Speaker 1Welcome to Energy Unplugged, the go-to podcast addressing the global energy transition. I'm Hugo Batten, MD of Aurora APAC. Delighted to be joined by Virginie Sandilia. Virginie is the CIO of Shizen International and head of project finance for the Shizen Energy Group, one of Japan's leading renewable developers. She's had a series of senior finance roles at Shizen, including international finance head and finance group lead. Before Shizen, she was associate director at the Clean Energy Finance Corporation in Sydney, and before that in project and export finance at HSBC in Singapore. So she's seen clean energy financing from both the lender and the developer side. Today's discussion is going to be largely focused on the economics of grid scale batteries in Japan, how they make money, how they get financed, and what could stop the buildup. We're also going to touch on some other APAC markets too. Virginie, welcome to Energy Unplugged, delighted you can join us.
Speaker 2Thank you. Glad to be here.
Speaker 1We're also joined today by Arthur Yanagisawa, head of advisory in Japan, who is going to help facilitate the chat today. Welcome Arthur. Looking forward to it. Awesome. Well, Arthur's going to step through some more of the detail, but just at a high level, what are the top two challenges say in delivering grid scale batteries in Japan over the next five years? Like what's the stuff that's actually stopping them reach FID?
Speaker 2So the interesting thing that is happening in Japan at the moment with BES is right from the start, step one, when you need to obtain grid approval, it's been very, very challenging. The grid is to be fair bit congested, the applications are way too high. So clearing that first hurdle is going to be essential and will actually literally make the project happen. So that first step, super important, a little bit more down the line looking at more development process. I would say firming up economics and financing is very important and especially relating to financing. At the moment in Japan, we see an increase in interest rates. It has a very big impact on how developers, asset owners look at returns in the short to long run and where interest rates land in the next five years will be really critical on how many projects actually get off the ground.
Speaker 1Japan's at a potentially slightly earlier stage when you look at kind of relative battery penetration. At the moment, a lot of batteries are making money from balancing market revenues. As you'd know elsewhere in the world, GB, Australia, we have seen batteries do very well in the early days where they've made money out of ancillary services until those markets have been saturated. And in particular, Japan also has METI coming over the top to suggest price cap reductions in the balancing market. How do you see this playing out again over the next five years? And in Japan, because METI has a very strong role, how do you factor in kind of regulatory risk when you're looking at the revenue stack for Japanese batteries?
Speaker 2So this is spot on, it's a big difference in the Japanese market compared to the other markets overseas. The difficulty, to be fair, as you start looking at new technologies in every single market, new entrants have to be rewarded from taking a bit more risk, establishing new technologies in such markets, and that has to be on the back of economics that are, to be fair enough, to justify the investment. In Japan, we're seeing very frequent changes or actually the intention to make those changes. And from an investment perspective, this is not the landscape that somehow will help to make those investments. So on my side, I'm a bit cautious to see in the long run what will be the impact. But nevertheless, in the short run, I think for a lot of developers now, it's looking again at the economics and seeing returns going down very, very sharply. There's also a bit of a difficulty on the financing side on how to bank those revenues if actually they are not sticky enough and subject to multiple changes. So on the bank side, it's looking at what kind of sensitivities could we run, so it's pushing all the numbers down and doing the same thing, to be fair, to other revenue sources. So increasingly, it will become more difficult to finance this batch of early-stage best
Speaker 1projects. It was the LTDA, the long-term decarbonisation auctions, that have largely bought on the first tranche of batteries. So the first couple of rounds, it was about a gigawatt each. And the 2025 round, I think it was about 1.3 gigawatts. Over that time, battery bids have come down a lot. And the way those auctions are structured is, just for our listeners, and I'm not as across the rules as you and Arthur, but you get quite a big subsidy, something like 80, 90% of your capex, but then you have to give up 80 or 90% of the gross margins. So you're giving away a lot of the upside if you do win those auctions. And it really is a capex cost of capital shootout as those auctions get more mature, at least that's my take. Is a 20-year LTDA contract genuinely attractive to an organisation like yours? How are you thinking about that giving away the upside versus merchant volatility?
