Speaker 1Storage is often called the missing piece of Europe's energy transition. The remarkable advances of solar and wind technology have left battery energy storage systems, or BES, with work to do to catch up. But that work is being done, and batteries are moving from a niche asset to a core pillar of modern energy infrastructure. Figures from energy advisory DNV predict that grid-connected energy storage capacity will double from 2024 to 2030, and increase eightfold by 2040. And while pumped hydro made up 93% of storage capacity in 2024, it's expected to make up only half by 2030, and 10% by 2060, with batteries emphatically taking the lead. And one more stat for you: only 2% of solar today is co-located with storage, but that should rise to around 50% by the mid-2030s. I'm James Lineker, an editor at PEI Group. In this special episode, sponsored by Teleri Energia, I'm joined by Villa Romali, investment director for energy storage at Teleri Energia, and by Henry Taskerman, co-founder and CEO at energy technology company Capelo AI. We'll explore what makes battery storage systems attractive, where to find the best opportunities, and what it takes to be successful in the space. Okay, so the obvious starting place is: why invest in batteries? Tackling that first is Teleri Energia's Villa Romali.
Speaker 2From our perspective, we had in the funds wind and solar earlier, and now we decided to add the batteries there as well. There's a couple of reasons: generally, the storage provides higher risk-adjusted returns than the wind and solar currently. But even more importantly, it balances. And that's why I'm here.
Speaker 1Thank you. and layer on top of that probabilities and uncertainties, you can plug that into a decision-making model. Tarskanen studied computational physics and has a background in climate change modelling, all of which starts to look quite useful for this line of work.
Speaker 3It is incorporating the local market knowledge, the forecast, the probabilities, then building the decision-making model on top of that to try to maximise the earnings every day from the market opportunities. So when you make the decisions to the markets, when you get the revenues daily or in 15-minute blocks, then you need to be able to see that which changes in the strategy would have yielded even better results. So you need to have very tight feedback loop to be on top of the market condition and to have this kind of a self-learning dynamic approach to the trading and optimisation. So all of these need to go in there and it's complex and batteries are in a way complex investments, but then when you find the signal, so to speak, in the complex, you can really build for the battery investments to be utilised in the markets.
Speaker 1Of course, which markets you are investing in also matters. We've already heard about some of the differences between mature and transitional markets and how their varying characteristics affect revenue drivers for standalone bets. But where are the best opportunities?
Speaker 2Currently, we see the best opportunities in the Baltics and also another interesting market is Romania. There has been a couple of other markets which have been hot, recently, for example, Bulgaria. But that was really driven by the government subsidy, which was, in our opinion, a little bit oversized. And then that caused actually challenges and lack of visibility where the market revenues will be if you suddenly build huge amount of batteries. But yeah, generally we see that the Baltics has extremely good arbitrage opportunity at the moment. And on top of that, you can still earn the upside on the energy services for a couple of years.
Speaker 1That arbitrage opportunity, of course, comes from the difference between low and high energy prices.
Speaker 2You need to have in the arbitrage the low and high prices. The low prices you get when you have already relatively a lot of renewables on your market. And then the high prices may be more difficult to find in Europe. And that's driven usually with old, new ones. And that's driven usually with old, thermal generation, it can be coal, oil, in certain cases, even gas. So kind of the renewables start to be almost everywhere in Europe. And that's why the better opportunities are in the countries where you have older thermal generation, which then basically is the politics and Eastern European countries. In addition, what we are looking on the market is obviously the visibility on the arbitrage revenues on long-term. No too quick and large changes in the generation mix, stable political environment and regulation towards the electricity market. In addition, we are actively looking now also projects where we do hedging for the batteries. And that's something which is not yet available on all markets. So that's additional benefit that there is. Traders who can provide the hedging agreements.
Speaker 1When it comes to investing in batteries, Romali believes there are several elements that go into being successful.
Speaker 2It's mixed bag. Of course, those complex asset class, basically, you need to have a technology knowledge. You need to have sourcing knowledge. You need to have construction knowledge, how to build those projects. Then you need to have really deep understanding on the electricity markets. Of course, we use a lot of advisors. That the trading that we outsource completely, because we cannot just be experts on 15 different countries on the battery trading, because we do investments in the multiple countries. And then on top of that, you need to have, obviously, the knowledge to evaluate what kind of hedge is really beneficial for you. And then the financing knowledge as well, if you're planning to leverage
Speaker 1your project. With installations reaching several hundred megawatt hours, or in some cases, even gigawatt hours, and costing hundreds of millions of dollars, they represent significant investments. So hedging options are fairly significant too.
