(upbeat music) Experience the energy transition like never before was talking new energy, a podcast from LCP Delta. Each week, we speak with energy innovators from industry leaders to strategists shaping the future of energy. Join a global community of listeners from Europe, North America, East Asia and beyond. (upbeat music) Hello and welcome to the episode. I'm here with my colleague, LCP Delta expert, Tom Spout, who leads our storage activity. Hello, Tom. - Hello, John. - Tom, in the storage market, there's a lot of discussion around tolling, but not all of our listeners are in the storage market. So if we think of big batteries, before we come to to tolling, can you give our listeners a feel for the markets? Or maybe UK, which has been established a bit on Germany, which is the place to be at the moment where you're speaking to me from today? - Yeah, I mean, it's been quite an evolution. So GB is obviously kind of the pioneering battery market in Europe. It saw a big capacity increase in the last five years, but now we're seeing other European countries. Also becoming attractive spaces for battery investors, just at the same time that GB is leveling off as a market, I would say. And what we see today is that Germany is the biggest market with the most excitement from different players, lots and lots of people are looking at the German market, and that's also a really big market for tolls. And we see tolls being really popular in that market. - Okay, can you mystify the word tolls for our listeners that aren't familiar with it when apart from motorway tolls, when you're paying to drive it on the motorway, how does it apply to the board of critical batteries? - Yeah, so it's kind of a similar route in that it's kind of rooted in sort of infrastructure finance. But if you look at the business model for a lot of storage on the market today, they're looking to achieve secured revenues, so revenues that they have a high confidence in. And a toll is basically an agreement that says, I agree to give you access to my asset, and you can trade it, basically renting out to someone. And then they're signing up to pay a fixed fee for that access. So typically it would be either a specialist optimizer or a big utility saying, I'm gonna pay you ex thousand euros per year to access this asset. And then they get to keep the trading revenue that they get from embracing the asset, they get to fold it into their portfolio, and you get a guaranteed revenue stream. So you're insulated if the market takes the downturn, but also obviously if the market is then very profitable, you're not getting the upside. You're still just getting paid the toll price. - But what that can, do I imagine, if enable infrastructure investors take a look at the battery market and see it as something they can get a steady, low risk rate of a term from, and hence low acoustic capital or leverage in more debt, and spread that the money they've got to invest over more battery projects. - Yeah, those are both really important drivers. So getting access to cheap capital is always good. Being able to borrow cheaply is great. So for lenders, seeing guaranteed revenue streams is really nice. It means that they are more comfortable lending to the project. And then that is also very critical in the German market, because one of the real differentiators between Germany and GB, is that GB has a capacity market. So there are long-term contracts available from the regulator in that market. In Germany, there is no long-term capacity market right now. So if you want some kind of long-term contracted revenue, you basically have to get it from your trader. This is quite similar to what we saw, also, of organ Germany in the renewable space, with the rise of commodified PPAs, and again, financing through bilateral guarantees. - Yeah, okay, so there's a lot of market risk, market opportunity in the day-to-day, the day-to-head market, and the wholesale markets in Germany. But with that, that's quite hard. - I mean, part of your job time is predicting those revenues, so you can forecast them, but they're volatile. - Yeah, there are volatile, and there's always uncertainty in that. I've always thought it's important to be realistic about that SNK class. It's an SNK class that does carry a lot of merchant risk. If you built a battery in GB in 2021 versus 2023, the difference in return between those two assets would be really significant. So there is a lot of short-term volatility in the market. I think the other key component here is the nature of that volatility has created a lot of demand for people to offer tolling agreements. So we always talk about why people would want them, but the other important part is, why are companies keen to pay to get access to these assets? And in the German market, what you have as a market, which is right now set by negative prices, it'll have over 500 hours of negative pricing this year, and that's obviously leaving a lot of assets paying negative prices. And then it's also a market with a lot of kind of imbalance in intraday costs. So if you're out of balance, you can incur a lot of costs. And because of that, the intraday market is very liquid and it trades very, very often very quickly with a high turnaround rate through to delivery. So what you see is basically a market where there's a big premium one flexibility. Most of people need access to some kind of asset that can capitalize on a system with negative prices and with lots of imbalances. And really, the only asset that could do that is storage. So people are trying to get access to those assets. - Is that what you expect to see more and more of them, the split between infrastructure investors, tolling agreements, and trade or felt optimizes taking that market risk or market opportunity? Or do you think that will only be part of the market? And there'll be a lot more complexity rather than that simple picture I just described. I think it's a bit more complicated because there's a third