Why do BESS projects use debt?

By using debt, the investor does not have to finance the entire project from equity. This means committing less equity, retaining more liquidity and being able to deliver more projects in parallel. If the project generates stable cash flows, the use of debt makes it possible to increase the rate of return (IRR) on equity. Financial leverage works, however, only if the project is genuinely able to service the debt.

In BESS projects, debt is not extended on the basis of the investor's balance sheet but on the basis of the project's ability to generate cash. What matters is how much CFADS the project generates, how stable those cash flows are and whether they are sufficient to service the debt over time. This means that financing is based on the logic that the project repays itself.

To obtain financing, the project must go through a detailed verification by the bank. This includes assessing assumptions on revenues (revenue stack), the way the storage facility is operated (dispatch), technical parameters and degradation, the quality of contracts (LTSA, warranty) and the results of scenarios and stress tests. Debt thus introduces discipline — the model has to be realistic, not optimistic.

Project financing covers not only the loan itself but also protective mechanisms such as DSCR and financial covenants, DSRA and reserve accounts, cash sweep and the cash-flow structure (waterfall). These mechanisms reduce risk, stabilise the project under difficult scenarios and ensure continuity of debt service.

Not every project can be financed with debt. For that to be possible, the project must demonstrate stable and predictable cash flows, resilience to market volatility, consistency of technical and financial assumptions and an appropriate contractual and operational structure. The inability to obtain debt financing often means that the project does not meet bankability requirements.

At ENVALIS we treat debt not just as an element of financing but as a key test of project quality. We analyse whether cash flows are realistic, whether the project maintains its credit capacity under stress scenarios and whether the financing structure is adequate to the risk. This helps us answer the most important question: does the project really deserve to be financed?