Column: Florence Anglès
In the previous column, the focus was on verifying the project’s viability. But once this point is clarified, the question shifts. It’s no longer about whether value can be created, but whether it can be sustained. In a constantly evolving environment, the challenge is understanding when the equilibrium might become fragile.
Sustaining Value: From EBITDA Volatility to NPV Sensitivity
After verifying the structure’s solidity, the focus shifts to the sustainability of value rather than its mere existence. The question then becomes: do the projected cash flows remain stable in a realistic operating context, considering all technical constraints?
Unlike traditional infrastructure, BESS construction projects are heavily dependent on revenues generated in the market. This makes them sensitive not only to price fluctuations but also to profound changes in market dynamics. At this stage, the aim is to assess risks to transform operational uncertainties into financial uncertainties, and thus measure how the investment reacts to key assumptions.
Fragility of Revenue Streams and Risk of Market Saturation
BESS projects often rely on multiple revenue streams, such as arbitrage, frequency response, voltage support, and sometimes capacity mechanisms. This diversity can reduce risk, but it also leads to exposure to market fluctuations. These markets are often highly competitive and can change rapidly. When new capacity is added, revenue margins tend to decrease, and past performance is no longer a guarantee of future results. In this context, the main risk is not the fluctuation of short-term earnings, but rather the gradual decline in margins over time. The key questions are:
- How sensitive is EBITDA to a 20% to 30% reduction in arbitrage margins?
- What happens if ancillary services revenues decline due to increased competition from new entrants?
- To what extent are revenue projections based on historical conditions that may no longer hold true?
Weak revenues primarily affect EBITDA levels, but due to discounting and leverage effects, they can have a much greater impact on internal rate of equity.
A project evaluated using overly optimistic growth assumptions, without considering downside risks, demonstrates financial vulnerability rather than genuine strength.
Degradation, Efficiency, and Integrity of Long-Term Cash Flows
Technical assumptions significantly influence financial results. In battery energy storage (BESS) projects, factors such as degradation, efficiency, and system condition directly impact the sustainability and reliability of cash flows. Battery degradation plays a significant role in energy production capacity, the duration of revenue generation, the need for capacity expansion, and the remaining asset value. Overly optimistic degradation assumptions may lead to inflated final cash flow projections, potentially resulting in an excessively high net present value (NPV). Other technical assumptions follow a similar trend:
- Round-trip efficiency has a direct impact on arbitrage margins,
- Availability determines the ability to meet contractual obligations,
- State projections influence the sustainability of long-term revenues.
Even small deviations in these assumptions can have significant financial consequences. In some cases, they may be enough to push the project’s IRR below the investor’s cost of capital.
The key question is: at what level of technical degradation or underperformance does the project become unprofitable?
If small deviations in technical performance have significant consequences for returns, robustness should be prioritized over optimization.
Schedule-related risk: commissioning delays and discounting effects
Time is a critical but often underestimated risk factor. Delays in commissioning not only postpone revenue generation but also reduce the net present value. Initial cash flow plays a more significant role in net present value (NPV). An initial cash flow lag increases the risk to NPV, particularly in capital-intensive projects. A six-month lag may have a limited nominal impact but a disproportionate effect on NPV due to the discounting effect. From an investor’s perspective, the question is not only whether the lag can occur but also what lag the project can withstand without impacting its returns.
Furthermore, a delay in commissioning can lead to various side effects, including:
- Increased development and construction costs,
- Loss of access to favorable market conditions or revenue opportunities,
- Non-compliance with financing terms.
In leveraged structures, schedule risk can directly impact debt repayment capacity and refinancing conditions, thereby amplifying its effect on return on equity. The question, therefore, is not whether the project will ultimately be operational, but rather: how significant is the value erosion caused by an execution delay?
Leverage, Coverage Ratios, and Resilience to Risk
Ultimately, a project’s “bankability” is tested in a crisis, not in baseline scenarios. A project may appear robust under optimistic assumptions but prove fragile under more realistic adverse conditions. Stress tests must assess the robustness of the investment project under adverse scenarios, such as:
- The impact of EBITDA compression on debt service coverage ratios (DSCRs),
- Internal Rate of Return (IRR) performance under conservative valuation conditions, the sensitivity of equity value to increases in the weighted average cost of capital (WACC),
- Net Present Value (NPV) under reduced availability or efficiency.
At this stage, it is essential to make the following distinction:
- EBITDA volatility affects short-term financial performance,
- NPV sensitivity determines whether the investment remains justified.
A project with a stable NPV under adverse scenarios is considered investable despite fluctuating short-term performance. A project with a marginal NPV under moderate crisis scenarios is considered inherently fragile.
Conclusion
Ultimately, the goal of risk assessment in battery energy storage (BES) mergers and acquisitions is not to create a perfect model or to account for every possible scenario. It is to answer a few practical questions, even if the answers are not always clear or perfectly structured.
First, is the project feasible in a safe and realistic way?
This is the starting point. Grid access, permits, regulatory compliance: if any of these elements are uncertain, the projected revenues become meaningless. The project may look promising on paper, but it simply won’t materialize. Then, assuming it does materialize, the question is whether its value will hold over time. BESS assets do not operate in a stable environment. Performance fluctuates, equipment ages, and market conditions change. What matters is not the base-case scenario, but the project’s behavior when conditions are less favorable.
There is also the question of execution. Delays or friction, even relatively minor ones, can have disproportionate effects, not necessarily because they significantly alter the project, but because the time factor may not be as secondary as one might think. Costs skyrocket, revenues fluctuate, and the overall balance sheet changes. Over time, operational stability becomes equally crucial. A project unable to maintain consistent performance tends to accumulate problems. Individually, these problems may seem manageable. Together, they can become far more significant.
Finally, there is resilience. A project should not be evaluated solely under favorable conditions. The real test is observing its reaction to pressure, declining revenues, rising costs, or less favorable market conditions. This is where the distinction becomes clearer. Some projects remain largely intact even when assumptions change. Others do not. This isn’t always immediately apparent, but ultimately, it’s what makes an investment worthwhile. Therefore, risk assessment isn’t about eliminating uncertainty. That’s unrealistic.
It’s about understanding your level of risk and deciding if it’s acceptable.