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- [00:03]
A
A set of architectural drawings is not a house. The drawings are precise, detailed, took months to produce. But between drawing and building, things change. Groundworks don't go to plan, lead times shift. The drawing was always an intention, not a guaranteed outcome. Battery storage is full of the same gaps between the revenue forecast and the actual returns. The capital structure that worked and the one that doesn't anymore. The the market you modeled and the one you're actually operating in. The developers who survive that gap are the ones who design for it from the start. This episode was filmed at the Investing in Battery Energy Storage conference and is a live recording, so I hope you enjoy being part of the audience. Paul Mason is the Chief Investment Officer of Harmony Energy, one of Britain's most active developers. This episode isn't about what the forecast said. It's about building a business that wins. When plans change for episodes like this, we often get follow up questions perfect for asking to Ko Moto Energy's AI analyst. Check that out today, link in the description, then back to the episode. Let's jump in. Thank you. Thank you for coming along today. Hopefully my mic is kicking in. You can hear me. I think I can hear myself.
- [01:23]
B
Which is.
- [01:24]
A
Which is slightly off putting. Today's gonna be a bit of a special treat. Usually when we record these episodes for transmission, we record them in a sort of small booth where there's only about three people there. So when you make the inevitable mistakes, you can go back through and correct yourself. But today we're gonna be held to account in front of a full audience. So that's gonna be a lot of fun. Just to start off and to help me understand kind of who's here for the people we have in, in the room. How many people here have listened to transmission before show of hands. Okay, that's better than I expected. And how many people have been on transmission? Yeah, okay. Okay. I think, I think. Well, there's another one here as well. Right. So, fun fact, Paul was guest number one of what is now, I think 240ish episodes. So yeah, it's beyond time to get you back on. So let's get into this. Right. So the one question I want to ask to start off with is what does everyone get wrong when they think about or talk about building an ipp?
- [02:28]
B
Okay. I'm not convinced there's one thing that people get wrong, but it's maybe helpful to think about things that I think we have done quite well. We at Harmony, we started always as a developer and always developed with the mindset that we would own and operate projects long term. And that's not always been the case. We've definitely sold some projects along the way, but it was always the intention to stay involved with projects. So when you start developing in that way, you look for the problems that you can expect and you deal with them early. And it's much easier to design solutions when you're still at that planning and design stage than. Than finding out once you've bought a project from another developer and you're trying to uncover what might go wrong. So I think that sort of mindset has set us up really well from the outset. I think when you get into construction, we have tended to go down the route of full EPC contracts. Despite that, we have insisted on having our own project managers very heavily involved. Even when you've got that full wrap, there's a lot of issues around interaction between your contractors, grid connection, staying on top of DNOs, et cetera. Have they procured equipment that they should have done? So I think we've seen projects come online much quicker than some others which were being built next door. In some cases we saw some of our competitors have year long delays where our projects would come online because of that, maybe slightly more detailed interactions through construction stage. And I guess really just coming back to maybe your topic from the, from the earlier talk, I think there's potentially a risk that people treat revenue forecasts like a detailed cash flow forecast that says in July 2026 you're going to earn exactly that much money and then get very upset when it doesn't arrive. So I think a bit of expect management around what a forecast which is used for evaluation purposes might be used for and how that might be misinterpreted. So I don't know, maybe a few things along that I think we've tried to do well and really get into.
- [04:53]
A
This is kind of saying more is more. Right. So if you have the history and context of the site, when something then goes wrong, you're in a better position to manage it. And that can both be from the physical operation of the site, so developing it, operating it, but it can also be from the revenue side as well. In terms of, okay, that forecast number that's been up, that's been down. But I know that it's not a fixed cash flow number to be writing down and to be raising debt against. There's some uncertainty that comes with that figure.
