198. Battery Blitz in Germany - Oct25

With Laurent Segulin from London and Gerard Reed from Berlin, this is Redefining Energy. Today on Redefining Energy, we're going to talk about the opportunities in the German battery market. And it's going so crazy, I call that a blitz. But first, a word from my partner. Abloco Energy is Europe's Premier Leaser of 10 Foot Container Mobile batteries. Built in Europe with CATL Best LFP cells, Abloco Energy serves 14 European countries, including France, Germany and the UK. Abloco's batteries can be leased for any duration between six weeks and six years. And they are monitored by the Dutch award winning platform school, Abloco Energy. Make your life easier, make your business more flexible. Back to the show. Yeah, that's a good way to put it. All right. Absolutely. It's a huge amount of drivers in that market, Laurent, Starting with just price volatility. Right. Incredible. What's going on? Before we introduce our guest, I've decided to bring on for a few minutes Zach Williams from Modo Energy. Because Modo is really the best analysis of every battery market. For three, four minutes. Zach is going to explain us what's the state of play in the German battery market. Let's listen to Zach. Zach, welcome and please give us a broad picture of what Modo analyzes and then a few key figures on the German battery market. Yeah, thanks, Laurent. At Modo Energy, we look into how batteries are performing today and how they're going to perform in the future. So we offer benchmarking services, power price and battery revenue forecasts and also research into these markets. So some of the key topics, challenges and risks behind that. You follow gb, Australia, Texas, California and you recently opened Germany? Yeah, we originally started in GB and for about a year now we've been doing the US markets and Australia and most recently now expanding into Europe. So Spain, Germany, France and Italy are next on the list. So it seems the German market is very hot right now. What's your assessment of the German market now and going forward? Germany is a really hot market at the moment. There's a lot of interest both from the local developers as well as a lot of foreign investment. So a lot of companies that have got a lot of experience in GB that are looking how to get assets deployed in Germany as well. The merchant case in Germany is particularly strong. So you've got really strong, robust merchant returns across the three key portions of the revenue stack. So first of all, the fundamental case in the day ahead, power market. Germany has the strongest daily power spreads of Europe's major markets. So there's over 100 gigawatts of subsidized solar capacity and only 80 gigawatts of peak load. So, so during peak solar hours, the grid is flooded with this additional solar energy which it can't consume. So the result is you get these deep troughs in negative prices. So Germany has the most frequent negative prices of Europe's major markets and the deepest negative prices. So it's a dream for batteries because you can charge during these periods of deep negative prices and shift that energy to later in the day when power prices of return. So yeah, ultimately Germany has the strongest day ahead power price spreads in Europe. On top of that, the market design in Germany means it has an extremely lucrative intraday market. So why is that? Essentially in Germany there's no central balancing mechanism like you have in markets like in the UK and there's very strict imbalance penalties for being out of position. So if you're a solar or a wind or thermal generator that's out of position, you deliver more energy or less energy than you agree to, you get charged a penalty. So they're strongly incentivized to make sure they sell as much energy as they produce. So how this happens in practice is solar producers will forecast how much energy they produce in the day ahead market. Let's say this is 100 megawatts. Then for the following 24 hours, as the forecasts are updated, they get a clear idea of how much energy they're going to produce. They correct their forecast in the intraday continuous market. So this creates a lot of intraday volatility which batteries can take advantage of. So I've heard batteries can trade up to 15 times as much volume as they actually deliver. So a lot of non physical trading in the intraday market and on top of that you've also got the ancillary services. So Germany requires about 5.5 gigawatts of total ancillary service demands which are not yet saturated. And the star of the show in that market is the AFR or Automatic Frequency Restoration Reserve, which you can bid 2 gigawatts in either direction. And there's only around 5 to 800 megawatts of batteries registered in that service already. So if you're an optimizer of batteries, you've got these three really strong revenue streams which you can cross optimize between. And that's why Germany is looking so strong and so attractive for so many different players. Well, Zach, thank you very much. So it's a very, very hot market. Thank you so Much for coming. Thanks. My pleasure. So, Gerard, we've decided to bring a very special guest. We could have brought a very established developer, institutional, but we have decided to go for a Pioneer Commando. Yeah, absolutely. So what we've decided to do is bring in Philip Mann, who's the CEO of a battery business called Terroller, very active in the German market and some very interesting and pioneering agreements that they've put in place, which I think are very important for the future of financing batteries not just in Germany, but across the world. Yeah, absolutely. And one of his innovation, well, first of all is vertical integration, but with partner at every step of the way. But the second, he has master