Alex Blackburn: Hello. Welcome to Inspiratia's latest webcast. This is the first in a new series looking at battery storage in partnership with the law firm Gowling WLG. I'm Alex Blackburn and I lead Inspiratia's renewables coverage in London. For this episode I'm joined by Helen Emmerson, a partner in Gowling's real estate team, and Roberto Castiglioni, a senior investment director at Ingenious Infrastructure and managing director of Argonaut Power. The three of us sat down in late September at Gowling's London Bridge offices on the bank of the Thames and started by talking about grid connected batteries, or front of the meter. The latest figures put the UK's installed capacity at around 350 megawatts driven largely by 2016's enhanced frequency response auction. Looking ahead, the project pipeline is said to be somewhere close to 8 gigawatts but investors talk about a lack of clarity in the regulation and say that arguably the biggest barrier to investment is the lack of revenue visibility over the medium term, let alone the long term. That's why some market players, including my two guests, have gone behind the meter, signing or advising on deals with large energy users to install batteries in other forms of on site generation as a way to lock in energy prices and combat increasingly frequent brown outs. We'll join the conversation with Roberto explaining more about Argonaut's proposition.

Roberto Castiglioni: Our model envisage a set of revenue generated by the host, by the customer, that accounts for like 30-45% depending on what the customer wants and depending on the load of the customer, and then the rest, around 60% is generated by the ancillary services. Ancillary services like frequency regulation or capacity market. So if we focus on the customer revenue we have revenue like possibly UPS an Uninterruptible power supply so if we provide the UPS service to the customer we get paid a certain amount of money under a long term contract but also by reducing their grid cost and sharing the savings then we can further announce our profile and add again a long term contracted revenue. Obviously it's difficult to understand how much because again grid charges are changing and so we don't have visibility necessarily on the amount but at least we have visibility on the revenue kind so we know that we can contract for 12, 15 year an item in our revenue stacking. Triad for example is a big part of our behind the meter revenue and we know that triad will change but at least there is a visibility over the next 5 years which is helpful because also we try to amortise the battery within the period and once the battery has been amortised then it's a lot easier to take merchant risk of course because everything is upside once the your equity has been repaid it's a lot easier to make another worse.

Alex: And you're working with a lot of, kind of you know, big companies, water utilities, distribution firms, chemicals manufacturers and Helen, putting it to you, if you're one of these kind of large energy users, how do you go about identifying a need for something like battery storage which is, as Roberto says, quite complex, you know in terms of its investment models or kind of other forms of on site generation.

Helen Emmerson: I think Roberto touched on one of the key offers that you get from a battery storage or on site solution which is that uninterrupted power supply, and that is where the need will come from, so a number of large energy users are starting to experience brown outs on site and that undoubtedly is going to drive them to approach people such as Roberto in this space, so it's that need for certainty and uninterrupted power supply, it's the price certainty or price clarity as well, that this kind of solution can offer. There's also the green credentials, so a number of operators are offering green PPAs for example, so all of these solutions offer a really good proposition to the large scale energy user who is looking to understand how they can make their energy supply more certain in what is an increasingly uncertain economy that we're working within at the moment.

Alex: So, drilling down to your into your model I suppose and how you win business Roberto, how do you identify potential customers, you know, some of the kind of groups that I just mentioned, water utilities, distribution companies, how do you make your proposition stand out in what could be a potentially quite crowded market?

Roberto: Yes so our offer is basically fully funded solution so the customer doesn't put any capital up front there's no capex for them and normally there's no opex. Obviously if they require something particular like UPS and the amount of better power they will have to pay for that capacity that we reserve for them because obviously we won't be able to use that capacity to generate revenue through the ancillary services. When we structure the proposition at the beginning we always put the customer at the centre of the proposition and I think that other offers probably lack this peculiarity. We have noticed that what is out there in the market has been structured on the back of PPAs for example or on other kinds of solutions where the customer actually takes risk. What we try to do is de-risk the customer, we always say that worst case scenario for the customer is the same situation as it was before, they won't lose any money and it takes time to make the customer understand that it's a risk free proposition and it takes time probably to teach the customer about what behind the meter storage is. Of course the customer's main concern is the connection. This customer rely heavy on electricity of course and having someone that comes on site and touches their connection is a big thing for them. They don't want someone who comes in and messes around and creates issues and once the battery has been installed and then they leave, they need to fully trust the operation side of the battery and they don't want to have people hanging around the battery constantly coming on site and touching the battery so our proposition is to make sure that the customer sees that we're working with professionals who have been doing this job for years so they know how to install the battery, causing very little disruption to the operation of the customer and then once the battery's been installed they don't see us and they don't see the battery. They don't have to do anything. If I could paint the container in invisible paint I'll do that but we're not there yet, but we've noticed that talking to the customer and telling them how the process will go and how the operation will be of the battery increases their confidence and so far we've received very good feedback from all our customers and potential customers.

