UK and Europe in the midst of energy transition journey

The UK power market is undergoing a structural transition with a shift away from traditional fossil fuel power generation to renewables, driven by the legally binding UK government targets committing to a reduction in emissions to net zero by 2050. By the end of 2022, according to the National Grid, 39.1% of electricity demand was already met by renewables (wind, solar, biomass, hydropower and storage), while coal only contributed 1.5%.

Similar to the UK, Continental Europe is also in the midst of its energy transition journey, with EU countries required to cut greenhouse gas emissions by at least 55% by 2030 to comply with European climate laws. An increased sense of urgency in Europe, in concert with a significant array of converging factors, are leading to a large decarbonisation agenda that will see investments increase in the renewable energy market.

How BESS help with the renewables’ stumbling block – balancing supply and demand

The increase of renewable generation to the UK power mix is eroding the stable baseload generation, which we have all come to view as a ‘given’, and therefore creating a greater need for balancing services due to the higher intermittency of renewable generation and higher system volatility.

The National Grid Electricity System Operator (NGESO) has to constantly balance supply and demand across the network, as well as manage system stability and constraints. This is where grid-scale BESS assets are being utilised: they are highly suited to ensuring stability of supply, plugging the gaps left by shortfalls in the availability of solar and wind, and in turn support the rollout of further renewable generation.

Battery storage is a growing, fast-evolving market as BESS assets are expected to be critical going forward to meet the energy transition. As more and more countries have committed to decarbonising their economies, the renewable energy market has seen aggressive growth and accommodated a growing range of asset classes, including BESS, to facilitate the energy transition. 

Oil and gas volatility have boosted the UK BESS market

The Russian invasion of Ukraine and the consequential effect on oil and gas price volatility has expediated the energy transition to alternative renewable generation. This has had a “bumper impact” on the UK BESS market, which – although positive for revenue generation in a nascent sector – makes it difficult for lenders to forecast projects with variable revenue during this economically uncertain point in time. However, over the past few years, there has been more liquidity from more lenders in this space.

Historically, the market has been largely equity funded, however, with both investor and bank appetite growing, private sector funding will increasingly play a bigger role in the large-scale rollout of transition assets.

Financing of traditional project finance assets, such as wind and solar, has been underpinned by the strength of their contracted revenues. To some, BESS assets are considered a new asset class that doesn’t necessarily require fixed revenue to be commercially viable from a developer perspective, therefore a more innovative approach to debt financing is needed.

Overcoming BESS specific challenges is key to driving its widespread adoption

A main challenge for BESS developers is securing the planning permission and near-term connections to the electricity grid network. Currently, there is a lack of availability of grid connection dates, resulting in delays to BESS assets coming online: a developer seeking to become operational in the next two years may find there are no grid connection dates available for another seven or eight years. This raises the question around deregulation to allow for speedier consents to keep pace with the fast-growing BESS pipeline, and ease the bottleneck to deliver on the UK’s ambitious net zero targets.

Another key issue is costs, which are increasing in line with inflation, interest rates and supply chain delays. However, with higher interest rates impacting the internal rate of return, investors may want to look towards new transition assets such as BESS, which potentially diversify returns. Lenders can help structure deals to suit sponsors.

Supporting BESS customers as well as corporates on their journey to net zero

NatWest has committed to provide an additional £100 billion of climate and sustainable funding and financing between 1 July 2021 and the end of 2025. This includes financing to the BESS sector where NatWest has arranged, structured and advised multiple ‘first of their kind’ financings across the full spectrum of tenors, revenue models and buildout strategies to support the rollout of BESS assets (see case studies of our most recent transactions below).

Annually acknowledging best-in-class transactions and organisations, project finance and infrastructure journal, IJ Global, named NatWest as its “ESG Financial Adviser of the Year 2022 - Europe”. The award is given to the financial adviser which can provide the strongest evidence of financial innovation on ESG transactions or advisory work, as well as ESG initiatives and commitments. 

Looking to the future, Jacob Lloyd, Head of NatWest’s Specialist Asset Finance, is optimistic about the growth of the BESS market and lenders’ potential to contribute to progress towards net zero through deploying more capital: “The opportunities are fast flowing across all of Europe. And they don’t seem to be slowing down.”

Our work

We are proud to have supported BESS customers as well as corporates on their journey to net zero with a wide range of ESG transactions, celebrating many sustainability ‘firsts’ in key sectors and driving innovation in the sustainable finance market.

You can read in more detail about how we have helped our customers on our Case Studies page and find information on related awards we have won on our Insights page.

See some recent examples of our support for the BESS sector here:

Case study 1: Building the infrastructure for Renewables – NatWest support Harmony Energy Income Trust plc’s growing BESS pipeline

Incorporated in October 2021, Harmony Energy Income Trust plc (HEIT) is an investment company – listed on the London Stock Exchange since November 2021 – that invests in commercial-scale UK BESS assets and complementary renewable energy generation projects. HEIT is advised by Harmony Energy Advisors Limited, which is a wholly-owned subsidiary of Harmony Energy Limited (Harmony), a leading UK developer of battery energy storage and other renewable generation projects.

NatWest proactively approached Harmony to understand their debt requirements following the HEIT float, and in June 2022, NatWest was mandated to bilaterally support HEIT Holdings Limited, a wholly-owned subsidiary of HEIT, with a £60 million Capital Investment Facility over a 5-year tenor, to finance the construction of their initial seed BESS portfolio consisting of six assets equating to 312.5 MW / 625 MWh.

