Andrew
Welcome back to the Megawatt Hour, the latest podcast series brought to you by Energy Voice in paid partnership with BDO. In this series, we'll be examining how energy storage technologies are reshaping, reinforcing and recharging energy markets in the UK and further afield.
Our first episode saw us take a sweeping look at the what’s, why’s and how’s of energy storage. This week we'll be taking a deep dive into perhaps the most exciting and active area in the sector today: battery storage.
In less than a decade, the UK has moved from having no large-scale battery capacity to more than 1.6 gigawatts in operation, and that shows little signs of stopping as we accelerate pace towards net zero. We'll be looking at what's driving that growth, the hurdles faced by the sector and importantly, what opportunities may yet lie ahead.
I'm Andrew Dykes, an editor at Energy Voice, where we are leading the global energy conversation, and I once again joined by my co-host, David Bevan, a corporate finance partner at BDO, who heads up the group’s renewable energy practice in the UK.
We are also pleased to welcome back Ben Guest, who is managing director and head of the new energy division at Alternative Asset Management Group, Gresham House. Gresham operates the UK's largest listed battery storage fund, which Ben oversees as well, so we're lucky to be able to pull on some of his incredible insight into this rapidly growing sector.
So, last time we covered the basics of storing energy in general, but I think it would be good for us to make sure we're on the same page to kick us off.
So Ben, would you be able to kind of give us a back-to-basics 101 primer on how batteries work?
Ben
Yes, and great to be back.
Batteries essentially, and I won't go into the chemistry and the analytics and so on. I'm not a practising engineer, I'm not a technically a qualified battery expert, so I won't. I won't talk on those terms, or although you might have your audience falling asleep.
Andrew
We won't hold it against you!
Ben
I think in practical terms, what we're really talking about is what are batteries doing. They are importing electrical energy at a certain rate, what's often called in the sector power, the rate of energy flow, and the key thing to think about when you're talking about batteries is that this is a various set of parameters which relate to, just reeling some of them off, your ability to charge them or discharge them at different rates relative to their storage capacity. That's often called a C rate, but some people call it the P rate, which is a power factor. The Chinese manufacturers tend to use that expression.
Then you need to think about your cycle life, and cycle life can be expressed in many different ways. And typically at various what's called a depth of discharge, another bit of jargon, so DoD or depth of discharge.
So if you can discharge a battery 100%, how many times can you do it 100% before it dies or before it reaches what's called the end of life? Now that's another technical term, because it's actually a defined term. The end of life is usually a percentage of the beginning of life, which is the capacity that it would have on the tin when you first buy the battery. How quickly does it take to get to that point?
And then that cycle life will be very different if you used a 50% depth of discharge or a 10% depth of discharge, and understanding that is actually pretty important.
Then another aspect is the round-trip efficiency. How much energy will you lose when you charge it and then release the energy? And how will that vary depending on how quickly you do it, so there's another important thing to understand. In that context, you need to understand the safety of the battery, which can be again defined by various third-party standards, in other words, what rating does it have in terms of safety and what safety standards does it comply with, and at what level does it comply with them?
So is it at a battery cell level? Is it at a module level, a sort of a combination of cells and which are wired up together, or is it a system level, you know, is the safety considered there. and there that's all about making sure that the battery performs within its safe parameters, which are typically defined by things like current, voltage, temperature.
And are the controls in place at a cell, module or system level, so various safety features in any case. Then you have, and probably the last big important one is density. How much room will it take up and how heavy will it be. Weight doesn't matter too much for something that doesn't move, but matters a lot more for cars and which use batteries obviously, but volumetric energy density or just energy density is in Watt-hours, which is a measure of energy per litre, is important and you're getting innovations on that both at a chemistry level and of course at an overall system level.
David
Ben, one question I had there, and you did a very good job, a much better job than I did last episode, of going through the various characteristics of batteries and how you might look at them and characterise them. But when you apply that to the kind of the current situation, there obviously I hear lots in the market about different types of battery chemistries that are emerging, and they have, it seems to me that they have, they all have different, slightly different characteristics that could be, for example, cheap. There may be very big terms of scale, but they may be cheap or be based on plentiful resources, etc.
So, I think I understand that. What I'm less clear on is why lithium-ion, which seems to be the go-to chemistry in the utility-scale battery storage market, why has that emerged? Is it almost like a VHS Beta Max accident, or is it actually that if you line up all of those characteristics side by side, lithium-ion really is the best solution for utility scale?
Ben
Great question. So I would not categorise it as a VHS Beta Max accident, because VHS and Beta Max were two products that were essentially the same. They were using the same technology but with a different form factor and one just became more popular than the other. I can't remember exact the reasons why, but it just did. Here we are actually talking about different technologies to achieve the same thing. So different ways of going about it and therefore accident isn't going to dictate the success. It's actually which one is actually genuinely better, and the attractions of lithium are multiple. Let let's look at a couple of them.