Alex: In your model there's no capital outlay for the customer and what you're saying there is also, you know, it's very invisible in as much as is possible, so where does the reluctance stem from, why isn't everyone you know doing this, all large energy users, why are they not doing this solution?

Helen: Do you think it's because this isn't their core business and anything that has the potential to interrupt what the core business, what business as usual is, it is by its very nature incredibly high risk, so to have an unknown entity coming in interfering with the connection as Roberto's mentioned, construction work, you've got people, you've got interruption, you've got uncertainty in terms of impact on your workforce, on your deliveries, on movement round your site whilst construction works are underway, you've got third parties coming on installing cables, this all very easily falls into the too hard pile, when business as usual is hard enough and that's why I think the key is educating the customer so that they understand it's actually a very short term disruption and the legal process, which is the angle that I would look at this from, doesn't need to be very complicated, you know, we can have very straight forward documents that govern the land rights, that govern access on to the site that will allow a customer to feel comfortable that business as usual will continue, both during the installation phase and then during the longer term relationship, because this is about building a long term relationship between the provider and the customer.

Roberto: Exactly. Education is important for customers and it takes time to acquire customers. We've recently signed an exclusivity with a water utility to study, design and install them and operate batteries on some of their sites and I remember I started a year ago and they've been very collaborative throughout the process and we started with a certain contract to share the savings but then through the education process they actually decided to opt for a different kind of contract, there could be more risk but with potential upside and we had multiple meetings where we involved our technical solution supplier, we worked on the solution around their needs and also introduced aggregator so that they had a full picture of what they were getting into. As Helen said, this is not core to customers, I mean it is in the sense that without energy they will not be able to carry out their daily operation but this is not what they do. What they do is treat water, what they do is produce bread, paper, glass, plastic, ... and taking time off to think about oh, lets improve our carbon footprint, lets reduce our energy costs, lets improve our resilience, is not sometimes top of their agenda unless, as you said before, they are being affected by brown outs, which we're seeing a massive increase of brown outs. I think the latest data reveals that brown outs in 2017 reached around 900 between brown outs and black outs in the whole country. Up from 400 in 2014. This is because of course the grid is facing massive challenges of a lot more renewable energy coming to the grid and a lot of the base load coming off the grid so we will see more brown outs, customers will experience more issues around that. I have to say the customers that move the quickest are the ones that are being affected by brown outs cause for them it's a cost, it's a real cost, it deteriorates their machines and basically dents their competitiveness because if you can't for example fill the orders in time, the customers are not going to be happy. We have for example supermarkets being affected by brown outs whereby they have fully automated distribution centres and if they have a brown out they are delayed in their deliveries to customers and that means that they have to apologise, by giving them a coupon of £15 for example, so that's a real cost, and the fact of course that they lose competitiveness compared to their competitors because their competitors deliver when they say they have to deliver, between 5 and 6 on a Tuesday night, and not the next day, fair enough, and these are the customers that rules quickly and want the battery as soon as possible.

Alex: So coming back to the education question, practically speaking how do you sell this proposition, bearing in mind the complexity and energy isn't their industry.

Roberto: Sometimes, I have to say, they know a lot about what's happening and they've been researching, they've been studying, they understand the drivers of this market. If there is on-site generation then that's quite easy to sell because you basically sign a PPA with a customer that is lower priced than what they would buy from the grid. That's an easy sale. On the battery side, it depends again on what their need is, why are they doing it, as Helen said before, she said some customers may do it for carbon credential and we see that some customers they need to meet certain targets and that's potentially the driver of having on-site generation and storage of course. Other customers they do it because of UPS, other customers do it because potentially they see a lot of savings and it's a way of increasing their competitiveness by cutting down costs where before wasn't really possible. A few years ago it wasn't possible to do it. Now reducing their opex is possible and especially customers that are heavy in R&D and they're always looking for more money to invest in R&D and if they can save opex and then take that savings and put into R&D then there is a massive reason.

