Financing Batteries in Australia with Harrison Moore (Azure Capital)

Hey, everyone. Welcome back to the transmission podcast. I'm Wendell. In this episode, I'm joined by Harrison Moore from Azure Capital, a key financial adviser helping to get battery energy storage projects in Australia off the ground.

We get into the weeds of what it takes to get a best project financed in an M. The steps, the challenges, and the evolving investor appetite for merchant grid scale storage. We also talk about how different commercial structures change the financeability of batteries, the impact of policies such as the CIS, and whether there's enough advisory and capital bandwidth to meet the scale of the pipeline in Australia. If you're curious about the financial structures behind the energy transition, then this one's for you.

If you're enjoying the show, please hit like and subscribe. It really helps to grow our reach. Let's dive in.

Harrison, welcome to the transmission podcast.

I think just to start off with, could you just, I guess, yeah, give a bit of an introduction to yourself and what you do?

Yeah. Sure. Thanks for having me. So Harrison Moore, partner at Azure Capital. Been with the firm for coming up on eleven years now, working in transactions for the better part of sixteen. And I do M and A, so buy side, sell side, and capital advisory, so help people raise debt and equity for projects.

As a firm, we've been around for over twenty years. And one of our big areas of focus is energy renewables, and that's the part of the business that I'm responsible for and batteries in particular. So I've worked on over transactions, over ten gigawatts in in batteries.

So, yeah, within those sort of projects, then what's the role that, I guess What do we do?

Yeah. Yeah. You end up playing.

So, basically, we're the advisory capacity. So we're bringing together all the different work streams within a transaction, whether or not that's on a diligence side of things. It's sort of coordinating with people on the project side of things, on off take, whatever it might be, bringing that all together to get funding arranged for a project. So on batteries, by way of example, we're working on a number of battery financings at the moment.

We're coordinating with the client. We're coordinating with different funding partners, so in this case banks, to pull together effectively a financing package. Part of that involves optimising the terms, so working with lenders to make sure we're getting the right structure that sits around that. That's about managing risk.

It's also about getting the best pricing, the right amount of debt into the structure so that's sustainable, and about how do we kind of bring all those different stakeholders together. So we have a lot of project management role in that as well.

Yeah. So someone will come to you for a project, but ultimately, that needs financing funding from somewhere because they can't do it all themselves.

Yeah. And they'll People come to us at stages in a project. Right? So most often, someone might be within six months of reaching notice to proceed.

So their project's almost ready at the start line. They're gonna hit go on construction and get into to building something. So there's a lot of work, obviously, that goes into development, securing land, approvals. Often you have some form of off take, so committed revenue stream as part that.

And then procurement.

So who's going to be building what? All those packages sort of brought together, and then we're involved to kind of bring in the financing, the funding package for that. And often that comes from banks effectively.

Yeah. I was gonna ask about the timelines. Like, is six months, like a typical kind of timeline for a project?

Normally, a process for us is probably, you know, a six months, and the first part of that's just preparation. So when we actually engage with the the finance community that they're ready to go. What we want to be doing is running an efficient process. There's a lot of activity in the market.

People are busy. And so what they're looking for is for you to make their life easy. And so there's a lot of preparation work that goes into that to pull everything together so it's easy for lenders to navigate their credit process. That usually takes two, three, four months working with our clients, various other consultants in order to actually get it to that point that we can engage formally with the market.

Then a credit approval process might take a couple of months to get through this transaction documentation and then to get through to signing and then ticking off any conditions precedent prior to closing on a financing. We do get involved a bit earlier sometimes. For some of our clients, we may have been involved twelve, twenty four months before they actually get to financial close. In those circumstances, we'll be helping feed into key project contracts around bankability to make sure it's ready when it gets to the end, any commercial overlay. Sometimes we get involved in offtake procurement as well. So what's the commercialization strategy? How are gonna bring in an off taker to help give you a a certain piece of the revenue stack?

I think that bit's really interesting, Pete, because it's obviously the most of the focus is on the financial side, but then it does that need mean you need pretty good understanding of what's happening with the asset, the energy market in general?