The reasons why lithium chemistry became more popular than the alternatives, in particular lead acid batteries, Nicad – nickel-cadmium, that is – all the chemistries that have been used in consumer electronics, which, until the car market and until the battery energy storage system market came around, were the greatest use of batteries. Apart from lead acid for backup, the main benefits of lithium-ion were its energy density and its cycle life, and basically some of those characteristics that I mentioned. So, you know, on round-trip efficiency on energy density on power, on manufacturability, which I haven't really touched on, it really just beats the others.
Now, that doesn't mean that you get started coming down the cost curve and then when it came to, you know, various alternatives being considered for cars, really lithium-ion has just been streets ahead. Now bear in mind that lithium-ion is not one chemistry; it's a family of chemistries, and specifically there are two subsets of lithium-ion, arguably three because of how Tesla started out, category of lithium-ion chemistry that have emerged, and actually within each of those there are other formulations, so essentially you can manufacture and optimise the characteristics of a battery to suit your purpose. So even lithium-ion batteries that are made for battery systems are quite different at a chemical level to the lithium-ion batteries made for cars, such that the energy density for a car battery is much greater than a battery energy storage system, but the cycle life for the energy storage system is much greater, and the round-trip efficiency is probably a little better as well.
So you can still play around with the chemistry to optimise it by tweaking the chemicals that you use to optimise for managing power flow and heating or depth of discharge or just cycle life, and you can do that either by changing the material mix or the material amounts in absolute terms of having thicker cathodes or thicker anodes or more electrolyte and other things as well, so it gets very, very technical very quickly. It starts going over my head, but essentially you can do an awful lot, but fundamentally lithium-ion does have attractive features of good energy density and good round-trip efficiency.
Those are fundamental points. The challenges that lithium-ion batteries have had but haven't been a big issue for consumer electronics have been cycle life, and what is important in terms of consumer electronics and in anyone’s interest is safety as well.
So these are things that lithium-ion batteries have tackled, I would argue, you know, yes, I mean you could look on the internet and see lots of instances where lithium-ion batteries have ruptured and burst into flames and so on, but by and large, whether it's through packaging or control systems or other means, the safety record of lithium-ion batteries, I think, is probably quite good, considering how many of them there are out there, you know, that they are allowed onto planes, you know you're allowed a phone, a laptop, a Kindle, everything else. You're essentially taking something that would burn and not stop burning until it had burnt itself out, and you couldn't put out, and still it's allowed, so there have been concerns around those. Lithium-ion batteries weren't allowed on planes, for example, as an auxiliary system for the longest time, and they used much heavier batteries just because they were considered safer, and that's actually already changed in the aviation industry, so it gives you an idea that lithium-ion batteries have got a good safety record and trust.
David
And actually, that brings you out to the original question in terms of writing how these things work and how they might look, and if you haven't seen a battery storage site, I guess they're kind of thinking of bit like a sort of small, very nicely ordered trailer park with lots of freight containers full of batteries, but what they also contain in those freight containers are energy management or battery management systems, which really are all about Ben’s point about ensuring that these things operate safely and don't burst into flames, that they are kind of cooling systems and various bits of technology in there as well as the batteries –
Ben
Absolutely
David
– that help make them safe.
Ben
Absolutely. And to that point there are various ... one thing I haven't mentioned on the safety side is there are two categories. In very simple terms, one is: how do you prevent a fire starting in the first place from a safety perspective, and then if it does start, how do you minimise the loss? And this is a big thing in the insurance industry, who actually wants to make sure that they insure. So, you know, if someone goes wrong, and it will happen once in a while, what's the cause so that you learn from it? But then how do you stop propagation, So the limitation of propagation is the sort of buzzword expression now to make sure that batteries are more insurable.
Either use safety chemistry, and typically lithium ion phosphate chemistry has been seen as safer than something called nickel manganese cobalt formulations, and the reason for that is all batteries, once they reach a certain temperature, then burst into flames and they don't stop burning, basically, until they've burnt themselves out.
And usually you can take away the heat, the fuel or the oxygen, while [a battery] doesn't need oxygen to burn and therefore you can't smother it with something to stop it burning.
I don't scare anyone here, it's the point [that] the reality is that the temperature that you need to get to, especially for lithium-ion phosphate batteries before that starts happening is a very high temperature. It's well over 100 degrees C, while the warranty parameters require you to stay within much lower temperatures, so that's called thermal runaway, by the way, that's a term you'll probably hear it more and more, that once you reach a certain temperature, the temperature only keeps increasing and then it bursts into flames, but these are fundamentally very safe devices, and lithium-ion chemistry is probably more popular from a safety perspective, but is substandard versus NMC – nickel, manganese, cobalt – now in terms of power cycle life in particular.
Andrew
So, Ben, you mentioned there in aviation, obviously we are going to mainly talk lithium-ion and we're mainly going to talk on utility scale projects today. Are there certain edge cases where in these utility-scale applications you might not opt to go for lithium-ion chemistry, for one of these other characteristics, and is there anything that kind of warrants us covering before we kind of move on to the substance?
Ben
So I didn't mention the three different types, but I mentioned the two that are most commonly used and that we have used NMC and LFP batteries, that there is broadly lithium cobalt batteries, which is sort of more the consumer electronics device is what initially Tesla used. I think they've migrated towards more one of the other two and you only really see the two I've mentioned in the battery energy storage SSD.