Speaker 2So the LTDA contract, as you described, has an interesting element of very, very largely contracted 90% and then a little bit of upside that, to be fair, depending on the region in Japan, could represent actually quite substantial revenues. So this is an important part of the returns. There's also an element in the LTDA that allows for a certain period of time before your LTDA COD time deadline to actually generate merchant revenues. For some developers, that could be a few months, potentially a little bit more. And that has also quite a big impact on returns. It's also a very bankable contract. So it has a lot of plus sides. Now to be fair, you're also capped. So you can't go as high as you want to, but to be fair, it's because it's a contracted revenue model, right? So can't have it all. Nevertheless, it's an interesting proposition. The main difficulty is how to get scale. So as you also described, I mean, the numbers are not huge in the scheme of things and especially compared to the total market size, the oversubscription is a few times, I mean, 10 maybe more times for the oversubscription rate. So there's a lot more interested parties than actually winning parties. So for the parties that unfortunately can't get their hands in the LTDA contract, then what are the other solutions and to be fair, merchant is also an option accessible to anyone. At the end of the day, it will come down to investor appetite. So some investors will want high risk, high return style of projects and other investors will want well contracted, no downside type of project. So there's a little bit, you know, there's options for every style of every risk appetite in the market. I will say though, if a particular investor is looking at a portfolio construction strategy, if that investor doesn't have the LTDA contract for one or more projects, it's actually quite hard to then find the contracted element. So would you start with just merchant and then see how you go and then maybe stack up with contracted later? That's the part that becomes very difficult. And for the investors that have been very successful at the LTDA and that have scale, it would be easier for them to add merchant piece on top.
Speaker 1We certainly spend a lot of time with our subscriber base talking about grid connection processes and then grid risks for batteries. And so I think, you know, when you look at grid connection applications, a lot of these will be quite speculative, but it's something like 200 gigawatts in Japan. So it's enormous, but Japan is building it anywhere between one to two gigawatts a year. Now I suspect that will ramp up over time, obviously, as people get more familiar with the business case, but it is a relatively low conversion rate. What do you see the projects that are getting built doing well? I mean, it's a lot about the grid connection process, finding the right sites and executing on that basis. Is that it or were there two or three other key things you'd point to that the people who are executing are doing particularly well at?
Speaker 2No, you know, this is exactly right. And especially the developers that started very early in this process, two, three years ago, are already seeing really big success, early connection timings, really good connection costs. And this is clearly a winning strategy. So for a player that started, yes, around this range, two, three years, maybe even earlier, this is already a very big head start. For everybody else starting to apply now, things are very difficult and connection timings very long, connection costs, depends on your revenue model, but can be really prohibitive. So being able to navigate through that will be definitely the first major hurdle. Once this is clear, access to a very good battery price will also be a big difference. And this is where returns will vary significantly from one player to the next. So having those relationships and the volume will be critical to actually manage returns. So that would be my second one. Basic and financing, not everybody can access. So then after that, it depends on who the player is and what access they have, what other portfolio they have to finance, which could also facilitate discussions. But I would rank them in that order.
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Speaker 4You just mentioned financing and I think you mentioned at the start as well that that was going to be one of the key things in the next five years to bring on batteries. I was just wondering if you could walk us through what a Japanese project finance bank will and won't accept today for a battery. So we saw how kind of the early battery deals were predominantly the long-term decarbonization auction contracted revenues. But since this year, we've seen a few merchant projects come online. So I think HDRE project in Hokkaido finance by Omura as well as RSBM finance by Aurora. What do you think has been the key driving factor behind this shift in appetite? Is it market evolution or do you think it's kind of growing player understanding of the whole battery storage business?