tolling agreements and a tolling agreement, basically you build the battery and you go contract with a trader and somehow it's a swap fix to viable, which means Terralayer is going to get a fixed revenue. So that's excellent because you can raise debt on the top of that. And on the other side, the traders, and these are big guys, lwe Vattenfall, they get access to the battery and they trade around it without having to invest in the battery. Exactly. And that's very important because people don't understand that the trading desk in those big companies is very, very far away from the industrial department. So in fact it's faster to go through a third party than trying to organize something in house. Exactly, exactly. So listen, why don't we bring Philip on the show? Philipp, it's great to have you on the show. Thank you very much for inviting me. Filip. We like to bring thriving entrepreneurs and I think you're one of them. Three years ago your company did not exist and you have managed to raise close to 100 million of equity and debt, which is pretty phenomenal. So how did you succeed so fast? When we started November 22, we were still running our old company, which was a B2C luxury marketplace. And before that I started my career at Glencore. So the way I think about it is it's kind of coming back home, back to energy, which where I started my career, we've been able to move quite fast for the simple reason that there's this massive over indexing in renewable energy generation investment. But structurally too little is happening in grids and in storage. And so we felt very quickly on that. This is probably one of the largest single asset capital deployment opportunities of our time. Everything is about AI. AI is fundamentally about build world, which is data centers and data centers are about power. We very quickly managed to create a differentiated value proposition and hypothesis which combined with attraction that we draw attracted a lot of standout investors and we've been very lucky too. Yeah. I'd be interested to hear what you think your USP is. Yeah. So when we started with this business, you know, we looked at storage In Germany in November 22, there was under a gigawatt of grid scale Bass. So we said, okay, well there's obviously not enough storage, but if you truly believe that this asset class will be as big as people think. We felt three things needed to happen to make a differentiation. First one is a there will be a lot of people that need flexibility. Large CNI traders, utilities, et cetera. It will not be practical for everyone to own and operate their own assets. So we said somebody needs to build something like the Amazon web services for energy flexibility. The second point that we made is that we said most people look at flexibility and Bass as just a development business. But you know, storage is an active asset class. If you build a PV plant and you do nothing with it, still produces power when it's sunny. Build a battery and you do nothing with it. Well, it does nothing. So I think a lot of the value is actually in the commercialization of the asset. And the third thing that we said is you need to own the offtake. It's an infrastructure asset class in the making. It looks like infrastructure, it's hard assets, it's on the ground, there's power involved. But if you actually look at storage, it's a volatile business in the very nature of it. So we said you need to enable to attract off takers, to drive long term revenues. And if you have these, they will scale with you on a global basis. And we just closed two deals recently in Germany, one with rwe, one with Wattenfeim. And while obviously electricity markets are local, Germany's different to France, France is different to Spain and so on. But the off takers are global. So once you have somebody in Germany, you can expand to other markets with them. And so these were our three key hypotheses that drove what we built. So ultimately that led us to build terralaya. What is terralayer? We are a integrated energy flexibility provider. On the one side, we kind of have two parts of the business. On the one side, we are a quote unquote conventional best developer, owner, operator. We develop in house with partners and we own 50% of a joint venture where we develop grid scale batteries. Currently 100% focused on Germany. And on the back of that we've built an offtake platform that aggregates these batteries, virtualizes these Batteries and essentially markets portfolios of these batteries by tolling them out or renting them out to large off takers in a way that you kind of circumvent the conventional way to monetize these assets. Because typically today when you own a battery, you have one of two options, very simplified. You can go to a trader called Optimizer and they will trade your assets intraday day ahead. Then in the ancillary services you get very high revenues potentially, but it's volatile cash flows. Or B, you can go to utility and you can rent out the capacity, which is great because then you have fixed revenues, but all the upside is gone. And also the problem is that Currently in Germany, 95% of assets are below 20 megawatts in size. So we said you shouldn't have to choose fully risky or fully de risk, but no upside. So we've built a platform that aggregates assets across portfolios, building one large virtual battery across a portfolio, maybe Bavaria or across Frankfurt, and then gets offtakers the ability to rent this capacity without the constraints of the individual assets. Philippe, thank you for the sales pitch. I hope we didn't lose half of our listeners. Let's be a bit granular. You raise 100 million, how do you choose your first sites and choose your supplier? Because I've been buying batteries that I can tell you it's a bit of a headache. So