Speaker 2Generally, the hedging market, especially on the Eastern Europe and Baltics, Nordics, where we are investing, is still behind the US, UK, or some of the Western European countries. But there start to be relatively good options. And I think that's a good thing. I think that's a good thing. And kind of what are the main structures, the floors and tolls, those are usually the preference by the lenders, because they are really protecting your minimum returns on the project so that you can pay back your loan. They are not always the most attractive options as owner, and definitely not necessarily the preference by the offtaker. I think offtakers usually prefer the swap structures where you kind of have to pay back your loan. have fixed price for your arbitrage for the longer period of time. And that seems to be more preference by the offtakers because they can utilize those contracts to really hedge also their exposure towards the volatility.
Speaker 3Yeah. So if you think about from the lowest risk and the lowest upside potential to the highest risk and highest upside potential, then you start first from the lowest risk model, which is tolling, as Ville mentioned. So it is purely fixed revenue for your battery. Of course, take into account the availability of the system. So basically you get fixed payments for each megawatt or megawatt hour every month. And then you may have five year, seven year, 10 year agreement for it, for example. And you don't get any upside, but it's completely fixed. So very predictable revenues. Then you may have partial tolling, which means that part of the battery portion of it, it is fixed. So it's tolled, so to speak. And then the rest is basically merchant driven and daily market revenue driven part of the battery. So from portion of the battery, you get completely fixed earnings. And then from a portion, for example, 70%, you may get completely fixed earnings and 30% that is then exposed to the merchant upside and the merchant earnings from the markets. And that in my view is the second, how would I say, safest or most predictable option. Then you, as Ville mentioned, have floor. So then you have a revenue guarantee, so to speak.
Speaker 1That floor means your earnings cannot go lower than a certain threshold. There is also, as Romali mentioned, the day ahead swap, whereby you're hedging yourself against the day ahead arbitrage business case or revenues, which is getting away from tolling and closer towards a merchant model. But it's still a hedge of earnings tied to the day you hit market. The final option is a purely merchant driven case where every day you're in the market, you're exposed to market conditions, but you also have the highest upside potential. So how do you assess upside versus risk exposure? While banks are presumably comfortable with a tolling model, how should they be thinking about or assessing more hybrid arrangements, such as partial floors?
Speaker 3Of course, then it goes to the pricing of the debt as well. But I see that in our view, there should be even more banks financing merchant batteries. But of course, the industry is growing so fast and it's evolving so fast. So there are different approaches to it. But I see that this is roughly speaking the risk from the lowest risk and lowest upside to the highest risk and highest upside. And then every basically bank has to find their approach to this. But mostly it's on the tolling side and partial tolling and floor pricing side. Maybe Ville, because you are discussing with a lot of the lenders, if you have some insight to share here.
Speaker 2Yeah, definitely. And wanted to test if you are seeing similarly, but weird enough, what we see is that if you go northwards from Poland, the merchant battery is fine for the lenders. If you go anything southwards, including Poland, the merchant is completely no-go for the lenders. It's probably that, of course, the line is in Poland. And in Poland, there has been the capacity market for quite some time. So banks has used to see with the batteries some firm revenue. And after that, it's easy to say that, okay, I don't finance the full merchant. I need to have at least the capacity payment. So there's some fixed return. And if you look at Nordics, there is not fixed revenue streams available from the market directly. And at the beginning, when we started to do the battery investments and did our first battery in Finland, there were no hedging options available. So it's kind of like there is nothing to finance for the banks in the battery sector, if you're not comfortable with the merchant. Of course, the trend seems to be now, more that the banks wants to see some fixed revenue just because of the fact that they know also that there is hedging agreements available on the market. Then what's our duty then to evaluate that is the combination, adding the heads and putting the loan in the project if it really pays off as returns for the investor. And maybe, of course, what comes to merchant, there's constraints on the equity side. If you're looking at fully merchant batteries, most of the funds or other investors are not necessarily comfortable with that. And of course, if you're just doing portfolio of batteries and doing kaikkien merkkipalvelujen tasolla on melko suurta volatiilia palveluista, mutta meillä on hieman erilainen modeli Taleri Energiaan. Me laitamme oloa, vesiä ja batteriaa samalla talouksessa. Ensinnäkin asettiklassi tasoittaa palveluja itse asiassa, mutta katsomme myös palvelun tasolle enemmän, että meillä on palvelustrategia palvella tiettyjä palvelun investointeja, mikä mahdollistaa, että voimme tehdä tiettyä määrää palvelun investointeja, ja sitten voimme todennäköisesti lisätä hieman palvelun palvelun talousprojektissa samaan tasolle. Näemme tämän todella kiinnostavan suunnitelman, jossa olemme huonosti takaisin, mikä antaa paremmin riskiä palveluun. - Palveluja ja batteria samalla
Speaker 1talouksessa on tärkeää johtajille ja investointeille. Palveluja, vesi ja batteria samalla tasolle on tärkeää myös. Palveluja on hyvä, kun ilma on valmiina, mutta se ei ole aina tapahtunut. Nyt vain 2 % palvelukapasiteettia on palveluissa, mutta se on nyt lisääntynyt.
