- Customer avoided cost is not project revenue. It only becomes revenue where a contract converts it into a payment obligation someone is bound to pay.
- The chain that matters is: customer avoided cost → contracted EaaS fee → SPV revenue → CFADS → debt service → equity return. A lender underwrites the weakest contracted link, not the headline saving.
- S1 (contracted base) carries the debt; S2 (customer upside) improves the equity story; S3 (lender downside) decides whether the project is bankable at all.
- Carbon value counted on both the customer side and the SPV side is the same dollar spent twice. It flatters the model and evaporates in diligence.
- “What is the IRR?” is the wrong first question. “Which cashflow can actually be signed, invoiced, collected and underwritten?” is the right one.
Why this matters
This note is part of how I try to keep my own Pre-DD screens honest. The most seductive number in early-stage industrial PV+BESS is the customer saving, because it is large, easy to model, and usually true. A remote site burning diesel really does save a great deal of money by displacing fuel. The mistake is not the number — it is quietly assuming that number belongs to the project company.
Early models are almost always built from the customer’s chair, because that is whose data you have first: fuel burn, tariff, load. From that chair the project looks obviously worthwhile. Then a lender sits down, asks one question — what am I actually being asked to lend against? — and the attractive saving turns out to be sitting in the wrong party’s ledger. The project has not become worse. It was never financeable in the form it was modelled.
Three chairs, three different ledgers
A solar + BESS project displaces diesel, lowers generator O&M, improves reliability and creates carbon benefit for the site owner. Together these are the customer avoided-cost pool — the full value the project creates for the energy user. That pool is real. It is also almost entirely the customer’s, not the SPV’s.
The project company only receives what the contract says it receives. And a lender does not size debt against SPV revenue in general — it sizes against the portion of that revenue that is contracted, durable and downside-protected. Three chairs, three ledgers: what the customer saves, what the SPV is paid, and what a bank will actually lend against. They are rarely the same size.
Follow the cashflow, not the saving
The useful early-stage discipline is to follow value across the whole project rather than stopping at the customer saving:
Industrial BESS cashflow chain
Value narrows at every arrow. The lender sizes debt against the weakest contracted link, not the headline customer saving.
Every arrow is a place the value can leak. If the fee captures only part of the saving, the chain narrows at arrow one. If the fee is uncontracted or contingent, it narrows at arrow two. If tenor is short or DSCR thin, it narrows at debt service. The lender underwrites the narrowest contracted point in that chain — not the width of the pool it started from.
S1, S2, S3: what each case is actually for
To keep the chain honest, I separate project revenue into three cases that each answer a different party’s question:
Fixed, contracted EaaS fee only
The predictable payment obligation a lender can actually underwrite. This is the foundation. If S1 does not clear the DSCR threshold, the project is not financeable under the current structure — however good the customer economics look.
Fee plus behind-the-meter and customer-side value
Additional value — arbitrage, spare-capacity use, the customer’s wider avoided cost. It strengthens the equity story and the customer’s willingness to sign. But it depends on dispatch rights and behaviour, so a careful lender discounts or excludes it.
The stressed, bankable case
S1 run through the lender’s pessimism: lower availability, customer under-use, delay, credit stress. This is the case debt is actually sized against. If the project only works above S3, it is an equity story wearing a debt costume.
The rule I keep coming back to: S1 carries the debt, S2 sells the equity story, and S3 decides whether a lender shows up at all.
Carbon value: real, but not counted twice
For customers under emissions reporting, safeguard obligations or internal decarbonisation targets, diesel displacement carries genuine carbon value. It should be quantified and shown — it is often why the customer is at the table. But it needs discipline: the carbon benefit belongs to the customer unless the contract explicitly assigns it to the SPV, and a lender will not underwrite carbon revenue unless it is contracted, certified and stable, which it rarely is early on. Count it on both sides and you have spent the same dollar twice.
When S1 does not clear, redesign the structure — not the physics
A project failing the lender test is often a good project wearing the wrong commercial structure. The fix is rarely the battery. It is the contract: raise the fixed fee to capture more of the pool, extend tenor, add a take-or-pay floor, strengthen customer credit or termination provisions, reduce gearing, or re-examine tail-year sculpting that drops the minimum DSCR. The honest phrase is “the financing structure requires optimisation” — not “the project is not viable.”
The Pre-DD takeaway
Questions to ask
- Which party owns each saving and environmental benefit?
- What payment is fixed, contracted and enforceable?
- How long does the contract run relative to the debt and asset life?
- What remains after availability, operating cost and lender haircuts?
- Does the stressed CFADS still cover debt service?