explain that process and the type of team you have. I would expect more established guys like Ncavis or the classical solar developer to do that, but you managed to beat them. So how did you really build your asset first before you market them? Yeah, on the development there's two ways to develop. Obviously it's about quantity, but I think it's also very much about quality. And we've been fortunate in the approach that we didn't just develop in house. So we very early on started developing with co developers. We started a company with an engineering company from Hamburg, a greenfield development JV of which we own 50%. And then also we did greenfield development in house. And so from very early days we essentially developed across all four TSO zones in Germany. We currently develop in 33 DSO zones. And the reason why we were able to do this faster than others was A we had very fortunate timing to the market, but B we didn't have this romance of doing everything greenfield in house. We were happy to leave some economics on the table and have our partners make money as well to kind of parallelize the greenfield development efforts with many teams. So I think that enabled us to very quickly develop. And as a result we currently have two assets life in Germany. We have six assets in construction. We're about to sign another nine assets into constructions in Germany. And also we focused very quickly on the medium voltage, which is kind of typically 10 to 30 megawatts in commercial zones because it's faster to be permitted. As for the second part of the question, how do we choose the suppliers? We have a team from former Fluence, from rwe, from anoa, former Engie on the team. We could in theory do full EPC in house, but we buy fully wrapped. So we go to strong EPC partners like B Storage for instance in Germany or Axel, and buy fully wrapped. We have a team that is very active as a customer. You know, we drive to the sites every week, we look at how the systems are packaged, etc. But we decided to focus on where we think drives the most value with our skill set. And that's the development process and the commercialization process. Can I ask just to talk a little bit about the German market? Because what we hear is 200 gigawatts of batteries potentially in planning and then we hear that you've got the distribution companies like the edis' Bayernets, who are blocking every single battery coming onto their system. So just talk a little bit about the dynamic there and also what that means for your business going forward and. How do you deal with that? There's a German saying which is everything is cooked hotter than it is eaten. What that fundamentally means is people talk about development a lot more than what is actually developed. So what you mentioned with Bayern Werk, et cetera, is absolutely correct. And there are these publications about 200 gigawatts of grid reservations, et cetera. But at the moment, and this is changing and this is good for the industry, but up until very recently, everyone with a mother and a dog was able to submit the grid application with just a power of attorney with a piece of land without having to secure that. But the quality of a lot of these applications is really low. Or these are people that actually don't have the financial means or the engineering means or the capabilities to realize these projects. And so what you see a lot in Germany is there's a lot of talk about all these grid applications and a lot of the DSOs and TSOs just shut down these processes and they're now asking for proxies that help them determine seriousness. For instance, they want to see do you already have a system design in place? Do you have you already submitted the building permit Are you able to prepay a portion of the grid connection, charge the bkz, the bar cost and sus? And so this is how they're kind of trying to triage now who is actually able. But the numbers that you just mentioned, I mean I read about them too and you read about battery, tsunami, etc. But I do think the people that are actually able to realize, construct, finance and operate assets, this is a very small number in Germany. I am not that concerned about this flood coming because I think a lot of this stuff is just not high quality. You're smart, you have good partners, whether it's the epc, the engineering, you start building your batteries. When do you decide to go for the tolling? Very early on, like almost before the construction or once the construction is finished. So how does the tolling enter into the process? So basically the layer platform that we built allows us to aggregate many assets and through a single API to give the Off Taker 1 virtual battery. The deal that we did with Vattenfile for instance, is eight assets spread across the tenant region. So what we basically do every quarter is we assemble a cohort of assets which we bundle and virtualize. Once these assets are at ready to build or before ready to build, we run a competitive auction with different off taker partners like watten fallen RWE. We typically then sell 50% of the capacity upfront at pretty much at the same time as we mandate the EPCs. The assets then get into construction. Typically this takes, give or take, 12 months once they're alive and then once the assets are live, we have 50% capacity already told, typically right now between five and a half and seven years. This will go longer over time and then 50% is merchant. Now the merchandise, the way that we operate it, we auction it off on a daily basis to a multitude of bidders. If it does not clear above the hurdle price that we internally set, it falls back to conventional optimizers that are designated optimizer partners that help us. The idea however is from the kind of 50, 50 to upsize over time, to call