Yeah. Exactly right. So our role as much as most of the people come from, say, a corporate finance background, you have to understand the fundamentals of of finance and how those things fit together. You also need to have subject matter expertise around the energy market, around the technology, in this case, batteries, understand how all those things fit together in order to bring it all together and actually run a successful financing process.

And so in our organization, people actually come from a wide variety of backgrounds. So you have a number of people that are finance professionals. We also have people that have come out of developers or project finance banks. There's real diversity in the team, which is deliberate in terms of, you know, how do we kind of leverage the different skills required in order to deliver a financing.

Awesome. And, I mean, yeah, would you be able to, like, walk me through let's say, yeah, if we have the sort of example of a battery project, like, what are the different stages? I think you mentioned a few of them there that have to be reached in order to essentially reach that financial close notice to succeed.

Yep. Sure. So your land needs to be secured. You secured your tenure. You need to have all your approvals. So the right to actually go and build what it is that you're planning to build to operate it. You need to have your connection, which is often one of the longer lead items when it comes to batteries, so the capacity to actually connect to the network and operate your battery.

And then you need to have all your procurement in place. So, you know, where are you gonna get your battery from? Who's gonna build it locally? And then what are you gonna do on the revenue side?

So are you going to have a contract with a third party to give you a guaranteed revenue profile? Are you going to have some merchant exposure? Increasingly, we're seeing a bit of a mix of both. And lenders need to see all those things in place and committed before they're prepared to lend you money.

Yeah. If think about the project this project, so is there, like, a sort of certain size project? Or how do things change at different scales? Because so one thing in the Australian market is, I would say, the scale of battery being built is pretty big Yeah. Especially on average. And that compares, I think, very definitely to say how we see things in the UK market. As the size of the project increases, how do things change?

In terms of the market here, it's evolved rapidly and, you know, that projects have just become bigger and bigger and bigger. You know, the first projects we're working on might have been, you know, fifty or sub fifty megawatts.

And fast forward to a couple of years ago, we're working on something like Waratah Super Battery, eight fifty megawatts. The projects are getting a lot bigger. The majority of what we're seeing are probably more in that two hundred to four hundred megawatt type space at the moment. And part of the reason for that is the economies of scale. So the effort that goes into actually developing a project, the procurement piece, and then if you can get a connection and your revenue model stacks up, it actually makes sense to be building a slightly bigger project. There is some declining utility at some point on the revenue side, particularly with FCAS markets.

You know, as your projects do get bigger, but increasingly, FCAS is becoming, you know, less important and it's more around energy arbitrage. And so to the extent you can build a bigger project, then, you know, that that's the direction of the market. And, really, there's a demand for energy storage. The market is currently short. Energy storage and and battery energy storage is sort of the the cheapest, most cost effective, quickest pathway to market at the moment.

Is the I guess a point because obviously, yeah, as the projects get bigger, the cost of them gets bigger. Is there a point at which it kind of fundamentally changes, like, kind of your role or, say, the investors who are getting involved?

Yeah. I I think the market just evolves and and adapts.

Certainly, some of the the checks are getting bigger. And so, you know, the the number of banks that are participating in any given deal or the number of, you know, equity funding partners that you might see in any particular deal, that might change. But at the moment, there is more liquidity in the market, more demand to invest in this asset class than there is investable opportunity. That will likely change over time. But the outlook for battery energy storage, I'd say, is relatively positive, particularly in the context of a transitioning energy market, the likelihood of volatility for the foreseeable future, and an asset class which effectively allows you to participate in that and also facilitates that transition.

Yeah. I think that's obviously, yeah. One of the things that's so almost unique to the Australian market is that volatility, which I think we'll come back to. Within those stages that you you described in terms of getting a project to, you know, financed ultimately, are there any bottlenecks that you typically see happening, like, kind of on these projects?

Yeah. One one of the biggest challenges for getting a battery to the start line and into construction is aligning all those different work streams I talked about, and and the biggest one of those would be the the connection.

And there's a bit of a logjam of projects trying to get through the connection process, and there's a constraint in terms of processing those connection applications to get people connected because you've got, you know, a relatively complex set of assets all trying to come into the grid and people trying to forecast what the implications of those different assets connecting at different points in time at different locations. And that takes time to work through. Currently, that's creating a bit of a logjam.