But there is another battery type, for completeness. Two or three actually, that that have been talked about. One that is quite expensive but has a great cycle life and a great power rating is lithium titanate.
So if you only want to deal with power rather than significant storage, because significant storage requires a low-cost battery, you could use something like lithium titanate, which is typically a chemistry that's been dominated by the Japanese manufacturers, and historically I believe Toshiba had been the biggest player in that area.
Then in terms of other battery chemistries, flow batteries have been talked about a lot. Probably heard that as well, and vanadium redox flow batteries have been talked about probably the most, and they are all worth considering. The benefit of flow batteries is that they effectively have a very, very long-term cycle life; their downsides and detractors are that they work at a fairly low power rating, so you need a very long-duration battery to justify them. If you don't have a business case that justifies that, then the numbers stop working quite quickly, especially as you have to consider the fact that it's got an inferior round-trip efficiency to lithium-ion, to the best of my knowledge, I want to say, I don't want to get sued by anyone, and they also require a little bit more in the way of operating costs, because there are more mechanical devices involved and they have a significantly inferior footprint as in energy density, so they occupy a lot more room.
And so in places where space comes at a premium, UK being a good case in point, GB in particular, that's another reason to prefer something with a smaller form factor.
So flow batteries are interesting, and then the only other battery I would mention, which has been talked about for a long time, and which I'm hearing rumours about being explored as becoming mainstream, especially in the context of recent supply disruptions and/or tightness in the lithium market, are sodium batteries, which can be seen as inferior versions of lithium batteries, in terms of every aspect of the energy density power rating, ability to fully discharge round trip efficiency, etc. Safety would be better, but you can think of them as a sort of a poor relation, but you know the abundance of sodium versus lithium is far greater, and therefore may appeal to at least a significant part, or at least a subset, of the battery energy storage system market. It won't work in the car market, but it could work in the storage market.
Andrew
To pull on David's point earlier, you kind of mentioned what these utility-scale projects look like. Ben, could you walk us through kind of what Gresham's projects look like physically and in terms of on paper, and how you go about choosing, you know, where to place them and a new business model, basically.
Ben
Yeah, of course. In terms of what they look like, imagine a fenced-off area to start with, usually quite high fences. They can be what are sometimes called hit and miss fences, I always love that expression, it's basically where you have planks of wood with a gap between them, and as though you've got another set of planks of wood where they fill in each other gaps.
And so they're quite good for sound insulation and fairly cost-effective, because, you know, you haven't got huge amounts of material, and typically these fences are three, four metres high.
So a four-metre-high fence feels pretty high, it's comfortably more than twice your height, so it looks like you're really looking up and it's a big fence, and then if you're on the other side of them, on the outside of the project you used to see nothing inside. You know there's no chance of you sort of peering in. So a lot of our projects look like that and/or have sometimes other types of fencing where it's not as necessary, but then have landscaping around them and they're still quite difficult to see.
And so that's the perimeter. If you like, the perimeter might extend to, you know, enclosing a site that's anywhere from a fraction of an acre for something that's sort of 10 to 20 megawatts, we've got very few projects that are of that sort of size, whereas most of our projects are significantly larger, 30 megawatts or larger.
And by the way, 30 megawatts is basically the import and export capacity of the project, and then the duration of a project is a function of how much you can store and basically how long you can charge or discharge a battery for from full or empty respectively, like when you're operating the battery and therefore a one-hour project would, you know, at 20 megawatts would have a 20 MW-hour battery, so a one-hour project at 50 megawatts would be somewhere between one and two acres typically. So you've got a site and the sense of its size, and it would typically be, as David implies, not particularly exciting to look at. You know would have a path in it, which would be enough for a vehicle and or significant crane system to go on to it. It would be hardstanding, so that it can then move things around for maintenance. It would have been used during the construction and would have positioned the containers around the site.
But typically, if you think of what the project requires, you need the necessary equipment to allow the electricity in, so it needs a point of connection to the grid, and you'd have your own switch effectively, which would stay closed most of the time while the site’s operating, but for safety reasons it needs to be able to open, and that's exactly what it is, and there'd be various protection settings, mainly around the obvious, you know, current, voltage, that would make sure that if, you know, it was allowed to operate most of the time, but if something went wrong for whatever reason, an outage on the grid or an issue within the site, that switch would open and render everything safe, and there would be lots of other, smaller lower-rated switches around the site to isolate specific components.
So the specific components that you would have in, first you're taking the alternating current, so wavy electricity that you have going into your home as well, but here it's coming at thousands of volts into the site and that needs to be stepped down to a much lower voltage, the operating voltage of the site, and then you change that much higher-current lower-voltage electricity, because, you know, when you lower the voltage, you increase the current and actually start making the electricity more dangerous. It's the current that makes electricity dangerous, not the voltage, as long as you don't create a short from that high voltage to the ground, in which case it's also, you effectively allow the current to flow...
Andrew
Hence the fences!
