Andrew
Welcome back to the Megawatt Hour podcast box set 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.
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, where their expectations are changing with the maturing market, and perhaps most importantly, what investors expect to see in return. I'm Andrew Dykes, content editor, at Energy Voice, where we are leading the global energy conversation.
I'm delighted to welcome back my co-host David Bevan, corporate finance partner at BDO, who also leads the Group Renewable Energy practice in the UK. We're also joined today by Nicholas Beatty, a founder and director at Zenobe. Zenobe 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. Founded in 2017, the company has raised more than half a billion pounds in funding and now has growing operations in the UK, Australia, New Zealand and the Benelux states, and Nicholas is going to explain a little bit more about that journey today.
So before we get too into the nitty gritty, I thought we should start with some first principles again. David, I've been listening diligently to the Megawatt Hour all year. I've decided that I want to invest in this energy storage thing that I've heard so much about. How do I go about doing that?
David
Andrew, there are lots of different options, fortunately. I guess, to start with as an individual, as a homeowner, if you are a homeowner, you've already got some pretty easy options to invest directly in various types of storage. So, there are battery storage systems on the market for home use; there are hot water cylinders and advanced hot water cylinders that allow you to store heating, etc, and these are becoming increasingly sophisticated and able to interface with solar generation and other devices like heat pumps around the home.
So, in fact we're going to cover some of that in a later episode in the series. But if you're a financial investor looking for dividends, returns, capital growth, there are also lots of options in an increasing number. I guess the first one I'd start with is that you can invest in shares on stock market listed entities through brokers or investment platforms, and good examples of those are listed investment trusts. So these specialise in utility-scale battery storage, and there are at least three of those, to my knowledge, Gore Street, Gresham House and Harmony, who are focused wholly on utility-scale battery storage in the UK.
These investment trusts are vehicles which raise money and they use that money to invest in a portfolio of assets, and their funds are managed by a specialist investment manager for a fee, effectively. In fact, we heard from Ben Guest from Gresham earlier on in the series.
There are also a lot of other renewables funds and infrastructure funds which, you know, they may in the past have invested in solar or wind or other kinds of generation assets, and for one reason or another they are starting to invest in storage, sometimes just to understand the sector a little bit more, because it sits quite neatly with what they're already doing, but also, you know, the fact that nowadays when people develop solar farms, they often apply for planning consent for a battery, storage facility alongside, because it just makes kind of economic sense to do that, so those guys are increasingly an option for exposure to battery storage.
There are also obviously a wide range of other listed vehicles which range from really small entities on AIM and so on who are trying to develop different chemical compound systems for batteries, different electrochemical batteries, and also you've got the really large listed energy companies, the SSEs and Centricas of this world, who also have some exposure and some involvement in storage, but you’ve obviously lots coming along with that if you're investing in those kinds of entities.
So those are the listed companies. There are obviously also a lot of private funds that by their nature are slightly less visible to you and me, and they are more targeted at specialist investors, usually with fairly significant resources, and they typically form sort of limited partners in private equity type funds that invest in battery storage, and then finally, I guess, there are the numerous private companies, both large and small, which aren't listed at all and which are developing owning assets, and Zenobe’s a fantastic example of a corporate that's operating in this space, and we're lucky enough to have Nicholas with us today on this section of the Podcast.
Andrew
That's a great spot to introduce you, Nicholas. And yeah, could you tell us a little bit more about Zenobe and what it is you do?
Nicholas
Yes, so my name is Nicholas Beatty and I'm one of three founders at Zenobe. Zenobe’s a business that we started in 2017 and it's a business that's focused really on two main activities, one of which is, as David has already mentioned, investing in storage, large-scale storage across the grid currently in the UK, providing services to national grid, balancing services, power services and so on.
The other part of the business is on the fleet side, where we are the largest owner-operator of electric buses here in the UK. We provide them to the major operators like National Express, First Group, Go Ahead, etc, that are well known, and we provide those as a service and we provide the charging in the depots and the batteries themselves, and the buses so that they can optimise the operation of those vehicles, and in addition to that, we have a developing second life business, which is effectively taking the batteries off the vehicles and then putting them into new boxes so that they can be deployed into a second life activity, which generally means displacing diesel generation, and our fourth leg is the one that really brings everything together, which is the development of software within the business so that we can optimise all these assets.
