C (3:02)

Yeah, so if you look into the financial hurdles, the interesting thing is that many people think it's about volume, right? So if you want to finance a battery of 100 megawatt plus, you need a lot of money, which means equity and debt. But what we've observed is actually the investment that is really required is investment in time and into experience. And that is not something that is very popular because you just have to be very patient. So the really successful and sophisticated investors that we've seen in countries like Germany are those, they basically, for a few years, they only look into batteries, as in the technology. Try to understand that from an engineering perspective. Then they maybe build a very small plant, 5 megawatts, 10 megawatts, 20 megawatts, and take that from A to Z through, you know, permitting, constructing it and then also operating it. And once they have that experience, then they say, look, we have a story. We are kind of. We have proven that concept. We can now go to someone and say, give me a lot of money of that volume that we discussed before, right. And put it into a project which I am really sure I will be able to build. And this is what we are experiencing with those projects that we are actually financing at the moment. These are all those people that have gone through that very lengthy process and now they are really successful with it. And by the way, that's why I think that for UK investor, it might be really interesting to go into Germany. It's one of the few markets in the world where you could actually gain real operational experience. Right. And you could take that and now go to a different market. Obviously, you need some local knowledge, et cetera. You need to apply that in local circumstances. But nevertheless, it's something that has already been invested in. And I think that for me, that's the biggest financial hurdle.

B (4:44)

Yeah, so you're saying that it's not about the amount of capital that's out there, it's about finding projects that have this kind of history to them and a story where they can say, I've done this before, I've done this, I've done it at 5 megawatts, 10 megawatts, 50 megawatts. So now I'm coming to you and saying, I want to do 500 megawatts. And you can say, okay, I can. I can see how you've got the skill set to be able to deploy that capital effectively. That's, I suppose, the financial hurdles that are facing batteries. Did you also want to talk about some of the regulatory hurdles facing batteries as well?

C (5:12)

Yeah, absolutely. And Germany is a good example of that, because I don't think that complex regulation is a problem as such. It's more if that sector of regulation is still developing. And we see that a lot in Germany. Let me give you two examples. It's very typical example. So building permits and grid. Okay, so on the building permit side, you have, I would say, five ways or pathways how you could actually get into a building permit. So one is you are privileged as a project because you are bas. That's already an exemption because the normal assumption is you are not privileged. So we have already two. Then you have something that happened recently that the privilege got removed after five weeks. Again into. Yeah, you are privileged, but only if you fulfill certain those three or four extra criteria. So now it's a very, very limited privilege that you have in Germany. And then you have Bavaria, which made everything a bit fresher and said, actually you don't even need a building permit, just build it right away. Go there and do it. But then you think, is that really good for bankability? Right. So what do I do as a banker with something like that? No one can give me the stamp of approval. This has been permitted. And the same is true for someone who wants to claim against that project, someone who wants to disprove something has been done, and even investors convincing their own investor committees. So the problem is not that the process in itself is complex, it's that it's still under development. Because depending on where you were exactly in this time over the last few years, you had one of four or five pathways. So that's building permits on the grid side. It's pretty much the same. Right. So you had regulation in Germany, which was an original. Yeah. Secondary legislation that is focused on big power plants. And that was kind of capturing Bess. And then people were asking, is that actually the right legislation? So they just removed Bess from that. And then now it is falling on a big Energy Industry Act. So the Energy Industry act in Germany, for example, is a very broad legislation, was never meant for Bess. And now people have to regard the legislation that is just not made for the asset. Now what the industry is trying to push for is a specific grid code or grid legislation just for battery storage. So this is where we are at at the moment, but it is still in flux. So as a project developer, you have to get familiarized with. Yeah. Legislation that is very broad and it's not really meant for your asset and your understanding of the asset.

B (7:39)

So many different areas where the regulation is perhaps uncertain but also changing. You said that all of that adds up to something which you call bankability. And for those who've kind of never heard of bankability before, it sounds a little bit like a made up word. So what does it, what does it mean?

C (7:55)

Maybe let's start from the point of regulation. Right. So regulatory certainty means you need clarity in something. Right. So if you have clarity in your permitting, in your grid, in your offtake, in your project structure, and you're generally happy that this is something that you would put your own money into, then it's a bankable project.