Ben
You want to keep people out, absolutely! Of course if you go into the site and touch a container, you're not going to be electrocuted, you know. It's not dangerous to wander in, and so on. But of course health and safety is paramount.
And so the lower-voltage, higher-current electricity then needs to be turned into direct current. So you go from AC to DC, which is the mode in which batteries operate. They charge and discharge in DC, so basically single directional flow electricity, which is sort of what you'd imagine, really. Think of a tap: it doesn't go in and out; it's just flowing in one direction.
It's quite useful to think of it in terms of water as well, by the way, so the grid connection could be a tap. You keep it on most of the time in this case, it can actually flow in both directions because it's a battery, a crucial difference versus a renewable project, which would be generating electricity and sending it only out.
We have an export and import connection, and the battery is able to charge and discharge thanks to that, and so you have a transformer to take the voltage down.
You have an inverter to convert from AC to DC. They're often called power control systems or units, and they operate at what's typically called medium voltage, sort of 1,000 to 2,000 volts typically nowadays. And then that's the same voltage that the batteries operate at as well, pretty much by definition, and the biggest share of the site is taken up by the batteries themselves.
But you do have switch gear, transformers, inverters and batteries. Those are the key pieces of components and then you have other auxiliary kits, so you know you need auxiliary power to keep things going if there's an outage, you need switches to render the sites safe, and you obviously have the containerisation and the heating and cooling systems.
And of course in terms of operating the site, you need all the electronics that go with that, so you have effectively a fibre-optic network around the site communicating between devices as required, but then also connecting back to a control room, and that control room will be receiving all the data about the site and sending it on to various different sources, from National Grid, to ourselves, to the traders, and it will be possible for the traders, the onm (operations and maintenance) contractors, and National Grid, if the assets are registered with National Grid, and most of ours are, they can become dispatchable by each of those. Dispatchable, or you could turn them on and off with any of those people, either to perform some commercial activity or to render them safe. So hopefully that that helps us. An awful lot to go through in terms of what a site looks like and I'm doing it in words rather than providing a picture, but hopefully there's a mental image building.
Andrew
Yeah, unfortunately it's more difficult to do without slides, I appreciate that, but I think that's a very good summation of these projects.
Could you maybe tell us how many Gresham has on the books and, you know, you've mentioned the amount of equipment and work that goes into that. How do you decide where they're going to go, and how much money and capacity and things to put behind them?
Ben
So we've got 17 projects today that are fully operational. We've got another four projects today that are basically built and at various stages of commissioning; we'll have about 25 by the end of the year that are fully operational, and then we expect that to grow by about another 10 from the end of this year to the middle of the following year towards 2024.
So quite a lot of projects, and as I mentioned, projects are getting larger in terms of megawatts, so we're going from 425 MW to about 840 MW by the end of this year, and then by the middle of 2024 we expect to be at about 1,600 MW, and so effectively the size of the market that you mentioned at the outset is going to be the size of our portfolio roughly in mid-2024.
Now one of those projects will be in Ireland, so it's not all GB, so it's not quite like-for-like comparison, but it's sort of highlighting a fairly significant portfolio.
So Andrew, you asked about how we choose the sites. We have some important decisions to make at the outset, and then during the operation of a project. You have to evaluate a project financially, and its upfront costs and its ongoing revenues are the key variables that you can think about.
The upfront costs are easy to define because they are what they are and they are a function of the cost of the land, whether you're renting it or buying it, the cost of the grid connection, which is a function of how easy it is to connect to the network and how far you are from that connection point, and you have the site itself in terms of how easy it is to work with, is it a floodplain, do you have to raise everything – We avoid those, by the way – is it WAVY and hilly or is it nice and flat? Do you have hardstanding or is it muddy, or is it easy to access or is it a really tight turning point for all the trucks going in? Those sorts of considerations are key to evaluating a site at the front end in terms of how much it will cost you and how easy it will be to maintain.
We broadly assume that all projects will achieve similar levels of revenue. They will have slightly different costs, depending on where they are as a function of what, obviously, operator or weather might be, but broadly speaking, they have a very similar revenue opportunity as models. The reality is that might change over time as you get more renewables and you get greater distance between the average generation and the average consumption of electricity over time. You know with a huge amount being generated offshore, a huge amount being generated in Scotland and northern Scotland, in particular through wind, and the consumption not changing in terms of where it is, major city centres, you have a lot of considerations and it's likely that the market will be reformed to reflect the distance between a generation asset and the point of consumption. So that's an important consideration for generation.
But it will also mean that batteries are valued highly where they actually depart from the network and allow especially cheaper renewable energy to flow rather than needing something to be turned off and alternatives to be sourced.
So these are important considerations. The way we deal with that, to be honest, is think about where those constraints might exist today and become worse over time, but also just simply by diversifying, so we have sites all over the country, and I think that's a sensible approach in terms of you're not fully knowing exactly how the market might evolve.
Andrew
So Ben, you mentioned the kind of scale of assets that you've got on the books. Could you maybe talk a little bit about how you procure power to charge them up?