So that's sort of where we are as a business, and I can obviously go into further detail under each of those sub-headings, if that's of interest to you.
Andrew
Yeah, I was interested in obviously, founded in 2017, were all those prongs of that strategy kind of present when you created the company or did some of it happen organically? How did that process work?
Nicholas
That's a very good point. Actually, our very long-suffering investors started with the business that they thought, which we thought when we started it, was going to purely add batteries and own batteries that connected onto the grid, which could then be built up into a portfolio and that we then fully expected to sell on to a larger player in the market, such as, you know, Centrica or Shell or whoever. In the event, we found that the initial contracts that we had with the batteries in 2017 through to sort of 2019, the original values were sort of 19 to 20 pounds a MWh, so each of the batteries could generate somewhere around £200,000 of income per annum per MW. And we found that those contract values were dropping very quickly.
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, that we realised that we needed to really understand how these assets worked, and as I said earlier, to optimise their use, so we did make an early stage decision to invest in developing our own software, and actually 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. It also gave us an opportunity as the value of those contracts and the tenor on those contracts began to fall, to look around and think about where else the skills that we had developed could be applied, and that's when we started looking at ADL Alexander Dennis, the big bus manufacturer here in the UK, to help them and their customers electrify their fleets.
They had problems which frankly were able to be addressed by the deployment of batteries. The first one was the amount of power that was available in the depots, which was really not enough to support the electrification of fleets. So, as an example, our first contract was at Guildford, where Stagecoach had had a contract with the town council to supply nine buses to provide park-and-ride services, but they only had a 200-kW feed into that actual depot. To be able to support the nine buses that they've bought from Alexander Dennis, which between them had 3 MWh of batteries, they had to charge those up every night, when the buses were stationary in the depot. They couldn't do that with a 200-kW feed, and they asked the local DNO how much it would cost to upgrade that feed into the depot up to 500 kW, and the cost was going to be anything between £2-3 million and it would have taken up to two, maybe even longer years to take place, so that really wouldn't have helped them, so they turned to us, and we said that we could do it.
We installed a stationary battery. It's very simple business model. At the depot which was a Tesla battery, it was a 500-kW battery and that battery charged up during the day when the buses were out on the routes. It also then provided additional services to the grid that we were providing with our larger batteries in any case. And then in the evening when the buses came in, the first two buses would have been able to be charged off the connection onto the grid, but once you plugged in the third bus, you needed to start to draw down the power from the stationary battery in the depot, the Tesla battery. And that then became the basis for our, if you like, our fleet business, and that has been very successful and that Guildford project has worked very well. The cost is about 20% compared to what the capital of expenditure would have been if they've gone for a grid upgrade.
And we have used that as the basis and now we've got 25 depots where we're operating buses for, and have the charging systems in place for building a further 21 depots out, including the largest one in Australia.
And we've gone on to look at the fleet sector, at buses again because they were the largest asset that became available in a less regulation of fleet and, and we're supporting the buses themselves because we provide the batteries on the bus as a service. Again, we provide that on the basis that they pay a monthly charge for that battery, we put our software on the battery and we're able to monitor and optimise the use of the battery on the bus so that it will last as long as possible and then come to be replaced, and we also provide the financing of the chassis of the vehicle, so we provide the whole financing structure around it as well.
So that was how we sort of developed the business. As I said, it's been a very interesting and quite a fast-moving development for a company that's only about six years old now, but that's how we started with that battery technology, and how we've spread it into a different area and how we continue to look for other opportunities, for instance, in the maritime sector and other sectors where we can apply our skills and knowledge.
David
So your fleet business is therefore providing the buses, the batteries on the buses, the sort of buffer battery in the charging infrastructure in the bus depot, so it's a complete service. Do you retain sort of control over those, well certainly the buffer asset? You mentioned earlier that sometimes you use the battery for other sort of ancillary services similar to the ones that in your utility-scale portfolio you use the batteries for those when they're not needed for charging the buses. So do you control of that? Do you sort of tell the battery what to do and what services to deliver?
Nicholas
Yes, so that's very much what I said. The glue, if you like, across the group, it sounds like it's a quite a disparate group, is very much the software element, and being able to monitor and optimise the use of the various assets. So, we provide all these things on an operational basis, so what we're not doing is installing them and then selling them to a third party and walking away, and saying, you know, if there's a problem, if it's under guarantee give us a ring and we'll come back and fix it.