Speaker 2So in terms of financing, so the way I see it, the bulk is still very largely contracted and the big volume still coming from the mega banks. They usually need big ticket sizes or a view on the portfolio that somehow will get financed and there has been quite a lot of players accessing such financing on the back of mainly LTDA or tolling contracts. And for banks, the bulk of the volumes for financing will remain contracted. It's very important for them to have that good anchor to somehow justify adding a bit of merchant exposure on top. If we're looking at bank lending, we are aware there's other structures that have happened already in the markets in terms of bond issuance, which is also very, very interesting because to be fair, there's also investor appetite for well-priced debt instruments and I believe this is also a really good avenue for Japan to grow on what kind of financing solutions are available to players. Project bonds were used also in the past few years for also solar PPA projects where banks were not so ready to look at and so they are also a good complementary financing source for developers. Now merchants is interesting. I think it also shows that banks are ready to scratch their heads, look at the forecast, look at various debt sizing parameters, sensitivities and somehow get comfortable, but it will be still on a case-by-case basis. So the 200 gigawatts of grid connection we talked about, there's no way it can all be funded on the merchant side and there's a very, very small percentage that could go through sponsor credit and experience will be instrumental to actually move projects forward if they're looking at merchant exposure.
Speaker 4Yeah, that's super interesting and largely similar with what we're kind of seeing as well where players are kind of basing their extra high-voltage projects on the assumption that they will try to find contracted revenue schemes for these while also diversifying their portfolio out through some high-voltage projects that are kind of merchant basis as well. So yeah, I think largely on the same page there. In terms of the contracted revenue schemes, we fear that tolling is one of the big ones that a lot of players are currently looking at. I was just wondering who do you see as a kind of natural tolling counterparties in Japan? Are these like the trading houses or utilities, retailers or are we starting to see some of like the aggregators that we've seen in some of the other markets come in here as well? And I guess the second topic on tolling is I guess the price. Just wondering if you are seeing that tension here between the level, price level that makes a project kind of bankable versus kind of leaving in enough margin for the kind of off-taker on the other side. Just wanted to hear your thoughts around this topic as well.
Speaker 2Regarding tolling providers, at the moment, the list is very narrow. I would say the big one, definitely Tokyo Gas. Tokyo Gas is by far the number one counterpart that has signed the most PPAs or are also very active in tenders. So they are very experienced, very sharp. And I would say well aware that there's not a lot of competition to be fair in that field. We're seeing new players being set up or starting this product at the moment. I think we're all waiting for Geracross to also open the doors and have meaningful numbers. So that will be interesting. And there will be probably a few others on the retailer side, but we haven't seen a lot of activity. Energy traders, aggregators, yes. Some have been in the market already in Japan for a few years. So we are aware, for example, of Seiken Foundation that is in this market. There's others being set up that are also getting licenses. So we should see a few more players in the next few years. The main difficulty for them is that they need projects with COD targets pretty soon. And for any new project that you look at at the moment, getting a good response, you will get 2030, 2031, which is definitely too late to start engaging on a PPA. So development timelines are actually getting quite long. And it's difficult to farm up economics early days because no one has a crystal ball at the moment to know what would be a good tolling price in four to five years. This part is very difficult. In particular, setting and freezing a PPA price too early could be really detrimental. Battery price, we've seen a huge hike in lithium price came down, but where we would be also in the next three to four years is also a big question. There's hedging available, but it's not for everyone. What we are also very cautious about, and I've talked about it earlier, is interest rates. If you're financing a project, what would be the cost of debt in three to four years? Potentially at least 100, if not 200 more basis points compared to today, but also very hard to predict. So I would be.
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Speaker 2Cautious on signing a PPA too early, given the current market conditions.
Speaker 4Maybe just to switch gears slightly, I know we've been discussing standalone batteries until now. In Japan, we're also seeing some of this co-location coming into things, particularly in the context of the transition of FIT assets to even premium with a battery. Do you also see this as an emerging theme and area of focus for your company as well? Would be great to hear your thoughts.