B (8:15)

Okay. So it's about the confidence in the processes that underpin that project that's been put in front of you.

C (8:21)

Yeah. But most important, clarity. So it can be difficult processes. Maybe you don't have a full confidence in the process, but you work through it in detailed steps. Right. But as long as you have clarity of what you're facing, then a project can become bankable.

B (8:35)

Okay, well, let's take that clarity and then in all of this process. Right. So what we're really trying to do is trying to help market participants who want to be active in Germany, whether they're already in Germany or as you said, they're a GB battery owner who wants to move across into Germany or from anywhere else into that region? And I think this design of questions would also help for other regions outside of Germany too. Is there a specific set of regulatory risks that you see coming up for Germany that are going to change the revenue behavior during the lifetime of the projects? And how are you as a bank starting to deal with that?

C (9:08)

Okay, let's start maybe from a more basic stance. So we as a bank, we are interested in everything during a lifetime of a loan. Right. That can make the revenues go down. It's not nice. Or the opex go up. So these are the dangers that we face for our debt service and that the investors face for their dividend. Now what can make the revenue go down? And now purely focusing on regulatory aspects. Right. Because merchant risk, of course, can always make your revenues go down purely from a regulatory perspective. I'm thinking about aspects that only exist in bess, which is that a new Product can be introduced or a product can be discontinued in the revenue stack. That's not something I know from the energy markets. And one example that could happen in Germany is that they introduce a capacity market. So let's say you have a tolling agreement in place, capacity market gets introduced, maybe it's mandatory that you participate in that capacity market. You need to think about what happens with your tolling agreement. Do you need to renegotiate with your tolling counterparty? Do you need to find a solution to get compensated or compensate the other party?

B (10:10)

And we actually were just talking about this in the office yesterday about capacity market contracts. Right. And so to give people a little bit more color around how this process works, you talked about merchant trading. So that's buy low, sell high. Lots of people know what that is. Then a tolling contract. So that's effectively where someone is doing that trading for you and giving you a fixed amount of money. So a financier might really like that because it's a fixed amount of money, so they kind of know what they're getting, getting in. Then you say, right, well, there's a capacity market that might come in as well. A capacity market pays people for capacity, but that encourages certain types of assets to come forward in the market. So if you are, say a gas peaker and you get paid for capacity, your business case might look better. And so all of a sudden you've got more gas peakers coming on. And what does that do? Well, if you've got more sort of capacity in the system, maybe that brings down peak prices. Well, if we're interested in batteries, in the world of batteries, well, peak prices is something we really care about. And so if you're telling me that capacity market comes in, that brings one revenue stream, but it might also bring down the peak price. We're then sat there with this tolling agreement we just talked about and we have to say, well, look, how does this all slot together? Is that fair?

C (11:19)

No, but I think your question is exactly demonstrating that dilemma that you have in a market where you can discontinue or introduce new products, which is something that generally one is not used to from the energy markets. Right. But let's focus a bit on the OPEC side for a moment. We have had some experiences of OPEX that can go up due to regulatory changes in the renewable energy market. Right. One example is generation taxes in Spain or windfall profit taxes. Often there are situations where you also have a good revenue, like in the course of, in the case of windfall Profit taxes, so that's fine. But there's also other examples like business rates changes, you know, like local taxes or something that is regulatory. Hits your opex and you can't do anything about it. Now, in the case of batteries, what is a very specific issue there, and it comes up a lot, is grid fees. And in Germany, this discussion is in a bit of a turmoil. I would say there's generally a very good legislation in place at the moment that makes it pretty clear what's happening at the moment. So you are exempt for 20 years or so people thought for the next 20 years if you build your project before mid-2029. So that's good. Now there's uncertainty behind 2029. What do people do at the moment in the financing market? You don't notice that yet, but obviously in the M and A market, it's difficult to standardize the risk allocation between purchaser and seller. What is interesting though is that now the Bundesnetzagentur, which is the grid agency in Germany, they have issued some statements on how they would like to deal with the topic. And I think it's generally sensible. So they say on the one hand, not having grid fees is not really a solution. Okay, that's generally okay as an, as an opinion. And it's generally okay to see that in the context of European law. I think that's their main concern. They cannot be seen to favoring one asset over others. But they also say that Bess should not necessarily be punished for being Bess. I think that's also pretty good, pretty strong statement. And Bess, as we know, can contribute positively or negatively. So that's good. Right? I think the bigger problems arise from the fact that first of all, they didn't outline yet how they want to calculate the grid fee. That's uncertainty, number one. And what makes it even more spectacular is that we also now don't know whether the grandfathering for the existing projects will still continue. So they are currently putting a bit of a question mark around whether existing projects are exempt. And this is the worst that can happen for bankability. If you have a legislation that is in place, you believe in it, you believe in grandfathering, and then suddenly a legislation change says, yeah, actually that's not really true. What's in the law.