Ben
Sure. In terms of how we go to market effectively, our route to market is via traders that are third-party entities. They've got various different names. They can be called wholesalers; they can be called power purchase agreement providers; they can be called asset optimisers; most typically in the battery space they're called asset optimisers, because what they're trying to do is layer in different contractual activities to maximise and optimise the returns that they can generate, and the main contractors that we use are listed in our annual report. It is relatively public and we tend to announce arrangements with them, so we don't really hide who they are.
In terms of what our batteries do, they do one of two or three things: at any moment in time they could be providing something called frequency response, which is where we're dealing with what I tend to call the ripples on the surface of the market, essentially small imbalances that are dealt with via contract, essentially by the purchase or sale of electricity, where there's an availability of batteries that creates that sort of smoothing of the system by importing and exporting in response to small demand and supply demand imbalances. That's number one, and we're paid an availability fee for that, and that's procured by National Grid.
The key alternative is to trade. In trading, you are either importing or exporting power. You have your grid connection. You can do that freely. But you can choose to do it in one of two or three ways. Two key ways: one is through the wholesale market, where you could either trade in advance or trade in the very short term and is effectively importing or exporting power, almost at no notice, and so you can trade ahead later in the day or into the next day. That's about as far as you go, by the way, in this market, or you could in the same context offer your battery up to National Grid to trade it to make sure that the electricity system is balanced.
So one of the key features of this market, and many of the listeners will probably know, is that you know electricity is a peculiar commodity. You actually have to balance supply and demand in real time. You don't have to do that with oranges or gold, or water or anything else. You can store those things and/or just put them on a shelf. Electricity, once it flows, needs to be perfectly balanced, or devices trip or break or cause safety issues, so you absolutely have to do that and that's why keeping the lights on is number one of National Grid's [list of] priorities, not number two or three; numbers two or three being cost effectiveness, and so on.
I should stress, though, that it's not National Grid’s job any more. It's the entity that used to do that within National Grid was called the ESO, or electricity system operator. That's now actually called the FSO and is a national identity, and the FSO stands for future systems operator. It’s the same company, it's just being spun out of National Grid and owned by government.
And they make sure that they contract the necessary generating capacity to balance the supply and demand on the system and they do that just simply by buying power or asking people to not sell their power, and effectively buy back their positions. Typically, they do that to curtail renewable generation as required and balance a system that way as best they can, of course, because people can switch their lights on and turn their ovens on and do as they wish, which obviously creates variations in supply and demand, and that's what's dealt with in frequency response.
So you've got the balancing mechanism, which is the process that the FSO goes through to balance the market, you've got the wholesale market, which is where the batteries respond to commercial signals, and you've got frequency response, which is sort of dealing with the small imbalances in the market.
By definition, the traded market is the biggest market, because that's where you're dealing with significant potential imbalances caused by the intermittency of renewables. And I believe we talked about that in our last podcast, so that's what we expect to be doing with our batteries over the longer term, while frequency response we think is quite a shallow market. National Grid only procures in the region of the capacity of what's installed in terms of batteries today, so about 1 1/2 to two gigawatts of frequency response, while the size of the battery market will grow to, you know, 20 or 30 and maybe even 40 or 50 gigawatts in due course as a function of the imbalances that only grow as you get and rely more and more on renewables.
Andrew
That scale of what's coming up is a great place to leave it for a quick break, and we'll be right back to talk more about that.
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David
My, they sound excellent! That brings me to a point just to pick up on some of your previous comments, Ben.
Ben
Sure.
David
I noticed in my inbox not too long ago, you and a number of leading players in your world wrote an open letter to the EU about the benefits, and more the benefits and the importance, of battery storage. You referenced some of the some of the challenges that you have there, and one was a lack of flexible grid connectivity. Now, does that mean that you're finding just a lack of space to put batteries on the grid, or is it that you're finding the way in which you contract to have those connections is commercially challenging? What's the nature of the challenge?
Ben
Good question, David, and thanks for referring to that letter, which was initially authored by Fluence and did a great job of bringing some points together for broad communication, and this is a point that doesn't all just relate to batteries. It does relate to renewables in general and the ability to just connect new projects in this particular point. Ability to source grid capacity in different markets, if you think of a connection and you think about lots of different demand coming off a point of supply, so a great node on the network, if you like; demand comes off that, flows into a town or a few towns and then going into that point of connection you might also have some renewable generation, otherwise you'd have a big link to a power station in the distance as well.
When you want to add something to that point of connection, grid companies often think about what other supply is flowing into that point and they'll think of batteries as another source of supply because they sort of have to up to a point, and that's unfortunate, when there's all the renewable generation going to a point, because the reality is that the battery’s likely, but not necessarily going to be, doing the opposite of what the renewal generation is doing. If there's too much of the generation, then what the battery could well be doing is actually taking it off exactly when the excess generation is happening, and batteries often aren't looked at, This varies by country and jurisdiction in that way, and so it limits the amount of capacity that could go on to the network with limited amounts of reinforcement and there are lots of ways of limiting the flow of electricity from a system that might be acceptable to a battery, for example, and so presenting a connection offer and limiting its potential operation in a way that actually won't result in it losing much if any money, and because it's unlikely to operate in the way that would cause a constraint of the use of the battery would be very helpful, because it would allow more projects to come on, so that's one of the challenges for grid capacity in general.