it 60, 70 or maybe 80% tolling, but just that the capacity once the assets are cod is instantly available. And we believe you will be able to achieve a higher price for the tolling if it's click and toll and you can have it straight away rather than in 12 months. That's very impressive the fact that you have signed two tolling agreements, because I read recently on Pexapark that there's been only five tolling agreements in Germany. So you are 40% of the market. Yeah. Is there a market price for tooling or is it really location dependent? The short answer is there is no market price. I would say there is a range, but I think there's a lot of parameters that dictate tolling price. I think it's a contract size. B, there is a little bit of an element which TSO zone you are in, but it's not really a big difference. And C, it's, you know, when you start to deliver, is it, you know, this year, is it next year, is it the year after? And then there's a lot of structuring that goes into tolling. Things that impact price that you wouldn't think that impact price, for instance, the credit. So if you want to do a seven year toll and it's a single asset, let's say 50 megawatts, 100 megawatts, we've seen off takers that wanted two years of tolling fee sitting in your bank accounts as a guarantee. So if you have 100 megawatt toll, and I'm just going to invent a number, and you have €100,000, so 10 million a year, they wanted 20 million kind of sitting in your bank account with a letter of credit. And that obviously eats into your economics. And so I don't think there is a market. That's why we created what we believe is a differentiated product, because we think that we can create the market standard together with strong partners like rwe, like Vattenfile and other large utilities. But there is no fixed price yet where you can say that's the index and that's exactly the price. And then there's how many cycles a day, et cetera. So it's a rabbit hole you can get really into. So there's no such thing as the toll and that's the price. Philip, can I ask you, is the business model then to be an independent power producer going forward or do you at some point in town just sell the assets to somebody else? Look, I think we're both. There's a lot of differences. But someone who we admire and think has similarities to us is Octopus Energy. On the one side they have the utility, that's our best business. And on the other side they have Kraken, which is our layer business at the moment. There's a lot of synergy and we are, yes, an IPP or IFP at the moment. I think over time we will run more and more other people's best assets on our infrastructure and we will have them structure Tolling have them structure their merchant deals and become the operating platform for the business, hopefully partnering with other utilities, partnering with other optimizers, etc. We very much want to build this in an open way where we don't compete with utilities or optimizers or other asset owners. Does that mean in the future that we may not own assets? Potentially, but I think we very much like asset ownership. We want to own assets. It's a very big part of our DNA and at the moment I think something that goes very strongly hand in hand. The interesting part, and again, tell me if I'm wrong in the fact that you're only tolling 50% of your capacity. In fact you're giving them a seniority, meaning that if some of the battery don't work or only work at say 75%, they still get their 50%, is that correct? Or if the batteries only work. So basically there's a bit of a tranching being done and if you have a technical problem, you absorb it through not having the capacity to trade on a daily basis. Is that correct? It's absolutely correct. Basically the long term contracts always have priority. So for instance, Vatten file has a 55 megawatt seven year toll. That's a portfolio just over 100 megawatts that they have, so around 50%. And this is comprised of eight assets. So if any assets are down, we have 50% headroom to always make sure Vatten File gets what they signed up for. Anything that is spare is then auctioned kind of day ahead. And so for the off taker, the benefit is you have a much larger resilience because you don't have one grid connection with one very large asset. You have multiple assets in one TSO zone. You have much better resilience. You have one API which goes into your trading workflow. So you don't need to integrate many assets. We are the balancing responsible party for the ancillary services. It's one stop shop solution. And the beauty about it is also depending on how the customer accounts, this can have benefits from an accounting perspective for them because it's balance sheet light depending on their accounting treatment. Now once you get those tolling agreements, can you bring them to banks and say, wow, I love this, I'm going to lend you, I don't know, 80 cents on the euro or 50 cents on the euro. So is it a good collateral? Absolutely. The reason for the tolling of course is you want to de risk your revenues, but you also want to drive your bankability. And there are a Lot of local German banks that are happy to finance fully merchant, but that was because fully merchant was the only option. Now that you see tolling deals starting to happen, banks very much want to favor tolling contracts, especially when you finance larger assets. And B it allows you to push the gearing. The tolling is really important to drive bankability. But I would also say not all tolls are born equal. If you have a blue chip utility that is rated, that makes a big difference. If you have a super smart hedge fund style trader, they may give you a higher price, but they are not rated. So that's not really going to help you with your financing or that's going to mean you have