algorithms for determining which resources clear the market, and placed an overall cap on the amount of fast-responding resources that could be procured during peak-demand morning and evening hours.
Owners of battery and flywheel storage projects in PJM complained to FERC that the changes were unfair, unduly discriminatory and would result in losses of up to 75% of their investments.
The project owners raised concerns that the redesigned market signal reduced compensation and increased the energy throughput of their storage assets, thereby decreasing life expectancy and compromising performance and warranty contracts with equipment manufacturers.
Starting on 1 July 2020 until 1 January 2024, PJM will treat all price-taking offers from participating storage resources as having cleared the market as long as they abide by PJM’s conditional neutrality signal and meet certain minimum performance criteria.
Ben Grayson's practice involves the representation of developers, lenders and investors in the financing, construction and development of infrastructure projects, with a focus in renewable energy. This includes drafting and negotiating debt and tax equity financing agreements, engineering, procurement and construction contracts, operation and maintenance contracts, equipment supply agreements and power purchase agreements.

Ben can be contacted on +1 212 728 4126 or by email at
Todd Alexander’s practice includes representing developers, investors, tax equity investors, and lenders to infrastructure projects. He has extensive experience financing renewables projects including utility scale, community, C&I and residential solar projects, as well as wind, hydro, biomass, renewable natural gas and biofuel projects. Similarly, he regularly represents parties financing standalone battery storage, gas-fired, fertiliser, desalinisation, carbon capture, and LNG projects. He has represented sellers and purchasers of ownership interests in several large infrastructure projects, including power projects, airports, gas pipelines and portfolios of renewable energy projects.  He is the host of Norton Rose Fulbright’s energy and infrastructure podcast, “Currents”.

Todd can be contacted on +1 212 408 5269 or by email

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