Speaker 2We are very interested in definitely exploring this model further. It works. That's also very well with the first wave of FIT projects now becoming, let's call this, quite old. That's why you have a 10-year plus. There's a good opportunity to look at an improvement of economics. Adding a battery is definitely a good way to drive returns. The main challenge is accessing such a portfolio, justifying the investment with the value uplift you can get. It's a bit on a case-by-case basis. So that's probably the main challenge. What we also see is potentially some portfolios being financed, so not strictly speaking, co-location, but financing solar and BEST together could also be an avenue, but that's irrespective of FIT to FIP, or you could convert FIT to FIP and do this separately. This type of strategy is becoming relevant in Japan because also on the greenfield side other things for solar, things are a little bit more challenging with a change of regulation for EYA. So it's requiring developers to be a bit more creative on value creation.
Speaker 4Yeah, I completely agree on the slight headwinds on the greenfield side, and as a result, increasing kind of attention to the existing fleet of assets as well. Very final question for me, if you had 30 seconds with Mehdi, what would be the one rule of change you'd want to advocate for to improve battery bankability in Japan?
Speaker 2So working for a renewable energy developer, we want to see, to be fair, both solar and BEST succeed and both technologies work hand-in-hand. Looking at BEST, I think they're an amazing tool to work with solar, extend the shape of the solar assets, and really help how the next wave of energy users somehow get access to power. We talk about data centers, I think, pretty much now every day. I would really encourage Mehdi to find a way to really push data centers to procure more green power and look at adding solar and BEST together. So using BEST as a way to get a really long duration rather than just using it on a standalone basis. For me, that would be a really practical way forward.
Speaker 1Yeah, it's so interesting. As you probably know, this debate is so live at the moment in Australia, where the New South Wales government, at least, and I'm sitting here in Sydney today, has said data centers have to procure 40% wind, they need 25% turn down, they need, I forget what the percentage is for firm capacity. And that will be phased in over the first four years that the data center operates. And I think the renewables also have to be, at least within the price zone, so effectively New South Wales. So reasonably firm requirements, reasonably quickly, and that does seem to be the international direction of travel now. Like governments are very, they both want to support domestic renewable development and they don't want to punish domestic consumers with higher transmission price rises. And so it does feel like that is the trajectory of travel. I'm not sure if that's what you're seeing on the ground in Japan as well.
Speaker 5I will say to maybe a bit of a lesser extent, I don't know, Arthur, you know, if you would
Speaker 2agree with me, but somehow, yes, the link between data center and how the energy procurement happens is somehow a little bit disjointed. And there's some efforts for certain programs to somehow connect the two, but the bulk is actually not there and really delays connection timings for data centers. So now you look at about 10 years, which is a bit long. So yes, if the energy piece could actually become again, the central stage, I think it will facilitate the development for sure.
Speaker 1Yeah. And I think, you know, to some degree markets like Ireland and Texas have been salutary lessons where you kind of let the data centers run and a lot of load hits quite quickly. And then you almost have to impose kind of moratoriums, which is not what anyone wants, right? But a measured approach is probably a much better way of doing it. We focused on Japan. It would be great to get your thoughts on just what you see in the wider battery space in Asia. I mean, again, I'm sitting in Australia. It's probably the hottest battery market in the world per capita right now. Are there other grid scale battery markets that you see accelerating across Asia at the
Speaker 2moment? So to a lesser, you know, a smaller scale compared to Australia, but still, you know, growing, I would definitely mention Malaysia. Malaysia went through Bestender that closed last year, that was the first of its kind for the country. So that was an LTDA style, so capacity payment. We're seeing now the next wave through a PPA program that has been designed by the Malaysian government to really push more renewables and battery together to solve for, as we discussed earlier, the data centers and big energy users, you know, requiring power. So we're seeing this being done in a very orderly way to really push the energy users to somehow get it done through PPAs, but the moment all the big scale in Asia relating to data centers, it's actually happening in Malaysia. We're involved. We've had really good success with one project last year with a PPA with Google, and we hope to see more.