- [05:18]
B
Yeah, exactly. I think it's looking at a range of potential outcomes rather than looking at a central case and saying that's Like a factual expectation of what's going to happen, understanding that there's a huge range of potential outcomes and that is quite, quite wide. So for example, when we took the early decision to go into two hour batteries, lots of others were still doing probably mainly an hour, but some were probably still sub one hour batteries getting built at that point. And your central case would tell you that the one hour battery or even less was the right thing to do because your revenue forecast said ancillary service were up here for a while and then they will come down. But it didn't take a lot of sensitizing to say, well what happens if that happens a year earlier or two years earlier and all of a sudden your central IRR tanked in your one hour case and your two hour case dropped a tiny little bit. So it was around looking at those range of outcomes and designing the right solution from the beginning. So feeding that view back through the development team, making sure we're developing the right projects, getting the planning for the right projects and then procuring the right kit.
- [06:27]
A
Yeah. And I think what's really interesting right is for the Harmony team, you've done an element of sort of the full life cycle, Right. So you have developed projects in the uk, you've built those projects, you've operated those projects and you've sold those projects as well. That's something that I think a lot of people in this room will sort of move towards at some point. Maybe they won't sell them, maybe they would say that now, maybe they might sell them in the future. We'll find out. But what's quite interesting for me is that you won a few groups who's actually seen that. So on that process, what are your sort of tips for others who are looking at that space? What are a few things that you learned along the way?
- [07:04]
B
I think it's comes back to that development from the outset and looking longer term. But we didn't necessarily go out with the idea that those projects that we built would be sold within a four or five year window where the idea was obviously that we would create, create a listed fund that would buy projects off us as a development group for many years into the future. We would grow that platform, expand its mandate, all the rest of it being flexible, I suppose, to understand what's going on with markets, take a look at the fund's inability to fulfill that primary purpose of buying projects and take a more, a more rational view about how do we continue to develop and to grow. And in order to do that we have to take a decision to sell, which wasn't something we wanted to do. Luckily, we're still involved in managing those assets, so they still feel part of the family under different ownership. But, yeah, I mean, coming back to the question, I think it really is around design the right product, understanding the rain, those range of outcomes, find the right pool of capital at the right time. I think the listed space was the right mechanism when we launched it, and I think we talked about this back on the first episode, but it was a very different. As you know, I've been trying to raise money into batteries for a long time prior to that. And that originally started with talking to individual investors about big ticket investment into a portfolio of projects. That comes with a lot of detailed questions, which, back in 2016, 17, 18, no one had the answers to because it was a new thing. So there was lots of theory that said it should work, but not much track record that was easier to sell in the listed space, where you're talking to fund managers who manage billions of pounds and you're saying, can you give me three or four or five million pounds? This is the story, this is why it works and people are willing to take that sort of punt. So that's why we ended up with most of the batteries in the UK being owned by listed funds, because that story was much easier to sell at that point. Yes, but as soon as the capital starts flowing out of that space out of London, those funds can't operate in the way that they need to. So it's.
- [09:41]
A
You need to look for other sources of. Other sources of cash.
- [09:45]
B
Exactly. Because we were always a developer first. We were never set up to be a fund manager. That sort of was happening by default because we wanted to have a friendly off taker for our projects and stay involved in them. It meant that we were much more open, I suppose, than somebody who is predominantly a fund manager who wants to remain being a fund manager. We're much more open to just saying to shareholders, look, this clearly isn't working. Your projects are being valued at some points, 30% of the real value, and we believe we can prove it.
- [10:19]
A
So, yeah, essentially you had assets that were being valued better privately than they were through the.
- [10:26]
B
That was the theory. And everyone goes through their quarterly valuations and the numbers all were coming out up here and there was a big question mark from investors, I guess, around whether those values are real. We felt very strongly that they. They were, and thankfully took it to market, went through the process and came out good.