This is a very technically onerous sector, you know, you've got to bear in mind that looking at the fleet side, these operators on fleet businesses, depot basically, have been spending hundreds of years looking at vehicles that are diesel, and then they've suddenly had to look at diesel hybrid vehicles and now suddenly they're being asked to look at electric or possibly hydrogen as a way of going to zero emissions. Well, the range of things that they need to look at to have a successful electrification of a depot is far beyond what they have as their technical capability within their groups, however large they are, and we're talking about quite large companies, as you know, David. So you've got to start with understanding what power is available, and can you upgrade the power that's available from the local grid to meet your needs to expand; maybe there's a stage one: you might have 20 or 30 vehicles in the depot but there may be 200 overall, so you might start at 20-30 vehicles to be electrified.
So you've got to understand that. You've got to then understand how do you go about optimising that electrification. That may well be – actually we do a lot of work around, for instance, the parking analysis: how do you analyse where the vehicles are actually going to be parked so that you can churn the vehicles through the day so that the first vehicle going out in the morning isn't always the first vehicle going out the next morning, and things like that.
So you need to optimise that. It sounds quite simple things to look at, but you do require data scientists who have, you know, the understanding, you have Python and things like that, and we've been writing our own software in order to achieve that. We then do the design for the actual depots for the customer. We then do the tendering out to electrical contractors, who then come in and build the actual depot, so that may well be, as I said, a stepping stone over 20 or 30 vehicles, so you start with that they come in, we have a project manager who's responsible for that. That might include a stationary battery or it may not at this stage. But obviously if we're thinking ahead, we're probably putting in much larger wires than would be required just to do 20 or 30 buses. You might have much larger copper wires because you don't have to dig everything up that you put in on the first phase of the development, and then you've got to think about, well, do you want to put solar on the roof, because that might help you reduce your electricity bills.
Then you've got the operation of the charging equipment with the software, how do you optimise that? As I said, you've got the vehicles themselves. We put the software on the vehicles so the software on the vehicles can communicate with the charging equipment so we can again optimise that charging and optimise the use of power while the vehicles are out on the roofs as well, and also take data that can help the operator optimise his use of the vehicle. So for instance, we do now driver training as part of what we can offer the customer and that driver training has shown that we can reduce the use of electrical power by between 25 and 35% by training the drivers, because it's a very different thing having an electric vehicle compared to an internal combustion, and that means that they're all saving money from the electrical power, but they're saving money from the amount of braking that they do, so, you know, the amount of wear on the brake pads is something like 0.25% of what it was previously. If you're driving around a diesel vehicle, which is a hell of a change, as you could probably hear, and that means that the vehicles are going to last longer.
So it's a very, I hope I've given you an impression, it's a very complex subject and you know it requires us being able to pull together people with lots of different skills and then obviously on top of that, David, we've got the financing capability within the business to structure that and reduce the costs of the financing, and also the structuring of the contract so that we can provide those assets, the battery on the bus, and the charging equipment as services, not as operating leases, which means that we hold them on our balance sheet rather than on the customer's balance sheet, which again provides additional financial benefits alongside all the engineering benefits.
Andrew
You mentioned at the beginning there, Nicholas, your investors. I think it's fair to say a lot of this work has kind of been organic and you've kind of come into it and it's expanded from there. Could you maybe talk about the fundraising journey and the journey with your investors and explaining all this to them as you've kind of grown out?
Nicholas
Yes, absolutely. Well, I'll go one step back, Andrew, if you don't mind.
Andrew
Of course.
Nicholas
So I said, you know, my career was at Hambros Bank and then I went to BNP Paribas and then there was a financial crisis and I left there and I built some solar farms at home, and I built solar farms at home because the bloke next door wanted to put up a wind farm. So I got a lot more support for putting up a solar farm than I did putting up a wind farm, and then we got involved in the batteries, so it was nice to have a common enemy in that respect.
But what was interesting was I pulled together the private financing for doing these solar farms and then we put the batteries on, as Dave was saying earlier, that improved the quality of the assets. And that's how I got into this industry. So I was very convinced by putting my own money where my mouth was, if you like, in that first iteration quite early on. Those were, you know, some of the first batteries in the UK at the time, and I could see that there was a really interesting opportunity for batteries in the future. They were very, very small at that point, they were only, you know, they were being used for just the balancing and so on. But obviously now things and technologies have moved on and we can see that.