Speaker 1Super interesting, and it's, I mean, this might be a hard question to answer, but, you know, one of my observations has been, you know, I sit across eight or nine Asian markets that you see that people can build kind of scale pipelines within a country, right? They hire the right grid connection expertise, they have good relationships with project finance banks to understand the supply chain and the trading market. It's very difficult to pull off kind of the development of Pan-APAC battery portfolios because energy markets are just so local. They are built on relationships, particularly places like the Philippines, for example, like other organizations, you know, other than yours, like what are the capabilities they need to kind of roll out Pan-APAC battery, I suppose all renewables strategies?
Speaker 2No, you're right, Hugo, I mean, it's quite difficult to actually be successful in more countries, and especially Asia is very diverse, very different country profile. Every country has its own way to handle investment policies, rates are different. The main challenge, to be fair, is also scale. We could have a few projects here and there, but how do you get to a meaningful portfolio? The way we see it and what's very important is local relationships and very strong partnerships. That's for us super critical, especially as we go from one country to the next. And then it's how do you leverage your global relationships? What is the link between all the countries? Because at some point it has to be a link. So naturally, for example, offtakers, the manufacturer, so the equipment manufacturers and lenders, to a certain extent, sometimes can be common and can really facilitate the work you're doing across countries. And there has to be some form of similarities, otherwise at some point it becomes very challenging to rebuild from scratch with completely different schemes.
Speaker 1Yeah, no, I completely agree. You've been incredibly generous through your time. So a couple of wrap up questions from our side, and I always do the same couple. What's one hypothesis or view that you have on the energy transition as a whole that you think is at odds with the general consensus? All right, so I guess it's going to depend
Speaker 2on what is the general consensus. But yeah, you've got to calibrate your views against the crowd, especially now with what's
Speaker 5happening politically and so on, it's become quite difficult,
Speaker 2I would say. So for me, gas being a transition fuel, personally, it's challenging to believe in it. So I'm going to say I'm not usually in favor and I'd rather have the energy transition without gas, but that's a personal view.
Speaker 1Absolutely. And again, it's a live debate in Australia, because I think one of my takes is people are underestimating the cost of augmenting gas networks such that you use them very infrequently, but when you do through wind droughts, you then need to ramp up and you actually spend a lot of money, not just on the gas generation, but the gas pipeline and storage. Including Aurora, I don't think people have modeled that particularly well. Final question then, who do you read or listen to in the energy space that you think is always good, thought provoking and relevant to your work in the private sector?
Speaker 5I'm always after good news. I don't know, maybe this is the positive side of me, you know, but and I find sometimes, you know, it's easy to be flooded with negative
Speaker 2news and feeling depressed. So since I left Australia, I've continued to follow the work of my previous colleagues at the CEFC. They have an amazing website, they produce insights on sectors, they also create webinars. If you look it up, it's something called the green room. It's very informative and really, really nice to see how they continue to push, you know, different sectors. sectors to actually move towards the energy transition, so I highly recommend it.
Speaker 1Yeah, and more than just electricity as well, they do work on natural capital and all sorts of things. Ian Lim, the outgoing CEO, is on our advisory panel and has made an enormous contribution to decarbonisation in this country. Thank you so much. This has been excellent, exactly the conversation that Arthur and I were hoping for. We've covered a lot in 35 minutes. We're very grateful. Thank you again for your time.
Speaker 2No, thank you for having me.
Speaker 1And thank you, Arthur.
Speaker 3Thank you so much. That was Virginie Sandilia, CIO of Shizen International and Head of Project Finance for the Shizen Energy Group, speaking to Hugo Batten, Managing Director of Aurora APAC, and Arthur Yanagisawa, Head of Advisory for Aurora in Japan. Thanks for listening to Energy Unplugged. Do keep an eye on our podcast feed for more in-depth conversations with senior members of the energy industry. The best way to do this is to follow the podcast via whatever platform you use.
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