It also creates sort of a challenge in lining up the different work streams because you're going to your battery supplier and saying, oh, I need a price on the basis of my project getting a connection at this date. That date slips. You're going back to your battery supplier and asking that same question, the same of your off taker. And it just makes it very difficult to sort of manage a timeline on a project. And the implication of that is uncertainty, and it goes to price. And so the cost of your battery might be higher or the price of your offtake might be lower in the absence of certainty. And it's part of the reason we've started to see some project proponents actually commit to building projects without certainty on their network connection or without certainty on their offtake just so they can remove that risk and then solve for it later once they have certainty on their project timeline and delivery.

And so, yeah, that connection process, that's ultimately managed by AIMO. Right? And so I guess this is one party, and they I don't know how big their team is working on this.

But Yeah.

It's a combination. Right? So part of it's AIMO, and then part of it's kinda, you know, the transmission network service providers in each relevant sort of state and territory.

And so it's a combination of those things.

Yeah. It's like TransGrid, for example. Exactly. Yep. Awesome.

And if we, I guess, look at the, like, kind of investor picture a bit, you mentioned there was kind of a lot of probably appetite from investors at the moment.

Has that changed in the last, say, like, to three years? Yeah. Massively. So a few years ago, I'd say there wasn't really an investable battery market in Australia, so it is relatively new.

The first investable battery opportunities we started seeing were most commonly co located. Existed generation assets, whether or not that's wind or, in particular, solar, people looking to co locate a a battery, share a connection, and there's some complementarity between those assets. We started seeing that more frequently a few years ago, and then the market quickly evolved into standalone batteries. And the market has sort of evolved rapidly and the liquidity required in that part of the market is huge.

Right? Like the number of battery opportunities that there are in the market versus the supply of capital means that there's a lack of investable opportunity at the moment. And so that is both on the debt and the equity side of things. A number of financings we ran last year for batteries were multiples oversubscribed.

So there was more lender demand trying to sort of put out balance sheet than there was actual capacity to do so. And we're start we're continuing to see that this year as well.

In my sixteen odd years doing this, it's the quickest I've seen the lender universe actually get educated and become progressive in a sector from a few years ago where lenders wouldn't consider merchant exposure lending against that to now actually being prepared to take a decent amount of merchant exposure. Still often a preference for as much contracting as possible, but at least a willingness to look at that as part of the the revenue stack when when lending.

What do you think is behind that? I guess, yeah, the kind of general appetite and also, yeah, the shift.

Yeah. I think there's an understanding that there's a requirement to build out storage to support the energy transition, and there's a mandate globally from capital providers to invest in this broader sector. And they've done that in the traditional generation renewable assets, wind, solar. There's now a requirement to invest in batteries effectively. And so it's a necessary sort of part of energy transition. And so people have had to become educated quickly in order to, you know, meet requirements for capital deployment.

So, yeah, like you like you sort of described, especially within the Australian context, well, in the NEM, sort of batch range of sales revenues are, you know, very sort of merchant focused, very volatile.

Is that something that then sort of completely happy dealing with? Or, you know, where's the balance of that today?

Yeah. So happy maybe wouldn't be the word the word I'd I'd used and not for debt or or equity. Right? And we often get asked, you know, do our clients want to take merchant risk? If you think about the investor universe here, it's often infrastructure investors or strategics who probably don't want to take lots of merchant risk or exposure.

And then the same goes for lenders who are more conservative part of the capital structure on the basis of being debt, senior secured, lower return expectation generally doesn't go hand in hand with taking risk merchant exposure. So everyone in the market would like a level of contracting, I would say, for the most part. It's just about getting the right balance to underwrite a capital structure. Now, there's a preparedness and willingness to look at that and an understanding that volatility is part of the market, but it's a bit of a balance.

So we are starting to see some fully merchant projects close from a debt and an equity perspective. But I would say that's less common, it's less frequent, and wouldn't optimize the capital structure. It's those projects that have a base level of contracting, potentially even with some plans to go and get incremental contracting, that will secure, you know, greater price structure, quantum of of debt, and we'll have a more long term sustainable capital structure.