Speaker 2Olen varma, että palvelu on lisääntynyt, ja katsomalla takaisin oli todella luonnollista aloittaa yksinkertaisella palveluilla. - Palveluilla, koska ettei teetä energiaa palveluilla, vaan teitit palveluja. Se on sellaista yksinkertaisen palvelun, joka on yksinkertaisen palvelun. Mutta kun nyt menemme enemmän palveluihin, joissa on palveluja, mikä toisin sanoen tarkoittaa, että palveluja ja vesi palvelevat joitain tuntia, on tärkeää laittaa ne myös samalla paikalla. Jos ei ole palveluja, ja palvelu on tarpeeksi vahva, voit edelleen puhdistaa palveluja. Palvelua ja vesiä voi laittaa eri paikoissa ja tehdä samanlaista, kuin jos ne olisivat samassa paikassa. Joten luulen, että se on todella palvelu. Ja tietysti periaatteessa, kuinka vahva palvelu on ja kuinka kalli se on saada palveluun. Koska lopulta se tulee palveluun, kuinka paljon tarvitset palvelua, jos haluat käyttää eri palvelukoneita, verrattuna siihen, jos palveluja ja vesiä laitetaan samalla paikassa. Silloin tarvitset palvelun eri palveluja, ja se on kohdistus. Se on matka, ja se vaihtuu hieman paikalleen mukaan.
Speaker 3Jos sinulla on jo palvelukone, sinulla on solarkyvyn takana palvelu, ja haluat investoida palveluun, ehkä sinun pitäisi odottaa kauan, jotta palvelukone luodaan yksilön palveluun, joten yksi parhaus on tietenkin laittaa palvelua siksi. Silloin voit saavuttaa kapeksia. Ja tietysti, jos palvelu ei ole liikaa, tai palvelu ei ole liikaa liikaa, niin palvelupotenssit eivät toimi niin paljon laittamalla palvelua samaan liikkupointiin kuin solarkyvyn. Mutta se, mitä Ville mainitsi, on se, että me näemme, että kohdistusvalvelu on nyt alkanut, ja se jatketaan massiivisen tasolle, joten minulle useimmat uudet solarkyvyn, esimerkiksi, jotka on rakennettu, niissä on jo palvelua yrityksessä. Me näemme Baltiassa, että monia hybridiparkkeja on tullut. Bulgariassa monia hybridiparkkeja on tullut, joten hybriiparkkeja, eli bateriaa ja solarkyvyn yhdessä. Tai bateriaa ja ilmaa edes, mutta solarkyvyn on vielä suurempi valinta, niin sanotaan. Ja sitten Roomassa sama, ja Akroassa, erityisesti alkuperäisimpien eurooppalaisissa maissa, joissa solarkyvyn kannibalisaatio alkaa olla melko iso ongelma, kuten monissa maissa alkuperäisessä eurooppalaisessa alueessa, mutta erittäin vahvasti alkuperäisessä Euroopassa, jossa on niin paljon solarkyvyn, että palvelut ovat hyvin pahat, kun jokainen muu tekee, ja sitten on alkuperäinen asia, jossa voi olla alkuperäinen, ja se voi olla alkuperäinen alkuperäinen, joten on alkuperäinen, eikä saada remuneraatiota siksi. Joten tämän takia tarvitsee laittaa bateriaaleja solarkyvyn yläpuolelle, esim. Suomessa tai Suomessa, ja näen, että se tulee olemaan aika nopeasti, kun osa samalla solarkyvyn alkuperäisistä projekteista lisää ja lisää ja lisää.
Speaker 1Tietenkin alkuperäinen alkuperäinen alkuperäinen alkuperäinen lisää kompleksitystä. Kun alkuperäinen alkuperäinen alkuperäinen alkuperäinen opetellaan ja optimoidaan, mahdollisuuskohdat ovat erilaisissa resurssissa. Kun alkuperäinen alkuperäinen alkuperäinen alkuperäinen alkoperäinen toimii yhdessä, uusia faktoreita tulevat mukaan.