B (13:57)

Okay, and I'll just pause you for a second just to say that grandfathering is this concept where effectively, if a regulatory change comes up essentially after people have made that final investment decision, that the impact of that regulatory change is essentially unwound for the people who made the decision earlier so they can have confidence to invest effectively so they won't get their sort of future revenues taken away from them by something that changes after the fact.

C (14:21)

Yeah. And every time that happened in a renewable energy market, for example, it had detrimental effects on investment and on debt. One example is retroactive changes. If you have feed in tariffs and they get revoked, suddenly the whole investment community for existing projects is really uncertain of what is happening.

B (14:38)

And just to kind of talk through how that impacts it. So all of these projects are financed on equity and debt, as you said, but they're all based around some sort of cost of capital. And if more risk comes into this process, then that cost of capital becomes higher. And so effectively the projects become more expensive for consumers if there's this perceived regulatory risk. Right. That's why we're talking about all of this.

C (15:01)

Yeah. Also, I mean, the question is, how do you actually sensitize for that, especially at the moment when you, when you cannot quantify the potential scenarios of such a grid fee? Because there's no precedent for battery storage grid fees. Right. In the, in the UK you already have kind of a general concept of three, four components. Yeah.

B (15:22)

This is, this is, this is where it gets fun. Right. So to play devil's advocate, I hear everything you've said about grandfathering and the need for clarity on grid fees, and I totally agree with you. I think that when I put myself into the consumer's shoes and I think about how the grid of the future is going to get built, it would really worry me if batteries weren't subject to some kind of dynamic grid fee. So in a really nice world, I would see that where there are constrained parts of the grid, if we make batteries behave in a way that respects that constraint, we could start to deal with some of those constraints and we can start to encourage investors to put batteries in the right place. The worst outcome for me would be almost if grids take a blind eye to it. So if the current rules in Germany just carried on forever and you were allowed to say, okay, just grid fees don't exist. The thing that I think ends up happening is you get lots of constraints that come into the grid because batteries aren't being given sort of clear signals in terms of how to behave. And I think what that does is it gives license to the network operators to build much more transmission than they would otherwise do. So, yes, we need more transmission network, but we don't want to have copper everywhere. Right. And so how can we, rather than building a Huge amount. How can we sort of make best use of it? I think is my sort of devil's advocate position. Right?

C (16:43)

Yeah. No, but I'm also totally in agreement that we need some form of grid fees. Right. I think where the issue arises at the moment is that, first of all, no one knows how it would conceptually be set up, you know, like in terms of the fee structure, and no one can quantify the size or the amount of the fee. I think this is more the problem. But I generally think from an energy policy perspective, I think it is positive to use grid fees as a signaling instrument. Right. To actually make sure that you don't just build where, I don't know, land is cheap or other factors are favorable for you, but where it actually helps the grid. I mean, Germany is trying this with other measures, for example, so there's some subsidy available for grid boosting facilities and things like that. But I think grid fees would be a natural starting point for that as well.

B (17:32)

And it's a message to sort of those network operators, this really fine walkway to kind of bring the clarity of the change you want to make, why you want to make the change, make sure you signal it far enough in advance so that financiers get comfortable with the risk. Because financiers and the asset owners want to put these assets into the system. They want to help the system deal with constraints. If I said to a battery operator in gb, I said, by the way, you're doing everything you're doing today. So frequency response, wholesale trading, same thing happens in Germany as well. But you can do one extra thing, one more thing that's going to become possible for you is you're going to be able to help the system manage its constraints better. And you're going to get paid for doing that. The battery owner is going to be like, yeah, fantastic. This is, this is great news for me. But it all comes down to can you actually set that pathway of future grid changes in the way that financiers and asset owners can understand?