Yeah. And so, I guess, by contracting in this context yeah. So these are kind of private, like, off take contract agreements mostly as opposed to say, like, market based, like, long term contracts like we see in other other sort of regions.

Because there's been a bit of a shift in that because I guess we could start off with, say, like, the old kind of a hundred percent physical toll of an asset, which is quite a simple thing then to get your head around.

But now we're moving to things, yeah, virtual tolls and partial contracting on asset. You know, how have lenders been able to get on board with this?

Yeah. Yeah. Again, it's it's education, and and what we spend a lot of our time doing is understanding it for ourselves. There is a new, emerging, rapidly evolving contracting market in Australia. You're right to say that the market probably started with full physical tolls ten, fifteen, twenty years, relatively vanilla. You're now seeing virtual tolls, capacity swaps. There's a number of government tender processes, whether or not that's El Tessa, SIP, system shrink services.

And the market is having to get educated and understand these products. I would say that's happened relatively quickly. It's just about understanding the risk allocation. And it's not just as simple as, well, this is a fix for floating payment.

There's other operational elements of risk which need to be understood, and they're different. It's not not every virtual toll, not every capacity swap manages those risks in the same way. And so you really need to understand the details. It's working with technical advisers, legal advisers, you know, commercial and market advisers to understand the allocation of those risks and what it means for a specific project.

From what you see, is there a preference for a specific type of contracting structure in the market, or is it still quite early?

It depends on risk allocation. I think we're increasingly seeing virtual tolls be a more common contracting arrangement. Part of the reason for that is the layering and the ability to bring in multiple off takers, which is a contrast to a physical toll historically where it's sort of all or nothing. Someone takes a hundred percent of the capacity of the asset or you you don't have a toll at all.

Virtual tolls allow greater flexibility in terms of, you know, the contract with counterparties as well as the operation of the batteries and this capacity to optimize there. We are also seeing, you know, capacity swaps more commonly, but there's probably less potential flexibility there in terms of how you layer in other contracts.

I guess yeah. So the capacity swap is a bit of a sort of almost like a sort of revenue share type deal, but it's purely on the offtake side Yeah. Is how I would describe it, I think. Yeah.

It's it's effectively you're agreeing with a party that you can operate the battery in a certain way. Let's call it profit maximization. You're have a a joint operating protocol that you both sign up to. Typically, an auto bidder is gonna be actually, you know, doing the heavy lifting there. And then you agree to kind of receive a fixed payment and pay back to them a proportion of the battery's actual revenue as a floating payment in contrast to a virtual toll where you could technically operate the battery in a different way to virtual instructions you're effectively receiving. So it's just the operations of the battery could could be misaligned, I guess, between those two contracting structures.

And you mentioned we have seen some pure merchant projects get financed. Is there anything kind of fundamentally different in, so, yeah, the structure of those deals compared to those with some contracting element?

Yeah. There's just a extra layer of conservatism applied because there's greater uncertainty in the revenue stack. And and effectively, we're saying, you know, we're seeing lenders not want to sort of take, you know, full risk on that basis. And if you think about it, a base level of contracting in contrast to a fully merchant project, you know that a certain level of capital return or debt repayments is gonna be underwritten by that contract.

Makes it easier to form a viewer on that merchant component where you've got none of that and you're effectively one hundred percent exposed to the market and you're committing to that a couple of years before you're even into revenue because a project needs to get built. There's just that extra layer of conservatism that's applied. Potentially, you could have different structural features within a deal, whether or not that's cash sweeps to accelerate amortization of debt, things like of that nature, potentially, or incentives. So lenders saying, why don't we encourage you to go and get a contract? Why don't we put in place a step up in your gearing so that when you do go and secure that contract, we're actually happy to pre agree to give you, you know, extra funding in that circumstance. And so trying to create alignment, I guess, with contracting.

Got it. And, I mean, if we think yeah. Like, the the sort of, I guess, the scale of the pipeline for battery energy storage in Australia and them is is enormous. Do you think so is there enough, as I say, like, liquidity on the offtake side to provide contracts for all of these to keep kind of to have the investor community happy?

At the moment, there's sufficient offtakes in the market at a price that's attractive enough for people to commit to building projects.