Speaker 3Järjestelmät, joita keskustelimme aiemmin, järjestelmät, joita keskustelimme aiemmin, ja päätöksentekijöiden ja päätöksentekijöiden mukaan päätöksentekijöiden mukaan päätöksentekijöiden mukaan mahdollisuuskohdat ovat parhaita käyttää alkuperäisiä alkuperäisten ja alkuperäisten palveluiden, kapasiteettien, markkinoiden ja arpitointien mahdollisuuksien kautta. Päätöksentekijöiden käyttö, ja alkuperäisten varaukset, ja kriittikohdat ja kaikki tämä. Ja se on jo melko kompleksinen alkuperäisellä alkuperäisellä, mutta kun se laitetaan sopimuksen päällä, niin pitää tarkastella alueellista tuotantoa, joten sopimuksen tuotanto, ongelmallisuus, kriittikohdat, joten kun alkuperäinen tekee tuotantoa, niin silti on vähemmän ympäristöä, for example, for the battery, or should you actually charge the battery sometimes from the solar? Should you use the battery for mitigating the solar forecasting errors? Is that the best opportunity cost right now? If you deliver ancillary services, then should the solar deliver it for most of the time? So it is the complexity increases for the battery trading optimization when you put it next to a solar farm. And what we do, we optimize this whole flexible asset, so to speak, so not the battery in isolation, or the solar in isolation, but if they are behind the same grid connection, we want to maximize the returns for the whole facility, battery and solar combined. So then the question is that when do you prioritize what? How do you use the battery for the best opportunity cost consideration? And then how do you take into account that many times the grid limit is the bottleneck there, at least during the middle of the day? So that adds to the optimization complexity. And then if you are an infrastructure investor looking to invest in a hybrid park, of course the optimization trading is crucial, but also the hybrid controller, the hardware piece there, hardware and embedded software that dispatches the facility to the grid, because that has to be sophisticated in a way that it chooses and it's aligned with the market trading and optimization of what we do, that when to use the battery, when to use the solar farm, for example.
Speaker 2And those hybrids provides also new opportunities on the hedging side, when the battery and solar project size increase. I'm sure that the typical PPAs comes as a more common structure to hedge the hybrids, so you have like a hybrid PPA and the off-taker takes kind of the benefit of the flexibility and they provide the fixed PPA price to producer and they basically pay premium if you compare the solar PPA to hybrid PPA, the hybrid PPA is just then higher priced because you get more balanced output when it's balanced with your battery asset. And I want to add for this day head swap, so the day head swap is not necessarily optimal from the owner perspective always, because to really get the heads you need to hit to those lowest and highest hours per day to have really that heads and that provides some operational uncertainty.
Speaker 1Part of this conversation that might seem to be missing is pumped hydro. I said at the start of the episode that pumped hydro made up 93 percent of storage capacity in 2024, but it's expected to account for only half as soon as 2030 and even less beyond that. Batteries really are taking over. That might seem surprising, but Romali explains why this is changing so rapidly.
Speaker 2In many European countries, including Finland, there is obviously talk always on the pump hydro. That's mature technology and large flexibility provider currently, but I see two dilemmas with pump hydro. The first one is the market dynamics and second is the economics of the technology. So if starting with the market dynamics with the pump hydro, your storage is at least 24 hours, can be multiple days, and then basically you are not doing arbitrage anymore from the highest and lowest price per day. You are more shifting from the whole day to night, or you are shifting from the weekdays to weekend days, or you are shifting from hot month to cold month. And if you start to look at the arbitrage spread on those operations, it's much smaller than what you see intraday, what you are capturing with batteries. So there is just not way to do investment market basis. You will need some kind of a CFD or government subsidy and I think we are getting quite similar topic as the nuclear is in many countries, that it's nice technology, it would benefit the system, but there is just no way to do that kind of investment without subsidies. And then there's another issue, what I mentioned is the technology economics. If you look at how aggressively the price of batteries has decreased now at least 10 hours, you are cheaper with the batteries compared to the pump hydro. And the pump hydro technology is not developing that fast anymore as the batteries, so that ours will be just increasing. And on top of that there is another emerging battery technologies, iron air for example, which is really planned for the long duration storages and when that technology develops further that there there's really good chance that you will get much lower price with that technology for the long duration than the pumped hydro.
Speaker 1Will Barron: Which sounds fairly comprehensive to me and also suggests you shouldn't hold your breath for a Teleri pumped hydro fund anytime soon. That's all for this episode. Thank you again to our guests, Ville Romali from Teleri Energia and Henri Taskinen from Capelo AI. This episode was edited by Eric Fisch and produced by Edward Cleaver. I'm James Lineker, reporting for Infrastructure Investor. For more market insights on a private infrastructure asset class, visit InfrastructureInvestor.com, where you'll find news, data, and more episodes of this podcast, which are also available on all the usual podcast platforms. Thank you for listening. Thank you.
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