M&A in BESS

For energy storage investors today, confidence has replaced capacity. Buyers are focusing on credible delivery rather than theoretical gigawatts, having seen projects falter at permitting hurdles, fail to reach financial close, or suffer technical setbacks before or after commissioning. 

Investors are seeking out projects with a clear path to a final investment decision or notice to proceed. They want more confidence of returns at their projected levels and timescales.

Independent asset manager Prime Capital is among the buyers focusing on projects, not pipelines. It recently acquired Germany’s largest co-located storage and solar project, in Brandenburg, and large battery schemes in Poland and Finland.

Grid connection, secured land and permitting are Prime Capital's non-negotiables to ensure confidence of execution. But speed is critical too.

“When we deploy capital, we want it to be drawn down into construction soon after we acquire,” says Mathias Bimberg, Prime Capital’s Head of Infrastructure. “So our priority is to assess the likelihood of a project reaching ready-to-build status within six to nine months.”

M&A activity in battery storage is buoyant. At the top end of the market, long-term owners of storage assets are set to consolidate. Institutional investors are seeking to expand their project portfolios or sponsor their portfolio companies’ transition into independent power producers, or IPPs.

But the nature of the deals has shifted, says Partner Chris Mitchell, drawing on his deep experience in energy and energy infrastructure M&A.

“Investors have earmarked a lot of capital for the energy transition,” says Mitchell. “Battery costs are dropping, and we increasingly see sponsors and investors looking to retrofit existing standalone generation with storage. This may help them mitigate price risks and optimize their investments.

“But sponsors and investors have also seen some projects miss delivery targets or fall short of expectations, so some are focusing on pre-investment legal, technical, and market diligence.”

Besides engineering hitches, storage projects can carry unique vulnerabilities that have grown in parallel with the batteries themselves. A 400 megawatt (MW) project with four-hour storage capacity takes up more land – and creates more noise – than the 100 MW, two-hour projects once common in the sector.

Planning lead times can be lengthy and grid connection delays may persist, even for batteries designed to support power networks. “Regulators have indicated commitment to cutting some of the red tape for these assets, but progress is slow,” says Mitchell.

These factors may contribute to why buyers are placing greater emphasis on quality over size. Growth of battery storage is forecast at 450 gigawatt-hours (GWh) for 2026 – but investors may look beyond those numbers.

Like an increasing number of buyers, Prime Capital uses joint development agreements (JDAs) with developers to incentivize them to hit permitting and design targets.

DLA Piper has advised on numerous JDAs over the past 18 months, many for storage projects. The JDA model sees developers offered payments as they reach key project milestones. Failure to hit one can be a cause for renegotiation – or even a dealbreaker.

“Investors want greater certainty on fundamental project deliverables,” says Mitchell. “They’re paying in increments but taking on the project only at financial close, when notice to proceed is issued and they can deploy primary capital.”

This arrangement can result in developers shouldering the risks and holding costs of any project delay, unless investors agree to cover certain development expenses. But JDAs are still attractive enough for an entrepreneurial developer, says Mitchell: “They can bring cashflow into the business, help with development costs, and provide certainty of capital when key milestones are hit.”

Equity investors may minimize risk by backloading their contributions. Market trends are emerging for the percentage of overall project value released at each stage of development for different asset classes.

DLA Piper’s insights from recent JDAs reveal how this typically works. When a developer secures a site, for example, the payment and reward may be relatively low. But obtaining good land can be hard. “Landowners are becoming much savvier,” says Mitchell. “Some are using consultants and running auctions for their land.” 

Also, investors may place relatively little value on planning approval submissions. But developers are rewarded for secured grid connections and other milestones that lead to financial close. 

Clinching financial close often requires high certainty of revenue. Sponsors are increasingly innovating with more complex offtake contracts to maximize returns and ensure a bankable project. These can include tolling arrangements, virtual tolls, capacity swaps, and network support contracts.

Prime Capital is exploring all options. “In Europe, the case for fully merchant revenue is currently still super-attractive,” says Bimberg. “But from 2028 onwards, we are looking into structuring our offtake via tolling agreements.”

The type of stack depends on the jurisdiction, he adds: “Germany has a very deep market. Finland’s market is shallower, so the requirement to toll or hedge is higher.

“You can also choose to profit from the current high pricing at the start of a project, then toll at a later point – there are a lot of possibilities to get your head around.”

Revenue stacking can make economic sense, but the details must be watertight, warns Mitchell, who regularly advises companies on overlapping offtake commitments.

“Multilayered contracting allows you to maximize revenue certainty for the megawatt-hour output of your asset,” he says. “But this requires careful assessment of the interface risk. Owners who fail to get the balance right can find themselves in default under one or more contracts in the stack.”

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DLA Piper advises investors, developers and sponsors across the energy storage value chain, from project structuring and joint development agreements to grid, permitting, offtake and revenue stack risk.