C (18:20)

Yeah, I think one way of doing it would be a dedicated legislation for bess and very clear timeline. So what has happened over the last six months is not helpful. Right. So going back to the example of the building permit, you introduce a new privilege and then you remove it five weeks later. That's not like a constant policy making that helps development, which is a very long winded process. Right. And the same is true for this grid discussion. It's more like a sector discussion rather than someone setting clear rules and setting out a pathway or doing a consultation. It's an ongoing discussion where the outcome

B (18:54)

is really unclear and it's a really hot topic as well. So very timely to be talking about it. Let's move on from the regulatory and market design elements Germany and let's go into the contracting and revenue models. So maybe in a very simple term, I think that banks would just love to get absolutely black and white tolling contract, 10 years guaranteed revenue. You don't have to think about it, you can just sign straight away and then you know, have a cup of tea.

C (19:22)

Yeah, we would love that, but maybe that's not available. Okay, so we need to deal with the reality. I think the reality of the revenue stack as such is pretty, pretty similar across the jurisdictions. Right. So you always have the possibility to trade something, you always have the possibility to help the grid with something and potentially you have some form of regulatory income, let's say auction capacity market. So where it becomes interesting for us is actually how you document this in a more contracted environment. So how do you get this into a fixed revenue stream or partly fixed revenue stream? And it's very interesting what has happened over the last few years, which I call the development from 1.0 to 4.0. Okay, so offtake 1.0, very simply it's just a route to market, just optimization. That was in the beginning. Someone needed to help you getting access to that market. Yeah.

B (20:12)

So the route to market is you're a battery owner that owns the asset, but you maybe don't have the capability to optimize your asset and to trade it in the market. So your optimizer is someone who will dispatch it for you and make sure you've got all the right market set up effectively.

C (20:25)

Exactly. Then everyone was moving towards how can we actually make part of this revenue stream fix in terms of a fixed or floor payment. And that's what I call offtake 2.0, which is you move to a physical flexibility purchase agreement, FPA or fixed offtake agreement. This is what we've seen many years in the UK for example with the typical 10 year floor and which currently in Germany is I would say the standard product in terms of the tolling contracts. Now where it becomes interesting is what is happening in the UK at the moment and what the sector is being discussing for I would say one and a half years now, which is 3.0 and 4.0. So what is 3.0? 3.0 is when you start to disentangle the credit worthiness from the optimization activity. Now that has Two advantages in my opinion. First of all, you find more people that can actually give you creditworthiness because you don't limit yourself to those that have a physical trading capability. So you can go to an investment bank or to someone who is a commodity trader and say can you give me that credit worthiness? And then on the other side you have the optimizer and the optimizer is not in the same contract as those that give you the credit worthiness. So you can keep the optimizer on their toes. So it's actually an advantage. Right. You can potentially exchange that optimizer.

B (21:48)

So you could have, in this version 3, you could have an optimizer which is a brand new company, exists only today and has 10 magnificent people in who are trading markets the best way possible. But as a bank you probably wouldn't be able to do any kind of long term agreement with them because they haven't got that track record, they haven't got the credit worthiness. So what you're saying is that brilliant set of 10 people plus trading house a over here together you can get both the trading and optimization competence of these 10 people but also the credit worthiness from the trading house. And that's version three?

C (22:19)

Yeah, that's the potential benefit you can create, of course, if you are happy and have diligence the abilities of everyone involved. And then 4.0 is I think the cutting edge at the moment, which is you only take one piece of the revenue stack and try to swap it into something fixed. So one cycle or you take only the day ahead and turn it into a fixed revenue stream. So I think where it becomes interesting is when you look into the UK versus Germany, where each of those countries sit. Right. So the UK has always been at the forefront of developing the product. So I call them a bit like the concept lab. They are the ones that try to find the next product and try to go into the next iteration of what is possible. Why? Because there's more experience and there's more innovation in terms of, there's more pressure to find innovation because there's more competition. Germany is still, there's not many projects above 100 megawatts and, and there's very good tolling agreements available that create a lot of value. So it's really the value leader in that sense. If you compare the two and you can really see that our developers that we talk to, they decide for a tolling agreement or have the tendency to decide for a tolling agreement in Germany and to decide for other types of structures. In the uk, just to give you a bit of a number, maybe to get a bit of a feel for the listeners as well, which is. So if you have a tolling agreement in Germany, what does that pay you? Let's say 100 to €120,000 per megawatt per year. Right. So that's, that's kind of the ballpark. Depends on many factors of course.