So when we started this business, we went round the infrastructure funds in the city in 2016 and we tried to raise capital from them for this business plan, where we were going to have 150 MWh or whatever it was of assets originally, and we secured 4 MW as of batteries to be able to purchase once we had the funding from a developer called Anesco, who was the one who had actually built my solar farms at home.
Anyhow, to cut a long story short, the infrastructure funds are much more difficult to get money out of, or they were in those days than they are now, and obviously with just a couple of sheets of paper and some nice ideas, it didn't work. So luckily we had a fallback position, which was friends and family, and also because these other assets have worked quite well, we had a group of people who were interested in decarbonisation and what was going on in that side. So we were able to pull together, and by the summer of 2017, 25.5 million pounds to start the business, and we think 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 and, you know, we’d lost the capability to use the OEIS, SEIS structure because energy was not considered to be an area that would get some government support in that.
But despite that, we managed to raise really what I think is quite a decent sum of money and it was the thing that enabled us to buy the first 4 MW and build another 10 MW with Anesco, so we had 14 MW of batteries by the end of the summer 2017, and we had enough cash to continue to be able to operate without eating equity, which is important. It also enabled us to say to our first institutional investor, which was an American fund called Tiger Infrastructure Partners early-stage infrastructure fund – they wanted to put £20 million into us, and they did in October 2017 – we were able to demonstrate that what we said we were going to do, we would actually do.
And so it was that we went on, and now we've raised £220 million of equity, of which £150 million came in ironically from Infracapital, who we approached in 2016, but they put £150 million into the company in November 2020.
So the growth has been rapid and we seem to have quite a lot of interest, which is great news, but we can see, you know, now it's big cheques that we need from large investors that can take us. And it's not just money; we need an investor or investors who will take us into North America, where we started a lot of work and where, as you're well aware, Joe Biden has passed the IRA, which is, I think, over £360 billion of support for decarbonisation in the States, and a lot of that is going into energy and into transit area as well.
And we also need more support for what we're doing in Australia, which is growing at a significant rate, and it’s good with the change of government there, there's more focus on decarbonisation there as well.
So we started by doing receivable financing on the fleet side. We had about £70 million worth of receivable financing by the end of December last year, and we have refinanced that with this private place platform that we put together which enabled us to get longer-term finance, of about 16 years, and includes Aviva and Scottish Widows as institutions who supported us in that, and that means that we've got now access to longer-term debt, on the fleet side, we've hedged that, and the actual rates on that transaction were very strong and positive, and has helped us grow further in that side of the business.
So we're always looking, you know, it's not just on the engineering side that we're looking to optimise what we can offer our customers, but we want to work as well on the financing and the structuring side to be able to optimise; what we offer the customer is a complete offering; without being good at the finance, you're not going to get the contract, however good you are at the engine, on the engineering and support side, and that's very much the case the other way round too.
Andrew
That's a great place to take a quick break, and we'll be right back after this.
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David
So Nicholas, we've talked a little bit about the sort of equity financing journey you've been on. Would you say, I mean, given your success, would you say the banks are generally now comfortable lending into utility-scale battery storage projects? Is that something you see a lot of now?
Nicholas
I think that the banks are getting more comfortable. I mean, there's absolutely no question that the banks recognise that they’ve got to play their part in the government’s need to see more decarbonisation and they got to be financing more decarbonisation and so on.
We obviously have seen that with the invasion of Ukraine there is perhaps a little bit more realistic view about what they can and cannot do in the current environment, and that, you know, there's no question that you can't just turn around and say “OK, I'm not going to finance any more carbon extraction or businesses involved in carbon extraction.” That just doesn't work. It is going to be a gradual move across, but people need to be kept under pressure, otherwise we're going to find that it's going to be difficult to meet the targets that governments have put into their own legislation and regulation.
So banks are very much part of that whole process and what we've seen is that when we started in 2017, we never wanted to be an equity-based business. We wanted to have the balance in equity and debt so we could drive down our total cost of capital. And obviously we started off by having conversations with banks that we thought would be supportive.