We're working on a number of them and we're assisting with some offtake procurement and we're saying there is still good liquidity in the market. It is different state by state. So some parts of the national electricity market are gonna have, you know, greater demand than than others, but that'll constantly be evolving. So the fact that we see that today, it'll really be driven by what does the demand profile and outlook look like over time and what is the build out of batteries? And so one of the things which both debt and equity are concerned about when they think about merchant exposure is, you know, could there be an overbuild of batteries? What will that mean for my revenue structure if I'm exposed to merchant? And that is part of the reason, I guess, why people do wanna contract because that it could impact on liquidity and the price on which people are prepared to offer offtakes.

Yeah. And I guess that's kind of like a fundamental element. Like, even if, yeah, you have sort of, let's say long term confidence that there is the volatility in the market, you can't guarantee that's gonna be rising year on year to provide you the cash flow to ultimately pay off your financing. Yeah. I mean, within that, like, what's the kind of role that some of the government backed sort of schemes offer? So, I mean, there's the capacity investment scheme and the New South Wales, like, Tessa. Like, is that playing a role as well in helping projects, like, get off the get the financing done?

Yeah. It's definitely playing a role. I don't think it's a standalone solution. If you look at projects which have secured government offtakes, whether or not that's through the CIS, LTSA, SIPs, system strength services, in almost all cases, it's been paired with some other form of offtake.

I do think it's an important part of the market in terms of supporting capital deployment into energy storage build out, particularly when it comes to specific use cases. Longer duration, the economics could be marginal, but there's a requirement for longer duration to support needs in the grid.

Those form of government subsidies, L TESS in particular, is a great example of how that can provide that market signal before the economics might make sense to incentivize private capital.

But we are seeing a shift into longer duration. So we're starting to see projects on a four hour basis without government support go and get third party private offtake contracts and still get the capital required in order to get built. And so they're playing a role in terms of starting that sort of pathway and also supporting projects and underwriting, particularly on the downside, some of that risk.

But we are seeing different investors play in that market in in different ways. So there's very different bidding strategies, I guess, that we we've seen, particularly on the capacity investments gain.

Yeah. That's not always, overly obvious to, I guess, those looking into the market kind of what those different structures are. So it's almost then so at the moment, it's kind of playing a role, but not, like, on its own in terms of supporting some of this investment?

No. Not on the basis of what we've observed. It's not a support mechanism standalone. It's definitely been important in terms of supporting projects in combination with, you know, third party commercial offtakes or or whatever it is.

But we haven't seen it, I guess, yet be a standalone solution other than in some of the longer duration examples with with the El Tessa in particular. Or if there's been a specific need so take Waratah, for example. That contract that was put in place had a very specific purpose. And so, you know, that was able to underwrite a very large project.

So we discussed kind of liquidity in the offtake market if we think about, I guess, the LSS which you needed. So, yeah, I guess, capacity in the cap capital markets, but also just from those, you know, helping advise like yourself on these projects. Is there enough capacity at the moment in Australia to support the battery energy storage pipeline?

Yeah. I think at the moment that there is, and it's the part of the market where we probably see the most liquidity in terms of renewable energy investment in Australia. Projects which are sort of, you know, at a ready to build stage, so ready to start construction in the battery energy storage space is probably where we see peak liquidity. And there's a lack of investable opportunity. So There aren't a lot of operating batteries at this stage.

Even if someone wanted to invest in, acquire an operating battery, there's not many that exist currently and there's even fewer of those that might be for sale. There's a huge pool of liquidity trying to get access to this market, both on the debt and equity side. Now that'll obviously change over time as more of these assets get built. There's more developers in the market. There's more assets that'll be available. But in terms of the actual requirement at the moment, I'd say, yeah, that there's more liquidity than is required and for the foreseeable future.

Yeah. And I I guess yeah. So a lot of our focus has been on sort of new projects. But yeah. So do you think, yeah, we'll get to a point where there'll be upside to, yeah, sort of buy some of the projects and port port portfolios which are are operational?

Yeah. Definitely. I I think that's probably on the generation side where, you know, the market saw peak liquidity a few years ago with people investing in operating, you know, solar wind projects. And so I think similarly, when there is actually a market there and investors looking to recycle capital, you will you will find that that there's a more developed market there. There just isn't the liquidity at the moment. There isn't the availability of assets.