B (23:45)

And what term would that be for and what duration?

C (23:47)

Anything between five and ten years.

B (23:49)

And that would be for a two hour asset would be standard.

C (23:51)

I'm always talking two hours, four hours we are today.

B (23:55)

But imagine somebody's listening, listening back to this. In two years time they'd be like two hours. What are they doing? Why not four hours?

C (24:01)

No, exactly. So the two hour asset is the typical one that gets contracted at the moment, whereas in the uk, I mean the levels are a lot lower. Right. So what does a floor pay? £45,000 tolling, maybe 65, 70. So it's just the capex is more or less the same. Right. But the way you can contract that same capex is just very different. So Germany clearly leads on value at the moment. I'm not saying it will forever and I think it will go through those iterations of developing the concepts further or copying the concepts from the uk.

B (24:31)

Yeah. And just for people kind of going okay, well look, this level in Germany is higher. You can get more revenue from these assets in Germany, a few things. So one, if you try and buy an asset in Germany there'll be developer premium. So it will cost you more to buy that asset because there are tolls or flaws being put in place with a higher number. So that is going to cost you more money. There are also different fees to pay for those assets in terms of things like bkz which is a fee to connect to the system you've then I think, and this is probably the really interesting part is that Germany over the next two years is going to go through a process of saturating some of its ancillary services, which is something we've seen happen in gb. We've seen it in Australia, we've seen it in Texas, ERCOT and we've seen it in California. Caiso we know it happens. Every market seems to do it slightly differently. How do you as a, as a financier, how do you get your head around that saturation process?

C (25:26)

Yeah, so the first thing is to recognize that saturation is real. Right. I think we have two examples now already because the UK clearly it has happened and in Germany I think parts of the ancillary revenue stack has also gone down significantly last year. Right. I think frequency response has gone down 90% or something like that. So there's been massive changes already. I think if you want to professionally set up a project, you have to be very clear about that. Ancillary services is not something you need to bank your investment case on and not your financing either. And for me, that would be the professional way of doing it. So actually ignoring it for the purposes of hard commitments you have to other people. Right. And seeing it as a pure upside.

B (26:11)

Yeah. And that's very much what we saw. Right. In the classic sort of saturation piece is the top level revenue that you're getting from frequency response. As soon as you get more assets, more batteries on the system than you need to address that frequency response, those assets start looking for the next best thing and the price declines until you find that level where assets feel free to switch between frequency and that next best thing. So I think when you're saying base it around something that's not ancillary services, you're essentially saying, look at the wholesale market, look at the trading. And if you can get comfortable with the trading level being 100, 120, whatever it might be, then that's the level to be basing everything around, rather than a higher level of ancillary services, because that won't last forever.

C (26:50)

And more importantly, what that also means is if the market is comfortable with that type of level and the sustainability of that part of the revenue stack, that also means that someone will be able to describe that in a tolling agreement and actually take the risk away from you and pay you for it in a fixed way.

B (27:06)

Right, okay.

C (27:07)

And that's exactly what you're seeing.

B (27:08)

Interesting. I'm. I think V4, I think there's a, I think there's a potentially a V5 which is, which is. It's kind of the same theme as V4.

C (27:16)

Right.

B (27:16)

But it's kind of, as you say, breaking up these contracts to indices so groups can essentially pass risk away from their project at a certain price. I think there is, I think there's more to come on that. I think there's some non physical settlements that might be possible that essentially allows people to have like an insurance product that pays out if revenues aren't what they, what they think it is. And I think that could simplify a lot of the, a lot of the market. Okay, let's talk about the bankability threshold. So we remember the term we talked about earlier, bankability this concept that an investment committee would get clarity, clarity on a project to be able to put debt into it. Is there a magic number for lenders? Do they need to have 50% of the revenues contracted, 70% of the revenues contracted? What is the point where you can say, yeah, I've got it, I've got clarity?