Now the ones that we spoke to at that point in time in the UK were three banks that really were supportive in this segment all on a High Street basis, which were NatWest, Lloyds and Santander, so we engaged in conversations with them. It took a bit of time for them to see what we could offer them in terms of building their confidence, in terms of going back to what I said about Tiger, which was what we said we were going to do, we actually did, and that's an extremely important part of what banks look for.
So we did eventually get a financing, which was led by Santander. We've done six financing of batteries with Santander now, six sites we've done, and that's been a very successful relationship between us and Santander, we believe, particularly as the batteries are making quite a lot of money at the moment, and so I think the banks won't be losing their bonuses at the end of this year as a consequence.
But now we're in the process of seeing that there's a lot more interest, so we’re, as I mentioned, already in the process to raise an additional £220 million with a sort of £400 million accordion alongside that, and we've had a lot of interest from banks, not just the ones that I've mentioned, the traditional banks in the UK, but other banks from Europe in the main. But we've also spoken, for instance, to Australian banks, mainly because we want them to understand why we're doing as a precursor to us knocking on their doors in Australia as we look at developing projects and opportunities there, and we've got down to a decent, say fingers on two hands, type of number of banks for that process, which as I said, we hope to close during December.
But that means that there's definitely an increase in interest from the banks. They do definitely want to understand this sector better. They like us because we've been frankly able to deliver what we said we were doing, and they can see that this is a company who they would like to be engaging with so that they can understand this sector better.
The other thing we've done is we've developed floors. So what we try to do is be much more technically advanced, so from the revenue perspective, what we do is we tend to stack revenues. So what we've done is, rather than just being connected to the distribution network, which is what we were originally with our assets, we've looked at ways that we can enhance the level of income that we can get from our assets, and we're currently commissioning a 100-MWh battery, which is the largest battery in Europe to be connected onto the transmission system, and that battery is also the first battery in the world to be able to provide the ESO, the National Grid's transmission operations business, with reactive power services.
Now that's important, but there's a lot of these services that were provided by carbon-based generation in the past, and I'm sure you know, David, that a lot of those services were basically by-products of generating power using rotating pieces of machinery. Now that those plants are being closed or have been closed down, there's a requirement for getting hold of those services from other assets, and obviously their traditional assets that have provided those services, but what we've been able to prove is the batteries can provide the services using sophisticated inverters which are designed not just to do the AC/DC conversions, but can actually provide other services alongside that, and by working with the large inverter manufacturers in Europe that's what we're including in our assets so that we can do that.
David
I was I was going to ask you, and you might not want to go into this, but we talked a lot in the previous episodes about the various complicated income streams that batteries can generate, and it sounds like this direct-to-transmission network battery you're talking about sounds like that maybe won't play in the traditional markets. Will it have different kinds of arrangements, means of generating revenue?
Nicholas
No, we will play in traditional markets like the BM market and FL market and things like that. But obviously what you need to do to ensure that you're going to get the best chance of having a higher revenue stream is to be able to play in as many markets as you possibly can, so with the reactive power market, we've got this first contract that I was mentioning, which is, you know, a contract over an eight-year period, so that gives us a run of eight years’ worth of income from the asset providing a specific service, then on top of that we've got, because people like EDF and Centrica are looking for assets like the assets that we own to be able to help them with their trading, they're prepared to enter into floors. And we've got floors that then help us effectively add another layer of income above the reactive power income, and then obviously on top of that we then have the merchant related income, which you'll be very familiar with, right?
So what we do by layering the different sources of income is then 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 a period of years, and they derive that comfort.
So that's what we're doing; and then with the other batteries as we build out, where, for instance, we've got the first, I think it's a curtailment pathfinder contract, which is going to be on the next asset that we're building. That is a very important contract for operating the grid because there's a lot of power that comes down from Scotland. As you nice people from Scotland will know full well, because you're having to power all of us layabouts down in the South of England, and all the power that you produce in in the North Sea or in the various firths comes onshore and then it gets sent down on the existing lines, and quite often there's more power going down the lines than can be utilised at the other end, which means the lines then warm up and then the people who are operating the wind turbines get paid to turn them off, which is rather perverse, given that we need as much power as we can. So the idea is this content curtailment structure enables us to divert that power off into the battery so that it can then be stored and then released when it's required and demand is higher later on. And again, for providing that service, there's additional value to us.
Andrew
In typical Scottish fashion, I'm sure we get a good price for it, Nicholas, so don't worry too much about that.
Nicholas
I'm sure you do!