Then more broadly, you mentioned contracting. The alignment between a generator and the network operator is not ideal, and that's true everywhere. If you want to connect to a network, obviously there's an obligation. There's a sort of regulatory process that obliges grid companies to allow this to happen, as long as they're compliant and back projects from a safety and design perspective, but the timeframes are very, very contractually loose. They can slip, they can move, and there's very little, if any, liability to either a National Grid or a local grid company. And that's a huge source of frustration.
That's a regulatory and contractual point. There's a further point, and I've seen this in the UK very significantly is also a real issue, and whatever the causes are, whether it's linked to COVID or Brexit or something else, but there's a real talent issue. There's a shortage of resource, and I find a shortage of motivation. You know, it feels like, and I'm saying this really because I do want to send the message out there, although I see it cautiously because I don't want to alienate either or anyone either, but frankly, there's a lack of motivation. There's a lack of incentivisation of people who work and get allocated to work on specific projects. Some do a great job, mainly because they're passionate about what they do, but others just don't and they don't have either the financial incentive or the motivation to do the very best that they could, and sometimes it's a lack of talent, sometimes it's a lack of motivation.
And then you can't be sure which it is in every case, but there are challenges and it's a challenging industry to operate in as a result.
Andrew
Do you think that the recent UK consultation, it was at the review of electricity market arrangements If my acronym serves me well, will make much of a difference to that and is it kind of positioning the UK is a little bit more forward-looking in regards to some of the questions or the challenges that you mentioned in your letter?
Ben
I do think the UK is forward-looking in general in this area, so I would say that absolutely. I don't think it will address the points I've raised, but I do think that some of the changes that are going to come through this are essential if not very practical, but in terms of the changes that may happen subject to Minder 2 decisions by Ofgem, and actually it's being led by Bayes now as well, and a lot of these reforms were originally thought of by National Grid, so I've just mentioned a sort of Trinity, if you like, of companies involved in series: we've got Bayes, the regulator Ofgem and the National Grid, the operator of the network historically.
Now you've got the wish to change how the market operates from having one power price in every half hour for the whole country to a power price for a number of different nodes, essentially the points, the points of electricity flow. In fact, it may be as many as 2,000 nodes, so it means that almost every point of connection either has one or two power prices associated with it, and that will effectively help make the pricing of electricity as a function of its distance from the point of where it's needed more efficient, so if you live miles and miles away from general consumption, then it may be that you are disadvantaged versus something that's closer, depending on your marginal cost as well, so it's a function of distance/grid that the systems need, networks need, all interchangeable points and your cost of generation.
This already happens in in various parts of the world, in particular America, as a sort of example. And it can mean that well-positioned assets do very well, but there's always a concern that it creates stranded assets, so I think certain renewable generators will express quite a degree of nervousness around this change, simply because there's a degree of uncertainty.
David
I keep hearing this word “Signalling” in lots of documents, which I think is kind of touching on what you were saying there about, would this nodal pricing effectively enhance signalling, because it's telling local markets more information about what real true pricing at that point is, or am I confusing two things here?
Ben
I think it is correct to use the word signalling. You get information about a node based on its pricing and so on and yes, you could use that expression this short answer.
Andrew
We've been looking at the UK so far, but obviously things are happening globally as well, and I know Gresham is increasingly looking outward from the UK. Could you maybe tell us about the kind of short, medium and long-term plans you have for more global deployment of battery storage?
Ben
Absolutely. And Andrew, you're absolutely right there that this is happening globally, so just to spend a second on that, you know what we see is very similar things happening in most markets. We are seeing the deployment of renewables. The level of renewables already reaching a good level. The UK reached 45% in Q1 of this year and most markets aren't quite at that level yet, but it's moving forwards pretty quickly, and there's even more of an imperative duty for energy security reasons most recently.
Electricity consumption is going to grow as petrol and gas consumption shrink for the purposes of transportation and heating respectively, and that means the importance of electricity grows and within that, renewables are going to gain more and more share. So, the electricity market is going to become broadly the energy market, with certain segments excluded, but become dominant and within that, renewables and solar and wind being the biggest elements of where the growth is coming from.
So dramatic changes are coming over the next 20-30 years and we have to bear in mind that the UK is just about, by our calculations, about a percent and a quarter of the global electricity market, so there's an awful lot going on outside Great Britain, Actually, to be specific, not just UK, Great Britain. and so there's an opportunity if we can export or carry over our business model to other places to exploit that growth, and I think we can. I think there are lots of wholesale market structures around the world and similar setups that allow us to take advantage of that.
And in that vein, we have got permission from our investors to invest not just in GB and Ireland as we have had historically, but in GB plus up to 30% elsewhere, with elsewhere being legally defined in our documents as overseas jurisdictions, and it covers US, Canada, the European Economic Area which includes Ireland, and Australia, and we're very excited about what that's going to bring in terms of opportunity for the fund, absolutely.