C (28:08)

It's one of my favorite questions that we get asked and there's a very long answer to it which will not give you a number, but let me run you through. It's more like a thinking framework, right? So there is one aspect which is what is your theoretical debt size of a project? This is how we start, right? So you have contract and uncontracted revenues, you attach a low or high ratio to them and that's your theoretical debt size before any incentive, stakeholder concerns, risk aversion, et cetera. So that's the maximum number we would give someone. But now we introduce a few controls, right? One of the controls is how do we get comfortable with the merchant risk as compared to our debt service? And there's two big things we look for, which is on the one hand, if we don't pay any dividend to our client, right, how can we still pay the opex and how can we still pay the debt service? So like a very, very basic break even price, which is theoretically a nice concept, but very difficult in battery storage still because we don't know what an objectively true breakeven price is that is good. So the only thing we can do at the moment is we compare different projects in different jurisdictions and then we get a feel for this is an acceptable or not acceptable breakeven price. So that's one way of controlling the merchant risk and the other one is calculating the percentage of the debt service that is dependent on it, especially if you run out of the tolling agreement. So the big focus here is how much debt do we actually have outstanding when we at the end of the contracted period? Because then we have a fully merchant project and that is in the future, right? So that's the two big controls there. And then we move to something which we call step number three, which is BIS balance incentive success, right? We want to control for certain other factors that sometimes soft, sometimes not quantifiable, and one of them is the balance of the loan as such. So we don't only look into what exactly happens at the end of the tolling. We also want to have a certain repayment structure over the course of the warranty period. You know, so let's say in year 10x percent should be outstanding, et cetera, or in year three or in year five. And then we look into incentives and incentives are very important. So in renewables, sometimes you had that situation where you had so much revenue, regulated revenue, for example, and so little capex that you would not get capped out so you could potentially finance 100%. And we think that's generally not a good approach for bankability. Right. You want skin in the game of everyone. You want this not to be the bank's project. So the bank really wants to help, but it doesn't want to help 100%. Okay, so, so leverage control is one of those incentives that we want to keep up. And also that, you know, equity is not repaid within three months. And this is where the third factor comes in, which we call success control. So success is good. We are really happy if there is merchant upsides and they are happening. That's why we also have always an element of Merchant. No, not 100% is contracted in a structure, but we want to somewhat make sure that if the project is very successful, especially in the beginning, that the loan also gets repaid a bit faster. So we cannot be in a situation where equity is repaid in half a year and the bank in 15.

B (31:17)

So there's a few things that you kind of brought into this, but the main principle that you're thinking about is making sure that the parties are both set up so there can be sort of a win win from the bank's perspective. It's about making sure that the debt always gets repaid in kind of all circumstances. And then from the equity side, you're thinking about there being enough incentive for someone to really push this asset hard to get the best performance out of it. So you need to make sure that solar site is well maintained or for the battery site that it's being optimized as it should. There are then a few things around that debt process. You mentioned One of them, the merchant knows that you just sort of dropped into the conversation. Let's just talk a little bit about that as a type of thing that someone could be looking at for a contract in terms of having a bit of flexibility in terms of what a bank can do outside of a standard process.

C (32:05)

Sure. I think the most important point for someone like a tolling provider is that they have certainty around when their tolling agreement really starts. So they need COD certainty. So what we usually ask our developers to consider is that, you know, you plan for a certain cod, let's say mid next year, that doesn't mean that your tolling agreement should start mid next year. Right. So we ask for an extended period by which the tolling agreement doesn't start. And that's what we call a merchant knows. Yeah.

B (32:33)

So the project can run in a merchant way before that toll starts. And COD is the commercial operations date. So when the project really gets started and starts making money.

C (32:42)

Exactly. And I think there's two more or there's more misconceptions about when banks finance a project that has a contract, it doesn't mean it's 100% contracted. Right. So if you look at a typical best structure in Germany or also in the UK actually, we finance for the length of the warranty period. That's the idea of the debt sizing. Right. So let's say with a small buffer, let's say 14 years or so, and you get a tolling agreement for seven years, five years. So only 50% of the time is really contracted. Right. So there's a lot of merchants still in these structures. And the same is true for the capacity. So the real tolling agreements you see at the moment they are around 80% in Germany, for example. So 80% of the capacity for five to seven years, which means, well, there's always 20% to play with.