a higher margin you need to pay to the bank. And so there's really a lot of elements that go into tolling. We always see this on panels at conferences. People go, yeah, you just told the assets. But to your point, Laurent, how many tolls have been made? And tolling is really complicated. And so we're very proud that we did amongst the first tolls in Germany, I think we did the first multi asset capacity toll globally with Vattenfall and then the second one for rwe and we're hoping to bring further innovation to this. Philip, if I look at the spreads in Germany, I just go, this is an all equity play. Why would I bother bringing debt into this? Because the returns are just so good and so quick. Yeah. What's your thoughts on that? I guess it depends how much equity you have. You're right, spreads are massive. But if we actually look at between 2019, 2024, the difference between spreads kind of daily price spread has increased 288%. So you're absolutely right. Obviously there will be some compression at some point potentially, but this is something that works all equity as well. I do think, however, as a independent player such as ourselves, which is very much about pushing the equity returns for our shareholders, we think leverage, if done in a healthy way, is a good instrument to drive up those returns. But you're absolutely right, this also works as a full equity play in Germany right now. Yeah, but Gerard, I would say the following. The moment your spread compress, the tolling price is going to compress as well. So in a certain way, and I guess your business model, Philippe, correct me if I'm wrong, is to create an integrated value chain, but at every level you de risk by partnering. Absolutely. So we focus on two parts, the development and the commercialization and everything else which is not core IP or does not drive core value relative to the skills that we have in house because we try to run this as a lean machine with only 40 people at the moment, we partner with others. You said something, Lauren? Yes. Spreads may come down. It's important to kind of cascade the revenue stack. So if we look at ancillary services, there will be a saturation in FCR and AFR similar to what we've seen in the uk. I think it's going to take longer, but it will happen. If you actually look at the power demand in Germany versus the UK in 22, Germany was at 82 gigawatts versus 44 in the UK. So there's a much deeper market in the intraday in the day ahead. So I think we may see some compression, but it's going to be mostly in the ancillary services. And then I would say even if there was compression in the spreads, the capex, the rates that we're seeing right now are falling so fast that actually future cohorts of best assets, even two, three, four, five years out, if you assume this trend to continue, will likely be even more profitable than today's assets, even at lower spreads. And if you then actually just look at the rate of wind solar deployment in Germany, I mean, we had 74 gigs of wind today. We're going to 230 gigs in 2045. And if we look at solar, we're 95 today, we're going to 215 in five years and to 400 gigawatts in 2045. So I think there's a reason to believe spreads will actually stay or continue. But even if they compress, the capex comes down a lot. Philip, as I'm listening to you, sort of begs the question, really what you are. Are you a tech player? Are you an infrastructure player? Or what are you? How do you see yourself? We often get this question and we don't think about it this way. I would say the cheesy answer is we're infratech. But the honest answer is what the customer wants from us, whether that's a utility, a data center trader. They want flexibility. They want flexibility without the need to own the assets, without development of the assets and operating the assets. They don't care if you are a venture technology company or an infrastructure type. With an infra PE company, they want flexibility. And we believe that by owning the assets, operating the assets and having differentiated software, we can deliver this value best to them. At the moment, we happen to own most of the assets. We will continue onboarding more and more assets of other people. But I think it's a very good symbiotic relationship. We show that what we do makes sense for our own asset base and then we can prove these higher returns to others. So I think we are both, I think we are differentiated infrastructure operators and so far it's been really great having our own asset base and our own software and it's been making it more compelling for our off taker customers and other asset operator customers as well. Well, Philippe, thank you so much for coming on the show. Very interesting to understand this battery. Roche in Germany. We wish you the best for Teralaiher. Thanks a lot. Philip Laurent. You call it the blitz. It's a great way to describe that market opportunity in the next few years. And sorry I say next few years. You really have to be quick. Okay. Simple as that. Yeah, things are happening now. This market's going to treble in the next two years. But even if you compare to GB, you know, we could go to 30 gigawatt, no problem. So this market has at least five years of extraordinary growth in front of it. And to quote Alec Baldwin in this famous speech in Glengarry, Glen horse, this guy has brass balls. Yeah, well said, well said. And we wish Philipp all the best actually with that, you know, the opportunity in the German market. Well, Gerard, I tell all our listeners, watch out for the German market. It's red hot. Absolutely. Sure is. Okay, I talk to you next week. Good. Look forward to it. Thank you for listening to Redefining Energy. Don't forget to rate the show and subscribe on Apple Podcast, Spotify or the platform of your choice.