David
Presuming the different revenue types the projects in different countries generate are kind of similar in nature, but perhaps are called different things, maybe operate in different ways. Is that right, or they're doing very different things?
Ben
No, absolutely right. If you think of any market, every single electricity market that I know anyway is AC. AC frequency can drift, so you need frequency response or control, the different words. There's potential for supply-demand imbalances in real time in the short term, say 15 minutes over an hour, over days, over long-term planning, and so that means that you need not just frequency control reserve, you need balancing systems and you need capacity markets and/or commercial markets that drive additional capacity through commercial signals, which is more those countries that don't have capacity mechanisms to incentivise new capacity build will do so through just the commercials in the in day-to-day market.
So yeah, absolutely, very similar, very similar technologies by the same manufacturers being installed all over the world, whether that's a gas turbine, solar panel or wind farm or wind turbine. Those same manufacturers all over the world, they will export globally and the same goes for the batteries. The batteries that we’ll buy to install abroad will be the same as, broadly the same as the ones we install in the UK.
The main differences are, as you say, regulatory, and of course in terms of how the intermittency shows up in countries with different, very different weather patterns. You'll have a very different mindset in terms of how you go about that.
Andrew
Yep, so we have 10s of gigs planned for the UK, of which Gresham will hopefully be responsible for a hefty proportion with kind of hundreds of gigs looking globally. David, are you seeing an interest from investors and kind of the M&A space picking up on that? and is there a lot of appetite from what you see?
David
Absolutely, I think so. Investors do really seem to like it in the UK, so we've now got at least three listed funds that are totally devoted to utility-scale battery storage. There are a number of private funds that are getting less visible to you and I, and there are corporates, people like Sonobe, who've been doing some large batteries projects for a number of years and they continue to be successful.
So Gore Street, for example, raised GBP150 million three or four months ago, and for a lot of other participants in the London markets, now’s not a great time, the last six months have been difficult, but the renewables funds end, and in particular you know the storage funds seemed to have done reasonably well in terms of fundraising. I think if we told them the last episode about this being a very short term, you know four or five years ago, these funds, these professional investors, well, roots to investment were born. And I think it took some brave investors to start down that road, and I think now investors are becoming more educated, whereas we've seen from this episode and the previous episode, there are some complex issues here.
The energy markets are not simple to understand and there are lots of different layers to running a battery project that don't exist within more simple sorts of solar farms, for example, and so I think investors have taken some time to start to get to understand that, and I think they're doing a better job at that now, and people like Ben and others that are out there in the market and telling their story and they tell the story very well and it's getting through and people are starting to understand the risks they're taking on with investing in this kind of asset, so yeah, I definitely think there is investor appetite.
The main reason is because I think despite the complexity, we all know that storage is required to deal with the intermittency problem of renewables. So as renewables penetration increases, you need storage, OK. It's almost a given. So the only question you then need to ask is obvious: do you believe that renewables penetration is going to increase, and I think most investors would probably say yes. I certainly feel that's going to happen, so if you put those two together it feels like a quite a simple investment decision, doesn't it? You know we're going to need a lot more of this kind of technology on the system globally. So yeah, investors are interested and I think personally there are going to be lots more listed and private funds that will channel money into this sector absolutely.
Andrew
And Ben is one of the first, I suppose. Have you seen that appetite change over the course of your tenure with Gresham?
Ben
Yes, enormously. You're absolutely right, David. Gore Street raised GBP150 million, I think, in April, and we also raised GBP150mn, a pure coincidence in late May, and the demand was strong and I know it was strong for Gore Street’s product as well, the raise as well. The demand has increased very significantly. Once you establish a track record, you have the trust of the market, but also broadly, once the need is understood to David's point, generally investors want to have some exposure as well, so we took well over a 100 meetings to get our IPO away back in 2018, and that was over a handful of months, and it just takes, it's taken days, you know, to raise more recent amounts. So it just means that, you know, once you're established, the demand is much greater.
But you know, it's now increasingly being seen as an investable asset class, if not, is investable but is not necessarily quite as low risk as renewables might be perceived is probably the way I'd summarise it, and therefore the expected return that investors are looking for from energy storage would be greater. One of the reasons for that is the fact that it's typically described as a merchant business model, and what that means is essentially you don't, we certainly don't and you can if you want, but you can't do it for very very long term, but we don't seek to lock in our revenues from counterparties in a particular space here as a floor level. And we don't do that because we don't think that floor pays us well enough, and so you're then paying away a lot of upside to those who would offer you that floor, but that means that we then have a not fully certain revenue line, which naturally for infrastructure investors, that's not what they're looking for, and so what we seek to communicate is that, yeah, while there will be volatility in our revenues as a function of volatility and the volatility, and let's call it variability and volatility over time that then drives our revenues, we do know that that volatility is fundamental in the market. You know that it's caused by how the market operates, the wholesale market structure that I mentioned. That's crucial. The fact that you've got cheap power from renewables and expensive power from flexibility providers and everything in between. And the intermittency is what unlocks the extremes.