B (33:26)

So there's that flexibility for upside for the asset owner as well. Okay, interesting. Let's move on to the role, sort of beyond capital. So we've talked a lot about how banks provide cash into these projects. And I've said cash, I more mean debt. But where do banks go beyond that in terms of providing value on top?

C (33:50)

So what we found out when we entered the German best market, I mean, when we said we want to enter the German best market because there was no bear market as such, we found out that we have some experience, let's say from renewables and PPAs that can benefit actors in the best market, which those actors did not necessarily have. So no one in that particular sub market was used to thinking about offtake. They were more focused on the technology and they had, as I said before, right. They had brought some real projects off the ground into operation, but maybe on a smaller scale, maybe without offtake. So where we started to create value is really developing together with a client or clients, one of the first tolling agreements in Germany. Actually, we financed the first tolling agreement deal in Germany last year. And this is where you really need a focus on the process of how do you make a project bankable. This is not about only the financing structure. What we talked about before or this is not only about actually paying out or analyzing an information package because there is no information package. You need to develop this yourself. Right. And that means also you need to not shy away from talking to third parties that have nothing to do with your client. Yeah. That is like off takers in the market, like creating a network of off takers and also advisors that can advise you on how to legally structure that.

B (35:08)

For example, wouldn't most banks just say, hey look, you know, this isn't, and I'm not trying to set this up as a, as a plug for NORDO B, but I'm trying to say in general, wouldn't most banks just kind of say, hold on like you've got me structuring tolling agreements. Like what am I doing here? Like I don't, I just want to bring projects through. I want deal flow to come through and I just want to sign them and kind of get, get volume coming through.

C (35:30)

Yeah.

B (35:31)

So, so why, why, why would you see yourself having to kind of reach over and start doing things like totaling structures?

C (35:38)

So we have financed PPA based projects for more than 10 years. Right. So during that time we've learned a lot about what works and what doesn't work. And we think as a team we almost got like first hand training in how we should set up off take structures that are bankable and that are sustainably bankable. What is sustainably bankable? It is off take structures where no one wants to walk away all the time or has a big incentive to walk away and where everyone wants to work through that agreement for a long time. And that contains also things like avoiding basis risk delivery obligations, you know, bad behavior of any of the parties in an adverse market scenario, dealing with negative prices. So all of that flows into that. We think if you think a bit bankability, when you set up an offtake structure, you really can create good projects. And if there's value, I mean the starting point is of course that there's value in the offtake itself. Right. So if it was on a very low level, all the bankability would not help you. But in a market like Germany where the value and the potential structure of such an offtake align very well.

B (36:46)

Okay, interesting.

C (36:47)

It really helps.

B (36:48)

Yeah. Let's then talk about another example. So going away from the contracting side, let's talk about the grid connection side. So what happens if somebody brings a project to you and the grid connection slips by two years? Is that project dead? Do you kind of put it into the bottom drawer? Don't, don't look at it again for another two years.

C (37:05)

Their focus is always on certainty of dates. Okay. So if someone says I have a grid connection and it's confirmed with whatever documentation I need and it will be in two years and the physical ability, because that's something sometimes interesting in the UK as well. So the engineering department of the relevant TSO is able to build that grid connection and that is all secured, contractually documented, then that's fine. The question is, is that not maybe inefficient to already now seek a financing if your grid connection is only there in two years, Right, because you need to front load, then best supply, etc. Etc. So while I think it is inefficient, it would potentially be bankable. Okay. I think when the project would have a sudden change where someone says, we start out with this will be in a year and then it will be in two years, then the project would collapse.

B (37:56)

So it's all around clarity of dates. So as long as the dates are getting more certainty, that project is getting that clarity rather than you being particularly worried about say the date being two years from now or whatever the date originally was.

C (38:11)

Okay, I think I have another point here which is more the debate in Germany at the moment, which is not necessarily the date of the grid connection, but what you can do with the grid connection. This is where we spend most of our time thinking about at the moment, which is you have a certain megawatt of grid connection, but then someone says, which is the TSO says, but you can only use it to that and that extent. Okay, so you might have a ramp up phase or you might have a restriction in auxiliary services.

B (38:40)

These are the flexible connection agreements.

C (38:42)

Yes. And it's not nice to have flexible grid connection agreements in the sense that bankability needs this clarity in. You need to be able to quantify, okay, if you can quantify the downside and okay, you say the maximum of flexibility in this grid connection is X. Okay then you make it bankable again. But maybe you don't make it commercially viable. I mean that depends then exactly on what that is.