The transaction included a £70 million uncommitted accordion for future acquisitions to their BESS portfolio, which HEIT subsequently triggered in February 2023, requesting a £50 million increase in the Capital Investment Facility and a £20 million Revolving Working Capital Facility under the same tenor, taking the total to £130 million to help further the roll out of HEIT’s ambitious growth pipeline.

NatWest, acting in its capacity as Structuring Bank and Joint Mandated Lead Arranger, successfully coordinated the syndication and upsized HEIT’s existing debt facilities through bringing in Coöperatieve Rabobank U.A. NatWest was also awarded the roles of Hedge Counterparty and Agent.

The increased facility has allowed HEIT to enter into contracts with Envision for the supply, installation and maintenance of two new BESS sites: Wormald Green (33 MW / 66 MWh) and Hawthorn Pit (49.9 MW / 99.8 MWh). The total financed project capacity now stands at 395.4 MW / 790.8 MWh across eight sites. These transactions are supporting the UK transition to net zero in line with our purpose.

Jacob Lloyd, Head of Specialist Asset Finance at NatWest, said: “Following the facility provided to HEIT in 2022, the bank was able to help further upsize our commitment alongside our counterpart Rabobank, to aid HEIT’s continued growth in the sector for BESS assets. HEIT has an ambitious pipeline of projects that NatWest is happy to support, as the requirement to smooth the unpredictable power generation of traditional renewables with energy storage solutions is ever more important. Facilities such as these are testament to NatWest’s commitment to provide £100 billion of climate and sustainable funding by 2025.”

Norman Crighton, Chair of Harmony Energy Income Trust plc, said: “This extended facility, whilst it may never need to be fully drawn, does give the Company certainty of funding needed to commence construction of two recently acquired 2-hour BESS projects. We thank NatWest and Rabobank for their support and the flexibility it has afforded us with this new financing package. These are highly attractive projects given their near-term energisation dates and are expected to be accretive to NAV as the projects move through construction, similar to the Company’s existing projects. We are entering an exciting phase of the Company’s journey where we expect to have an additional ca.300 MW / 600 MWh coming online during the course of the next 12-15 months. As more projects become operational, we look forward to growing the Company both through organic NAV growth and through equity issuance with the support of our Shareholders, whilst rewarding investors with an attractive level of income.”

Case study 2: NatWest financing supports Zenobē’s “world-firsts” for battery storage

Established in 2017, Zenobē is the second largest owner and operator of battery storage in the UK with 435MW of operational and contracted BESS assets. Zenobē aims to grow its total operational and pipeline portfolio to 1.6GW by 2026, with operations across the UK, Benelux, US and Australia. The company was the first battery owner to develop software to enter the Fast Response and Reactive Power markets and won a contract with NGESO to provide reactive power on the transmission network utilising battery technology – a world first.

In November 2022, Zenobē announced that it had begun construction on the Blackhillock site, part of its pioneering £750 million battery storage project in Scotland, bringing its total Scottish portfolio to 2100MWh which, at the time of announcement, equates to more than the total MWh of all grid-connected batteries operating in the UK today. Over their 15 years of operation, the sites are forecast to save up to 13.4 million tonnes of CO2 from the atmosphere, equivalent to taking 490,000 diesel or petrol cars off the road for 15 years – or the equivalent of removing more than all the cars in Glasgow and Edinburgh. They are also forecast to lower consumers bills by over £1 billion by reducing the curtailment of windfarms over the same period.

The new projects are all contracted to provide stability services to NGESO to improve the reliability of the UK’s increasingly renewable power system. These are the first commercial contracts in the world to use transmission-connected batteries to provide short-circuit level and inertia, essential for the grid to function efficiently as fossil fuel plants phase out.

Having worked with NatWest on an innovative contracted receivables funding in 2021 and on a first-of-its-kind funding platform to help service and finance new EV buses, Zenobē asked NatWest to act as its sole financial advisor to raise a syndicated financing package to support the construction of two new grid-scale BESS sites in Scotland, Blackhillock and Kilmarnock South, which together stand at 400MW/800MWh of UK battery storage. Given the nascency of the market, NatWest led the structuring and lender education process for 25 lenders who responded to the Request for Proposal, before refining to a syndicate of five final lenders. At the point of signing, the £235 million deal was the largest European Project Financing for grid scale battery storage.

NatWest also participated as lender in the syndicate and was successfully mandated with a tier one hold in the lender group, totalling £70.3 million. Furthermore, NatWest assisted during the transaction with the roles of hedge counterparty, facility agent and security trustee and account bank.

Nicholas Beatty, Co-founder and Director of Zenobē, commented: “Securing this first-of-its-kind financing structure is another landmark for Zenobē and our mission to accelerate the grid’s uptake of renewable energy affordably and reliably. As lead advisor, NatWest has been instrumental in developing a debt facility that enables us to deliver grid-scale battery storage projects in Scotland and presents a significant growth opportunity for our business to deliver more of these projects across the UK and elsewhere.”

Joe Taylor, Head of Infrastructure & Asset Finance at NatWest, said: “We are excited to have been able to support Zenobē again and as such help drive innovation and enable the increasing adoption of renewable energy through battery storage. This transaction aligns closely with our purpose to champion potential and to proactively support the UK’s transition to a greener economy. We’re committed to working closely with pioneering companies such as Zenobē on our sustainability journey.”

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