Andrew
It's maybe good to look at maybe the wider market as well; so you mentioned obviously early in your journey and speaking to these institutional investors and kind of finding a bit of a closed door. Certainly that they were kind of unwilling to maybe stump up a lot of cash in the beginning. Is that to do with the age of the company? Is it to do with the risks in the market at that time? Why do you think that was, and do you think that's changed in the years since?
Nicholas
It's undoubtedly because, well, the age of the company was year nought-one, whatever you like it was. It was very, very young. It’s moving into a market which didn't really exist previously. I mean, I think you've talked, David talked about, you know, opportunities to invest in listed businesses. Well obviously that even today there are relatively few businesses that are focused entirely on storage and, you know, it's a different market compared to, I think, what we're focused on, so it was all very early days at that point in time.
You can persuade friends and family to invest in an idea because more often than not, those are the ones who prepared to take risks where you haven't got spreadsheets that drive how you can analyse that risk you've got. Do you believe in the people who are doing it? Do they have the right expertise to be able to achieve what they're looking to achieve, and is what they're looking to achieve acceptable against the returns that you might achieve from supporting them? So that's much more of a personal sort of decision than something that requires loads and loads of analysis from analysts and so on, and then taken to investment committees and so on, which is the next stage that you get to.
And that's when we got to that, and obviously once you raise £220 million of equity and you've invested that, and that probably equates roughly to anything between £600 and £800 million worth of capex investment and income of £50 million and EBITDA of £20 to £30 million or whatever it is, you're looking at a business where the risks are completely different to what they were even three years ago, so you all know, it's like the old adage, isn't it: You know it's the more money you borrow from bank, the more a problem you become to the bank if you fail, whereas if you don't borrow enough money from them, they they don't really care about you, if you get my meaning. So you do get to a point where they've made such significant investments, and they believe in the growth of the business, that they're prepared to continue to invest.
We're very proud of what we've achieved with this business. We've got a fantastic team of people, we've got over 150 people now, we're adding to them, you know, day in and day out – huge – got 22 different nationalities.
We're trying to get more ladies. We've got quite a lot of lady engineers, which I'm very pleased about, you know, trying to get a little bit less white males, as it were, and we've got a really good spirited group of people who really believe in what we're trying to achieve with the company and believe what we're doing is important, so I think combining all that with the capital and everything else, we've got a very strong recipe for future success for the business.
Andrew
Definitely, and David, on the investor side, I mean, have you seen changes in the market as to how people view these assets, how much they're willing to stump up as well, as Nicholas says, it's a fast-moving market and there are clearly opportunities to be made. Has that changed the mindset, do you think?
David
I think so, absolutely. I mean, you know we mentioned before that in the listed funds, there are only three, as Nicholas mentioned, sort of fully listed investment trusts specialising in utility-scale storage and I think there'll be more, but it's still a relatively niche area in some respects, but there's definitely much improved knowledge, and we talked about the banks being educated, I think the investment banks that are running these processes and the investment communities that are funding the listed funds are much better informed and advised. I think there's been more stability in the various markets and auctions, etc, that batteries are bidding into, but it sounds like, I mean I've learned a new one today, just speaking to Nicholas about the large battery project. So there's some stability there, I think, on the count, on the flip side, maybe this is a question back to Nicholas, actually.
We've seen with particularly traditional renewables investors over the last sort of month or so, there's been lots of uncertainty around, and there's lots of political stuff going on, power prices have been volatile for a good while now and cost of capital is kind of on the rise. It feels like discount rates are going up, which is impacting net asset values for the core funds, or seems to be, and tax rates are a bit uncertain, and governments have been talking about possibly extending windfall taxes to cap revenues for certain generators. So if you ask a renewable project developer and someone raising money for those projects, they'll say that it's quite difficult at the moment. There's lots of uncertainty.
Is any of that infecting the battery storage, at a project level? is that infecting that area or is it a bit more insulated, do you think?
Nicholas
No, I mean undoubtedly the area is being affected. I think the biggest effect, to be honest with you, is on foreign exchange, so we've seen a serious deterioration in the value of the pound against the dollar, and the dollar as well going up against other currencies, as we all know. All the assets that we purchased batteries balance of plant and huge transformers and all the cabling and so on and so forth. That's all it denominated at the end of the day in dollars. So it does make a hell of a difference when there's the swings on the foreign exchange side. So we have to keep abreast of what's going on there. We got to make sure that we negotiate in order to try to continue to reduce those costs. As big buyers, though, in the market we hope that will help; we’re looking at buying 2 GW worth of batteries over the next three or four years.