B (39:09)

This has been one of the top questions we've had for our team writing research about Germany. But also we've been building the flexible connection agreements into the forecast because it keeps on coming up. And as you say, banks and asset owners just want clarity on what it means. And whatever those connection agreements mean, it changes what that revenue stack looks like. And so it's a critical part to get right. It all comes back to this same concept that we were Talking about earlier around grid fees, it's around how do we design this all so we get the most out of the batteries that we can get onto the system to make sure they're helping the grid rather than not seeing any kind of charges or incentives, because if they don't see the incentives, they're not going to react. So a really interesting part of how the market's developing, let's do a sort of, as a final piece, let's compare Germany and the uk. So experienced in both markets, UK is slightly further ahead as sort of innovation lab. I think we would say that we're both an innovation lab and we've also delivered some capacity as well. But if you're taking sort of a German perspective and looking at the uk, what would you say would be the obvious things that you would try and avoid as an industry to make sure that that's sort of more a path with more clarity on what success looks like?

C (40:29)

So first of all, the really good outcome of what we have seen in the UK is that experience could be made and lessons could have been learned already and Germany can really benefit from that. So developers in Germany, they should not ignore the information that exists from those markets. And the question is, what are really the experiences? I would say there's probably three things. So on the one hand, augmentation is a real option, saturation is real, and the third thing is that regulation changes all the time. So those three things are really observed realities in the uk. So how do you protect yourself against saturation? We said that already. Right. Protect yourself against believing in ancillary services, accept them as a nice upside, but do not bank on them. Now augmentation is more interesting one because I think there is now, five years ago, or when it started in the uk, there was not a real way of protecting yourself against it, but now there is. So either you buy four hour batteries or what some developers in Germany are doing, they build a two hour project, but they buy the adjacent land site already so they could potentially later increase the capacity. So that's a nice way of doing it as well.

B (41:38)

I suppose one thing I'd add to that is that some of the early projects, the actual energy density of the 20 foot containers wasn't very good. And so you might have had a 1 megawatt megawatt hour system. Now on that same footprint you could have 1 megawatt, 8 megawatt hours and so you could go 4x on the duration without having necessarily to have the land adjacent. Which is just another way of saying I Totally agree. Augmentation is very real and is a very nice upside for some of these projects.

C (42:06)

Yeah. And in terms of how you treat that as a financier as well, you need to be able to work around that. So that's why mini perms are also very common in. In Germany and in the uk. You look at that project not as something that you don't touch for 15 years. Right. You start and then once you run out of the tolling agreement, you have a few real options. You can refinance, recontract, maybe augment.

B (42:29)

And if you want to take a look at mini perms in more detail, we had. Conrad was around 10 to 15 episodes ago, talked a lot about mini perms and balloon payments. If you want to get in the real detail of how that works and have sort of the 101 of the financing, check out that episode. A great place to go. But essentially it's an option at that end of toll. So maybe seven years or 10 years to tweak the financing effectively, to set it up for the next seven years.

C (42:55)

Yeah, exactly. You really need to react to the reality of that physically, something will change that project. And then the third lesson learned, obviously is that regulation changes all the time. We touched upon that before. I think key here is to acknowledge that while you cannot always great certainty on every regulatory aspect, you need to be totally abreast of it. So if you are in development of best projects and you don't have someone that can dedicate time to focus on regulation on the grid side and on the permitting side, I think then you are not set up well.

B (43:30)

I agree. Let's wrap up with one final question. So if I put you in charge of Europe's power markets tomorrow, what's the one change you make?

C (43:39)

So if I have only one change, I would try to create clarity by giving clear timelines on every single aspect that affects my project. And that can be the grid, that can be the building permit, and that can be the contracting. But creating a clear outline, not of a policy goal, but of how I want to implement that in legislation or in regulatory circumstances. It's. It sounds very simple, but it's obviously not easy.

B (44:09)

It's not easy and we see it going wrong in loads of markets, for sure. Florian, thank you very much for coming on. Your daughter's GIF clearly worked because if you were nervous, I don't think we could tell. So thank you very much for coming on and for giving us all of those insights into the German market and financing.

C (44:25)

Thank you.