Andrew
To pick up on Ben's point, there David, is there a misunderstanding with some of these institutional investors as to how this business model differs? Is there a little bit more diligence needed on, you know, the side of investors to kind of understand what they're getting themselves into?
David
Yes, I think so. And I think if you want to see how some of that's articulated, then the prospectuses of these funds is a good place to start. They tell the story there as clearly as is kind of possible and as Ben mentioned, there's a lot of effort goes into talking to numerous investors to reinforce this complexity. So now I think from their perspective, diligence, it's kind of they're understanding what they're getting into. I'd like to think so. I think the diligence challenge is actually interesting. You mentioned that they tend to arise on the sort of transactional level where funds like Gresham and others are acquiring new projects. The trends have changed somewhat over the years, in terms of the stage at which investors are investing in specific SPVs, so there was a time and it still will happen from time to time, but there it was more common a few years ago that people would buy existing operational projects. And there the diligence challenges were quite numerous, really. Information inconsistency is one that we've certainly found on projects, so Ben mentioned the thing, he called them asset optimisers. They essentially are the party that provides the revenue directly to the SPV, essentially. And we found in our experience, if you had a lot of assets with a lot of different counterparties, you might find different levels and quality of information coming about the performance of your battery and the revenues that were generating, and that makes diligence the art of understanding the past. You know, to sort of predict the future that makes it more difficult. I think that more generally, actually, diligence is harder with these types of project, because, as I mentioned before, the nature of them is they're complicated, and not only that, there are multiple revenue streams.
There have been changes in the way those revenue streams and the markets that generate those revenues have changed over the years, so they're all of these things that give riders lumps and bumps in the history of these businesses, so that makes again makes diligence a bit more challenging. I think also, when you start to look forward, predicting the revenues for these assets is quite challenging; different investors or different people have different strategies about how to use a battery, number one. There are market professionals whose job it is to effectively give views on what prices in these markets might look like in future, but I think their job must be quite hard because they have to try and predict various things, you know, renewable penetration, the likely increase in battery storage. All of these factors, among others, this is quite difficult job, I would say I'm not close to how they do it, but it's not an easy job.
So, that means diligencing, i.e. getting comfort, and assurance over forecast assumptions is quite difficult with these projects, so there are lots of reasons why diligence is more challenging by comparison to, as we said before, a typical solar farm or wind farm where there are, I guess, two moving parts, really fewer interventions, fewer layers of information, and so they're simpler to understand compared to battery storage.
So yeah, lots of lots of interesting things, but of course, that's what makes them so fascinating. You know, they're amazing businesses to look at and try and understand, which is, you know, the job I'm in.
We're some over our MW hour, I think, now, but just one thing that struck me: am I right in thinking that essentially you guys have all built this industry? This battery storage industry without the benefit of subsidies that, for example, you know, the solar industry and the wind industry in the UK are phenomenal and super strong, but they did have some help along the way with feed-in tariffs, rocks etc. Am I right in thinking that other than the capacity market we haven't really had those benefits?
Ben
That's absolutely right, David. We haven't had subsidies at all. But there have been certain key changes to the regulatory backdrop and the elimination of various sources of friction in our business model costs and effect that have been eliminated, and it's worth mentioning this, because it sort of is a second overall key point around the need to set up markets well, from a regulatory perspective, to be able to unlock the potential for batteries, so you don't so much incentivise them as exempt them from certain things that they may be charged so, you know, typically the cost of a system, whether that is the subsidy regimes themselves, carbon pricing, the costs of the grid, the costs of balancing the grid, and the trade associated with that, they can be charged to the consumer or the generator, but it's got to be charged to someone.
And exempting batteries, which are effectively providing flexibility between the two from those sorts of charges not completely, but for the most part, is what's happened in the UK that's really unlocked the business model for batteries. Otherwise, as well as a cycle loss in terms of lost energy that you get from just the heat loss in the battery, which is very little in the lithium-ion battery, hence its benefits, covered that already, but also then you have a commercial loss because you sort of got these frictional costs you're having to contribute to carbon pricing and everything else green levies and otherwise, that then makes the spread that you need or to generate a profit or the price that you need in the frequency response contract to break even that much higher. Eliminating and making unlocking the way for batteries and GB has really, really helped and we didn't need to see that happen everywhere. That and putting back, basically putting batteries on a level playing field with any alternative sources. Flexibility. That's a crucial point: level playing field.
Andrew
That is a great point to leave this episode today and also trail some of the items we'll be talking about in future episodes, especially about building out the grid and how we incorporate more energy storage in general.
So, that's the end of the second instalment of the megawatt hour, thank you once again to my co-host, David Bevan, to Gresham’s Ben Guest and to producer Chris. Thanks also to you for listening. You can let us know your thoughts through our social media channels, or by emailing outloud@energyvoice.com.
And every week the Energy Voice team get together to highlight important stories from the world of energy in our regular podcast episodes. If you've not already, please do subscribe free to Energy Voice Out Loud on Apple Podcasts, Spotify or wherever you get your podcasts and listen out for more episodes of the Mega Hour coming your way very soon. I'm Andrew Dykes and thanks for listening.
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