Obviously those sort of numbers make people sit up and want to deal with you. In the old days. If you bought, you know, 50 MW, then people were dealing with you, but really they don't bother to come and speak to you unless you're buying north of 500 MW, I think probably today. So we need to keep at the forefront in order to be able to try and keep those prices down, but there is obviously a limit, and you can look and see what happened to lithium. You can see, I think, what might be happening around copper. Copper is going to be, I think, another area of whether it's convenient, and then and as I said, just more generally on sterling to dollars. So that's really the area that's been the major impact for us.
Then you've mentioned interest rates. Yes, interest rates have been very difficult again to deal with recently. We don't expect there to be any reduction in interest rates in the near future, and probably looks like they'll go up to 6%, depending upon what the political implications are for them going up to that level. And there's always going to be a balance between what happens to the foreign exchange relative to the interest rate, so we'll have to see how that works, but at the same time you've also mentioned that gas prices have been up.
Gas prices have the major impact on the electricity prices and the volatilities in the market, which obviously drive the cost of the services that we provide, so there is potential for an increase in the revenue alongside that, but the areas that we're most interested in at the moment are frankly the capex costs, because those are where we're really placing the bets.
Andrew
Without diving into your accounts too much, Nicholas, the returns to investors more widely in the sector, does this offer the kind of returns that that people are looking for? Is it seen as safe or is it seen still as a bit of a risk but could pay off given the volatility in the market?
Nicholas
Well, as far as we're concerned, obviously we have to meet infrastructure plus type hurdles, and, yep, we're able to meet the requirements of our shareholders and we have a pretty rigorous system through our investment committees and so on and so forth where they sit on them and so on. But we seem to be able to meet their requirements at the moment.
Like everything in life, there's a balance between growth and the returns that you get, because obviously the bigger you get, the more you're able to drive down the costs that I referred to; at the same time, the more important you become to your customers as a key partnership supplier rather than just as a sort of one-off SPV type supplier, and that's sort of where we want to go, so doing bigger projects and doing things that have enabled our customers to gain more from the structuring around the balance sheet, off balance sheet or on balance sheet, is also helpful. And then as I said, also adding on the software services.
And David will be able to know more about this, but I think as far as the public funds are concerned, there are levels of returns. I'm guessing there probably 6% or 8% something like that. I would think those are more in line with where solar development returns have been historically, where wind has been historically, so I don't think that they're going to be particularly out of kilter, and I imagine what we've got to see, I'd like really to see, is that the government recognises the importance of storage, because there's no point building loads and loads of wind unless you can deal with that power more efficiently, and adding storage to the portfolio is extremely important for the UK, and I think we've had Rishi Sunak stand up in his first Question Time and say that atomic and wind is the future, offshore wind is the future of the country. Sadly, didn't include the word storage, but I think that it's important that they do do that, 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.
Andrew
I think that's the message we've heard loud and clear through the podcast, but it's always nice to hear it again. Looking ahead, then, you're raising money now. You're looking to increasingly take the Zenobe model overseas, I understand. Can you maybe talk a little bit more about your plan, I suppose, for the next five years and beyond and maybe to the market more widely, where you see that going?
Nicholas
Yes, I mean the core of the business is definitely in the UK, and we've got lots and lots of opportunities in the UK and I mentioned with large numbers of gigawatts that we would expect to construct and own and operate here in the UK, providing the service, and these are all sites where we've already identified the locations and we've got grid connections and we've entered into options on the land, etc, etc. So these are all quite well advanced projects that we'll be looking to build on the network infrastructure side.
We intend to utilise what we've learned in the UK, which is a relatively deregulated market, to take that overseas, specifically into various areas into North America, where we've got relationships which will assist us. We are working in Australia, and there are numbers of different opportunities in the various states that are coming out, where they're looking for people to build batteries, and we're working with them and with the regulator in Australia, etc. So we see good expansion opportunities just in those two markets on the network infrastructure side.
On the fleet side, again, we've got a large number with probably 2% of the buses in the UK, or round about sort of 30-40% of the total electrified buses in the UK, that we have under our ownership with the services that I mentioned to you earlier, so there's still quite a long way to go here and supporting our customers in this market, so we'll carry on doing that.