Okay.

And I guess, yeah, you kinda touched on a bit there. Because, obviously, there's there's different elements that need financing within the energy transition in Australia. Like, is there comp is would you say there's kinda competition between the battery energy storage space and renewables? Or for that, I guess, what's available, or is it sort of two stand alone pots?

Some investors will only invest in battery energy storage, but generally, you're saying people invest across a wider array of assets, and and that would typically be renewable energy, wind, solar, batteries. For some, it's even broader than that, broader infrastructure mandate. And so at the moment, there's a lot of activity in the market. And so that does mean there is competition for for capital, and it could be between a solar farm and a wind farm and and a battery.

And people may have to choose where they allocate, you know, their time, resources, as well as their capital. And we definitely are seeing that sort of, call it, competition between processes at the moment. And human resource is one of the biggest constraints that we see for investors because there might be ten assets that fit their mandate, but they only have the human resources to look at two or three at any one point in time. And so they have to prioritize.

They have to pick and choose what it is that they're gonna look at.

I guess looking forward, like, do you see anything evolving on the sort of financing of of assets in Australia or the energy assets in Australia. You know, there's obviously market reforms on the way. Do you think they might play like a a role in structurally changing, you know, the financing space?

Yeah. I think the market will always be evolving. The offtake strategy and the willingness to take merchant exposure is probably the one we've seen change the most over the last couple of years from fully one hundred percent contracted physical toll assets through to beginning of this year starting to see fully merchant projects get financed. I think you'll continue to see more of that happening and potentially even a more progressive approach to how people think about merchant exposure.

I also think you'll start to see differential contracting offtake strategies as well. And that'll be across asset classes. So it might involve batteries, but it might involve a broader pool of assets, maybe on the generation side, more of a capacity swap style contract. We're starting to see that on hybrid projects, and we're starting to see more and more portfolio financings.

And so the lender community actually looking at assets on more of a holistic basis, and I think that'll be a key differentiator for investors in this space, those that actually have multiple assets at their disposal and the capacity to sort of think about things in a more holistic way.

Yeah. The hybrid sort of projects, the things that actually we haven't really touched on, which I guess is kind of the next wave of, you know, projects to come through. Maybe we'll have to touch on that in our future future conversation. Just to wrap up, you know, we always finish with with two questions. And so the first of which is, is there anything you would like to plug?

Oh, sure. If, if people are looking to buy an asset, sell an asset, raise capital for an asset, secure an offtake for an asset in the energy and renewable space, then, you know, that that's us. That's Azure Capital. So feel free to come and talk to us.

So basically, yeah, if there's, yeah, any interest in anything to do with investing in storage, you're the person to speak to.

Yeah.

And finally, do you have a contrarian view?

It's probably around investment in the market at the moment. And we talked about how batteries are probably where there's peak liquidity, lots of investment happening in that space. And some people have moved away from some of the traditional generation assets and, you know, in particular, operating solar assets, I'd say there's less liquidity in the market at the moment. And I actually think countercyclically, the risk adjusted returns look relatively attractive in that part of the market. And if one of your concerns around batteries are that there could be overbuild, there could be compression of gross margins, then the beneficiary of that is likely to be operating solar farms. And so in some ways, that could be a natural hedge. And, you know, if your mandate allows you to invest, across sort of a wider asset class, then I'd be encouraging you to sort of look at that because I think it looks relatively attractive at the moment.

Yeah. Because I think I guess there's been a sort of fairly common refrain, like, scale solar is sort of dead, but you're saying it doesn't have to be.

No. And I I wouldn't say it's dead necessarily. I'd just say there are market related challenges for solar assets around negative pricing, thermal grid curtailment performance.

And so those are factors that will continue to evolve and exist that are relatively well understood, I think can be priced. And I think with the build out of batteries, some of them will be mitigated. And so there's an opportunity at the moment where there's less liquidity sort of in that part of the market. And so I just think that represents sort of an interesting and attractive investment opportunity.

Awesome. I think that's a good place to finish on. So, Harrison, thanks a lot for coming on the on the podcast, and thanks, everyone, for listening. Thanks for having me.