Batteries power their way onto Latin America’s energy agenda

By Andres Garcia-Novel, CFA

The growth in the deployment of utility-scale batteries around the world – as well as in Latin America – has been increasing rapidly in recent years. In 2023 45GW of battery capacity was installed for stationary usage, far in excess of the market’s forecast for 30GW, and the market’s expectation is for another 50GW of battery storage to be commissioned in 2024.

There are many reasons for this acceleration in the deployment of Battery Energy Storage Systems (BESS), and these apply as much to Latin America as other regions around the world. The first of these reasons is favourable price dynamics: while in 2022, following the Covid pandemic and subsequent geopolitical conflicts prices of lithium-ion batteries surged by more than 25%, massive manufacturing capacity additions have resulted in battery prices falling 24% in 2023, with another 35% decline expected by 2030.

This fall in prices will only help the economics of such projects. To date, island nations or remote areas of large countries (such as communities in the Amazon) batteries have been among the most likely places to use BESS (in combination with renewable energy generation) to displace expensive diesel or HFO (heavy fuel oil) power sources, and dramatically reduce GHG emissions.

More recently, a significant deployment of renewable energy in some markets (e.g. Chile) has resulted in significant curtailment of renewable power generation, especially during solar hours. This has led to a direct and rapid development of battery projects (mostly collocated with renewable energy) which would shift power from non-peak to peak hours, potentially benefitting from the underlying significant price differentials (energy arbitrage).

Many of these BESS in Chile have been financed by the country’s utilities or large IPP (Independent Power Producer) portfolios through corporate finance structures, but elsewhere in the world (US, UK, and others) there have been plenty of project finance deals that prove the viability of non-recourse financing for standalone batteries (e.g. for transmission deferral) and hybrid (renewable energy-plus-BESS) projects.

Asset bankability

Utility scale energy projects today typically use Lithium-ion batteries, a proven technology with more than decade of meaningful operational track record for stationary use (on top of being at the core of the electric mobility revolution). The useful life of a BESS asset depends on its use case and cycling intensity but at a cumulative degradation level of around 65%, the performance usually becomes harder to predict, meaning that for one-cycle-per-day use cases a tenor of 15 years is potentially viable.

There are features that can be implemented to lengthen battery project financing deals, such as the inclusion of major maintenance reserve accounts to provide for the augmentation or replacement of the battery. These can provide lenders the comfort to lengthen tenors, but these costs can become onerous when accommodating such facilities in the overall financial terms.

In some cases, offtakers seek to blend storage/ BESS with standard renewable energy generation. An example of this is when a hybrid project is being installed to meet a C&I offtaker desire for a ‘greener’ energy offering on an extended, firm-supply basis. The amount of excess renewable power generation that would be needed without the ability to smooth out peak / excess generation would be prohibitively expensive, and in some cases, it would just be impossible to meet demand with a standalone renewable resource (e.g. solar PV to meet non-solar hours demand).  As such, the use of BESS for energy shifting can provide a cost-effective solution to achieve desired decarbonization outcome.

To facilitate bankability, some hybrid projects strip apart the renewable power and BESS components into two separate and unrelated contractual undertakings and revenue streams (two-part contract). This simplicity can be attractive to some lenders. In addition to the latter contractual modality, IFC has also been involved in assessing financing for projects with blended contracts which provide a single tariff for the energy provided by the hybrid project. While this adds financing complexity by introducing ‘interface’ risk between the renewable and storage components, these are clearly not insurmountable, as we have seen including in emerging markets (e.g. South Africa).

It should also be noted that the use cases for BESS go far beyond energy shifting. Batteries will have a significant role to play also for power utilities, such as providing of ancillary services, and they can facilitate further penetration of renewable energy and enhance grid resiliency to unforeseen climate events. 

With clear tailwinds on pricing and competitiveness, batteries will continue to play an increasing role in Latin America’s energy transition journey.

Andres Garcia-Novel is IFC's Chief Investment Officer, Energy Networks & Storage Lead