player in the game. So there's people putting money into the projects and then there's people operating the projects and sometimes there's the same people, but usually not. And then of course there's the developer who's trying to package a project to make it as attractive as possible. And that person has different incentives. They obviously want to reduce the amount of capital that they're outlying for each individual project. So they're driven towards high leverage business models. But they also want to maximize the return on equity. And obviously, when you give away risk, you also give away the kind of expected return. So in the long term, you will see tools kind of sticking around for the lower risk investors, like infrastructure investors. But I also think in the long term, in battery storage, it's not necessarily an asset inherently that is super appealing to infrastructure investors because it's usually not got direct subsidies. It's often not able to contract for long periods of time. It's quite a short lifetime investment by the standards of infrastructure investors. So it might not see the same market evolution that we saw in renewables that went from pure IPP and renewable utilities into also being an infrastructure play. I think it could be a bit more of a complicated landscape for battery storage. - Yeah, just because of the nature of the revenues, they're more uncertain. They're more exposed to risk. So tolling, you get full tolls. You get partial tolls as well, don't you Tom? Where as a owner of the battery, you may have a tolling agreement for half of the battery capacity and trade to us to sell, for example. So there's quite a lot of ways to manage that risk to divide that risk, or share that risk to many different parties. Are there other ways you're seeing developers, as investors manage risk apart from tolling agreement? - Yeah, there's a lot of different ways to manage risk. I mean, the off-text base is always evolving. So historically in GB, it was very heavy emphasis on floors. So kind of a guaranteed minimum revenue and then giving away and kind of share of the revenues that you make in exchange. And now we see a lot of emphasis on tolls, particularly in Europe. I think part of that is also people basically building assets in markets where they're quite new to the market. Are they going into the market for the first time and getting finance in that environment is obviously difficult. So then getting access to project finance with a bankable toll whether you're a counterparty that's renting the asset is signed up to pay for it for 10 years and they have billions on their balance sheet. That's one way to get easy access to capital when your lender is a bit nervous. I think for, in terms of the way I see the market evolving, I think you will see markets maturing. So markets that right now are only bankable on tolls. You might see moving towards more partial tolls. So a split between the rent and a more merchant optimization and also you can see those markets move towards floors. And then I think there is a lot of exciting stuff going on with financialization that you get these kind of virtual or financial tolls where people design a custom instrument which gives you a swap on some portion of your value could be on the day ahead spread, could be on a cycle of your asset, whatever the specific factor is that you're taking into consideration. So I think that's basically continued to evolve and there are basically as many structures out there as there are investors looking to build an asset. And presumably different markets will have different levels of risk and if you're building a storage portfolio across multiple countries or the storage and renewable portfolio or a storage and a speaker portfolio, you need to consider the risk of your whole portfolio not just focus on what's the best type of tolling agreement. Yeah, absolutely. And building across multiple markets is a great way to hedge in and of itself because the different markets have different risks. Even within Europe, different markets have very different structures. We've had the maximum auction results now from Italy and it looks like Italy will be one of the lowest risk lowest return markets for a lot of assets that are in the auction now. And then Germany is at the other extreme of that where it's supremely merchant and it's therefore quite high risk but at the same time carries a very high expected return. And then in between you have markets like TB or Poland where you can get access to a capacity market contract and you also take merchant risk on the actual operations of that asset. So there's a wide range of country factors to consider and I think what you'll see still is developers will want to keep as much of the merchant exposure for themselves in general because that is ultimately where they expected revenue is. Yeah, it feels to me like a market that is quite. I was gonna say embryonic for that's a real worth that's in the process of maturing. There's a lot of learning going on. Each market is different. There's different financial structures and there'll be a lot more evolution and change across countries in the ether. I think that's what makes storage interesting. It's the frontier of the energy transition ratio now. Yeah, okay. Well, time's getting the better of a storm so we'll leave it there but keeping it interesting is good and I think we'll need more and more batteries won't we? So finding ways to get the right investment, the right risk appetite spread across different parties will continue to be a hot topic for the years ahead. Definitely. Thanks, Tom. Thanks everyone for listening and look forward to working back next week. Goodbye. Bye-bye. Thanks for listening to Talking New Energy. If you're enjoying the podcast, please subscribe, rate and share with your colleagues. We'd love to hear your ideas, whether it's a guest or a topic. Feel free to reach out at
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