The core distinction: customer savings are not project company revenue
One of the most common errors in early-stage BESS feasibility is treating the customer’s avoided cost as if it were automatically available to the project company.
A solar + BESS project may reduce diesel fuel use, lower generator operating and maintenance cost, improve reliability and create carbon-reduction benefits for the site owner. Together, these represent the customer avoided-cost pool — the full value the project creates for the energy user.
But the project company (typically a special purpose vehicle, or SPV) does not receive the whole avoided-cost pool. It only receives what the contract allows it to receive.
That distinction matters enormously for project finance. A project can look attractive from the customer side and still fail the lender case if the SPV’s contracted service fee is too low, too uncertain, or too dependent on upside assumptions.
The three-scenario framework: S1, S2, S3
To keep this distinction clear, early-stage screening separates project revenue into three cases:
Fixed EaaS service fee only
The contracted, predictable revenue a lender can underwrite. This is the foundation of the financing case. If S1 does not clear the debt service coverage ratio (DSCR) threshold, the project cannot be financed under the current structure — regardless of how attractive the customer economics appear.
EaaS fee plus behind-the-meter arbitrage
Useful additional revenue, but dependent on dispatch rights, price spreads, spare capacity availability and customer acceptance of the operating model. Lenders typically discount S2 revenue or exclude it from the base case entirely. S2 improves the investor story; it should not be the foundation.
Pure behind-the-meter arbitrage, no fixed fee
Shown for comparison only. Without a contracted fixed payment, there is nothing for a lender to underwrite. The project IRR may look acceptable, but there is no debt case. S3 is not a viable financing structure for weak-grid mining or industrial projects.
The simple rule: S1 carries the debt. S2 improves the story. S3 is a reference point, not a structure.
Why the financing structure “fails” even when the project creates value
Not every project that fails the lender test is a bad project.
Sometimes a project creates genuine value for the customer, but the financing structure has not been designed to capture enough of that value as contracted, stable SPV revenue. In that case, the right response is not to abandon the technical solution. It is to redesign the commercial structure.
The most common causes of lender-test failure in early industrial BESS projects are:
- Debt gearing too high relative to stable contracted cash flow
- EaaS service fee too low — capturing only a small share of customer avoided cost
- Contract tenor too short relative to the asset life and debt repayment schedule
- Tail-year debt sculpting creating a single large repayment that drives the minimum DSCR below threshold
- Revenue case depends on S2 or S3 rather than contracted fixed fees
- Customer credit risk not adequately addressed in the contract or security structure
Each of these is a structural problem, not a technical one. The preferred phrase is “financing structure requires optimisation” rather than “project is not viable.”
Carbon value: visible but not double-counted
Carbon value adds another layer of complexity that is frequently mishandled in early screening.
For industrial customers — particularly those subject to emissions reporting, safeguard mechanism obligations, or internal decarbonisation targets — diesel displacement can carry real strategic and financial value. That carbon benefit is part of why the customer is interested in the project, and it should be clearly quantified and presented in any early-stage analysis.
However, carbon value needs to be handled with discipline:
- The carbon benefit belongs to the customer unless the contract explicitly assigns it to the SPV.
- If the model counts carbon value as both a customer benefit and SPV revenue, the project can appear more attractive than it actually is.
- Lenders will not underwrite carbon revenue unless it is contracted, certified and stable — which it rarely is at early stage.
The right approach is to show carbon value clearly on the customer side, use it to explain the customer’s motivation and total benefit, and then keep it out of the base SPV revenue case unless it is genuinely contracted.
What to do when the S1 case does not clear
When the fixed-fee base case (S1) fails the lender DSCR test, the project needs structural work before it can proceed to EPC quotation or financing conversations. The most effective paths are:
- Increase the fixed EaaS fee to capture a larger share of the customer avoided-cost pool
- Reduce project capital cost through scope, staging or procurement optimisation
- Reduce debt sizing or increase equity contribution
- Extend contract tenor to improve the debt repayment profile
- Introduce a minimum payment or take-or-pay clause to reduce revenue variability
- Improve customer credit support or include termination-payment provisions
- Re-examine debt sculpting and reserve requirements
The early-stage screen is not the end of the process. It is a structured way to surface these issues before significant development cost is committed. The goal is a clearer next conversation: what needs to change, and in what order, before this project can be financed.