We'll tend to follow our customers into new markets, like into North America where, as an example, National Express has a fleet, which is, I think, 1,800 buses in the UK, and they got 30,000+ buses in North America that are school buses, so we've got a good relationship with them. We would hope that we would be able to work with them to electrify depots in North America. And indeed there are lots of other customers in Europe that we're working with, or in the UK where we follow them into different markets as well.
And then I mentioned Australia and New Zealand. Sydney's got 8,500 buses. That's the same number as London, and probably Australia's got the same number of buses. I think roughly, as the UK has, over round about 30,000 buses. So again, there's huge opportunities for us there, and as we've done the first major electrification of a bus depot in Australia, we want to be able to build on that in the different states and we've got buses running in New Zealand as well, and that's a huge opportunity in a much smaller market for us to work there, so there's a lot of things for us to do in our core areas.
Then I touched on second life and second life business as we get batteries back off buses. I think in about five years’ time we'll be getting, you know, something approaching 500 MWh of batteries back from buses which we own. We'll incorporate those into second life applications and be able to build that business as well.
So you see, there's a lot of different things, not just on a geographic expansion point of view, but also actually expanding the business into different industrial areas, and I haven't touched on commercial vehicles, where again, using our knowledge on the depot-based bus business, we're already working with large European OEMs to support them as they enter into new markets, and at the moment that's an absolutely tiny market, but is obviously one which will grow at vast speed, given the number of vehicles we're talking about.
Andrew
I'm going to close with one question and I appreciate it is a big one, but we have it on our sheet and I am interested, given all we've heard so far on the podcast from you, Nicholas. To David first: are we expecting to see the boom in investment in energy storage based on the kinds of financial instruments that we've talked about today?
David
My view is we will. I think about the basic dynamics we've talked about many times on this series, and they are that increasing penetration of renewables on the grid requires storage. It's fairly clear we don't really have enough at the moment and the dynamics of electricity use and demand are going to change with these, etc, over the next 10-15 years and even more storage is going to be required, so I feel like, it's not a safe bet, but it's a sensible place to think about investing, I think, because we do need more of this and we're already seeing, you know, M&A levels are up in storage transactions.
The interesting thing we haven't really touched on is the way they're changing, because there aren't too many operational assets out in the market, sort of secondary transaction, secondary M&A, but what people are buying are earlier and earlier stage developments, and that's a trend that we've seen over the last few years, and so it'll be interesting to see how that pans out, but there is certainly a growing pipeline, which again, we've talked about on this series, and I think there is going to be significant growth.
Andrew
And to you, Nicholas, the same question.
Nicholas
We, well, we believe that we've got significant growth and we're not going to be different to anybody else. I think for people getting into this market there's going to be huge growth. There's huge amount of deployment of government funds to support it, not just in the UK, but, or rather less specifically in the UK, but in other in other countries as well. So there will definitely be more of it.
I think the issue is going to be maybe more that the West needs to build its own batteries if we're going to be relying on lithium. We're agnostic about the type of technology that we use, but it seems at the moment lithium is the best technology and that the West needs to have more facilities to build these assets, because undoubtedly the likes of Mercedes-Benz and BMW and General Motors and Ford and so on will get to the front of the queue to buy batteries to electrify vehicles. And storage can look pretty second place to those as far as the storage market is concerned, because of the huge volume that those customers are able to place with the suppliers. So I think it it's needed. I think that we need to have that capability in the West and not rely so much as we have done on the Chinese to supply our needs. And if everything aligns a bit better than it has been, then I can't imagine why there wouldn't be a very strong build-out of these assets to support the grids.
Andrew
That's a great place to leave it and plenty more to pick up on the manufacturing, the circularity, the sustainability of batteries. All topics we want to touch on further in future episodes of the Megawatt Hour.
That brings us to the end of this instalment of the Megawatt Hour. Thank you once again to my co-host David, to Nicholas for joining us from Zenobe, and to producer Amber.
Thanks also to you for listening. You can let us know your thoughts through our social media channels or by emailing Out Loud at Energy Voice.com. Every week the Energy Voice team get together to highlight the 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 Megawatt Hour coming your way very soon. I've been Andrew Dykes, and thank you for listening.
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