Helen: So on the education side, looking at this from the legal documentation which is where my focus would be, the education is not only what Roberto's been doing in his discussions with the FD but then it's my role to make sure that the lawyers that are involved understand why the documents are in the shape that they're in, where the comfort sits for them to ensure that the core business can continue to operate but equally why the battery solution or the on site generation will need certain protections to ensure that it can operate and generate the revenues that it needs to, to be a fundable project, so there's an education around practically what will happen on site, how much access is needed, when access is needed, what happens when something goes wrong, what happens when something breaks, these are the practical concerns that drive the discussions that a lot of the legal documents will focus on, in terms of who is coming on site, and then also the land take, how much land is actually needed for these projects, where does it need to be located within the factory site, the industrial estate, whatever the particular real estate is that we're looking at, and that is just helping people, simple things, like really clear plans, just demonstrating what we're doing and where, and that we're not going to be entering into the factory floor, we're not going to be causing production to stop for extended periods of time while infrastructure is connected. These things can be done practically so that the interruption is kept as low as possible because that is what is driving the attractiveness of these projects which is lack of interruption to power supply which is what is fundamental to these big energy users.

Alex: So last couple of questions I suppose. Roberto, from the investment standpoint, it seems like a very fragmented market, even though these are large energy users we're talking maybe 1 or 2 megawatt batteries I think, so is it possible to scale up and how do you do that?

Roberto: Yeah, I mean that is probably the downside of operating in this business. Scale is an issue because of course on the investor side, investors, they don't want to move for a few million, when you do a transaction you have some fixed costs and if the project is too small then it doesn't make economic sense so we're looking at batteries that are above 500 kilowatt and if it is lower than that then we want to be into a framework agreement, potentially for 10, 20, 30 which is possible with water utilities for example, because they have small pumping stations around the country, which is fine with us, but it has to be into a framework agreement. You sign it once and then you roll it out.

Helen: And you can also then lever those economies of scale on the documentation side so you can move towards more of a cookie cutter approach with the legal documentation which just means that you can roll these things out much more quickly, cheaply, more efficiently.

Roberto: Yeah, we started looking at the contracts we wanted to have standardised contracts across, and soon realised that it's impossible because every customer has a particular need and every battery is different, a different design, so having a portfolio could really help us because it reduces all these costs and you can have cookie cutter approach. That's why we are targeting a certain kind of customers. Scale is an issue but we're trying to set up a network whereby we receive opportunities from, for example, technology suppliers whereby they come to us with a customer that is really thinking about buying because they have a need and they don't want to put their own money. So at that point scaling could be helped by this approach and that's exactly how we are structuring our sales channels basically but sales for us is probably one of the main issues, together with of course the unpredictability of all the revenue.

Alex: Okay. And then just to close, people talk about a tipping point for battery storage. What does that mean, as a first question, but also how close are we to a tipping point for batteries and all kind of on site generation?

Helen: I think, certainly in the UK, to date we've been using battery storage to provide short term services but I think looking globally certainly the movement is towards longer duration batteries, and utilities, network operators, for example, are beginning to look at how batteries can be used for reserve power, for reinforcing the grid, particularly with all the challenges that the grid is facing because of the influx of solar and wind, the intermittency challenge that those bring to the grid and the grid infrastructure, so I think that we will see battery storage being used in a slightly different way going forwards as well.

Roberto: My opinion, the tipping point is the point where the grid and customers finally understand the benefit of battery storage. Once that's widely understood then it will be a demand driven market, people will be asking for storage whether front of the meter or behind the meter. Unfortunately, unlike solar and wind, that the tipping point was basically the subsidies, we don't have subsidies so we can't really rely on that to create a market. The market needs to be done from, needs to be created from the demand side of course, from either customers behind the meter or front of the meter and it will happen once people understand how batteries can be used to help the grid or to help their daily operations basically, which I hope it will be pretty soon cause I think it's about time.

Alex: That's all from this webcast. My thanks to Helen and Roberto for their time and to Gowling for hosting. See you next time.

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