The Megawatt Hour is the latest podcast boxset brought to you by Energy Voice Out Loud in paid partnership with BDO. This monthly series examines how energy storage technologies are reshaping, reinforcing and recharging energy markets in the UK and around the globe.
The fifth instalment of our series sees Energy Voice’s Andrew Dykes joined by BDO corporate finance partner David Bevan and Nicholas Beatty, founder and director of Zenobe.
This episode sees us take a closer look at the role of finance and investment in the battery storage sector, exploring how investors and companies deploy capital, what makes a bankable project, whether expectations are changing with a maturing market and – perhaps most importantly - what investors expect to see in return.
Mr Bevan makes the early observation that investing in energy storage as a consumer is already as easy as buying a home battery system, hot water cylinder or other smart energy device, many of which can help manage the consumption and cost of energy more efficiently within the home. (Stay tuned for more on this topic in a future episode).
“But if you're a financial investor looking for dividends, returns and capital growth there are also lots an increasing number of options,” he added. These include investing in shares of listed entities that might specialise in storage, such as Gore Street or Gresham House. Other large renewables-focused developers too are increasingly adding storage as a bolt-on to solar and wind projects, providing another route for exposure.
Finally there are numerous private companies, both large and small, looking to raise debt and equity to make good on their plans.
Zenobe falls into the latter camp. Established in 2017 as a pure-play storage developer, the company now designs, finances, builds, and operates a network of battery storage assets, electric vehicle fleets and infrastructure, with the aim of developing a fully circular battery economy.
It has since raised more than half a billion pounds in funding and now has growing operations in the UK, Australia, New Zealand and the Benelux states, while at the same time expanding its capabilities.
Mr Beatty explained: “We made a decision early on though that we didn't want to just be deploying batteries - buying them and financing them and sticking them in fields. We realised that we needed to really understand how they worked to optimise their use.
“So we made an early stage decision to invest in developing our own software and our own hardware so that we could control these assets, dispatch them, monitor them much more effectively than was available in the market at the time - and that gave us an edge against our competitors.”
In doing so, it also paved the way for innovative projects - such as deploying a 500kWh battery at a Stagecoach electric bus depot in Guildford as an alternative to a prohibitively expensive grid link upgrade.
Institutional investors
Zenobe’s journey did not always run smooth, however, with early-stage fundraising proving a challenge.
Having already developed a string of solar farms, increasingly with battery elements, Mr Beatty and his colleagues looked to raise money from infrastructure funds to set up a fledgling storage business in 2016. When the funds demurred, friends and a group of existing private investors stepped in, enabling the firm to raise around £500m.
“This is an important consideration because once you start getting into the world of institutional investors, they tend to disregard the important risks that these angel investors are prepared to take on to really pump prime these sectors,” Mr Beatty observed.
With the business established, 2017 saw the arrival of Zenobe’s first institutional investor in the form of US-based Tiger Infrastructure Partners, paving the way for further equity raises in the intervening years, including an ongoing process that will see the company funded until 2024.
“The growth been rapid and we seem to have quite a lot of interest, which is which is great news,” he continued. “But we can see now it's big cheques that that we need from large investors - and it's not just money, we need an investor or investors who will take us into North America.”
Asked by Mr Bevan whether banks are now more willing to lend to the emerging storage sector, Mr Beatty was confident that support was more forthcoming. “The banks are getting more comfortable. There's absolutely no question that the banks recognise that they got to play their part in the government’s need to see more decarbonisation and to be financing more decarbonisation,” he explained.
As well as fostering trust with its backers that Zenobe can deliver on its goals, the company has also worked hard to provide a compelling economic case.
“We've developed floors. What we try to do is be much more technically advanced from the revenue perspective; we tend to stack revenues. So rather than just being connected to the distribution network, we've looked at ways that we can enhance the level of income that we can get from our assets.”
This includes innovative models from a new 100MWh battery currently being commissioned. This asset is the largest grid-connected asset in Europe, and the first to be able to provide National Grid ESO with reactive power services under an extended contract. Alongside other services and activity in the merchant power market, it enables Zenobe to line up a diverse set of income streams from the firm’s storage assets.
“By layering the different sources of income - and ensuring that the proportion of those sources of income is to all intents and purposes, fixed - that obviously helps us a lot with getting a higher level of gearing than our competitors are able to get, because we can demonstrate to the banks that we've got that income over the over a period of years and they derive that comfort,” he added.
Government must back storage
While the initial hesitance of institutional investors in 2016 was largely related to the company’s age, it’s also fair to say the market has become much more developed in the intervening years.
Mr Bevan concurred that even although storage is “still a relatively niche area in some respects” there is definitely “much improved knowledge.”
“The investment banks that are running these processes and the investment communities that are funding the listed funds are much better informed and advised”, he noted.
Yet, that is to some degree offset by the present period of instability. Mr Beatty agreed that “undoubtedly” the sector is being affected by volatile power prices, interest rates and cost of capital, though said the most serious implications Zenobe had seen were due to the deteriorating value of the pound and foreign exchange fluctuations – something requiring particular consideration as the company looks at its capex costs for the coming years.
Looking ahead, he also underlined the importance of storage as a strategic priority for government.
“I'd like really to see the government recognise the importance of storage, because there's no point building loads and loads of wind unless you can deal with that power more efficiently.
“Adding storage to the portfolio is extremely important for the UK - we've had Rishi Sunak stand up in his first Question Time and say that atomic energy and offshore wind are the future the country.
“Sadly, it didn't include the word storage, but I think that it's important that they do, because they've got to recognise the importance that this asset class has on ensuring that we have a proper and resilient energy system as we transition.”
While storage may still seem a niche proposition for most investors, Mr Bevan suggests that its crucial importance to the future energy system would make it, “if not a safe bet, then at least a sensible place to think about investing.”