- [10:46]
A
And let's talk about that in a moment, but I just want to reflect back on something you said earlier around sort of the variability of revenues, where they come from, how much they bounce around. In your first interview, which I happened to listen to yesterday, there was a lot of conversation in that about whether batteries could ever take part in the balancing mechanism that was to give people a context of kind of how far this space has come. There was a. I don't know whether Roger Hollis is here, but there was a shout out for a Renko and some of the earlier work that was done in terms of testing out the balancing mechanism. And now it feels so second nature to us that this would be like what a battery would do. And when we look at the fleet, we see all of the batteries in those markets providing those services. So maybe just to go back, see what history can teach us, that revenue stack has just changed so much over the last few years.
- [11:33]
B
Totally. And I think there's still a way to go. Right. In terms of the. I almost think looking at revenue stacks now is a bit of an odd concept because all of the revenue streams are effectively just a way of buying or selling power. People are not bidding into ancillary services to get the money for providing those services. Now they're bidding in because that's. By providing those services, they're either charging up the battery or discharging. And that's the most efficient way that whatever optimization algorithm is running says that you either buy or sell power. So I think to try and split it up is a really difficult thing because you'll end up with some revenue streams looking negative.
- [12:16]
A
We saw this last month for the first time that the fleet in GB effectively looked like it was losing money in the wholesale market. Whereas in reality what it's doing is it's charging from the wholesale market and discharging into the balancing mechanism.
- [12:31]
B
I can't remember whether we talked about this five years ago, but it was always an issue where even back then you were more likely to get export volume through the balancing mechanism than import. And I was talking to Roger about this last night and sort of catching up over those early days where we were both trying to make that story work. And I think I still feel that in theory you could do without ancillary services and you could run a battery fully in the. In the balancing mechanism and it should do very well. The. The difference. The issue is still that it doesn't necessarily get that fair shot against other technologies. At least now we're seeing it gets a fair shot against other batteries. So you can Sort of price yourself against your, your, your competitors. But there's still a big piece of the pie that's, that that's missing there.
- [13:23]
A
That's still there. Okay, let's, let's come back to then the sale process of those assets to foresight. And I think the thing I'm really is, do you see in the same way that the solar space had, do you see there being a cost of capital shootout in the battery space and ultimately we're going to end up with six players all at sort of very low cost of debt that hoover up all of the projects that are in this room? Or do you think there's a world in which we have 30 or 40 battery players that continue to own and operate portfolios?
- [13:54]
B
That's probably something in between that. I think you've still got investors who want to hold batteries for quite different reasons. So you've got the pure financials where it comes down to cost of capital. I think you will start to see more of that. I think you probably start to see migrate more towards what we saw in offshore wind, where you get players who are developing, building, getting things operating and then looking to sell down minority stakes to that more passive, low cost of capital. And that's certainly the way we see a classic utility.
- [14:31]
A
Yeah, 51% and then 49% comes from somewhere else.
- [14:35]
B
Exactly. And that, you know, there's still a lot of complexity around operating, optimizing the battery tech. So it's not pure passive where you're just, you pay your money, you collect your check every month. It requires a bit more active management than that. So I think to keep whoever's managing the asset actively involved and owning the majority share, I think is probably a requirement for that lower cost of capital to be happy to sit in there.
- [15:06]
A
Okay, let's go to the future. Let's leave gb. I know you're now starting to look at other markets across Europe. One of the questions that's come up on screen, which I think is a really good one, which is sort of what criteria is important when you're looking to select new sites, when you're looking at a new market like Germany, what are the sort of standout features that you need to see in order to be able to commit to those markets?
- [15:30]
B
Yeah, so I think as a developer it's quite easy to take a view on new markets in terms of, we're pretty sure renewables are coming everywhere. Where you've got renewables, you've got a need for storage. So if as a developer you can go and find some land, get some planning and connect it to the grid. You, you've created something that's of value. The cost of getting that is relatively low. Yes, there's risk, there's binary risk around it, but we can make that quite easy. So it's a different story when you're looking to actually build it. Right. And operate it. And then you're much more into exactly how am I going to monetize this? What's the volatility around that potential range of outcomes? And therefore can I commit the construction capital? But when we've gone into.
- [16:17]
A
To push you on it. Right, what does the like, what does that list look like? What are. Say that the top three things you're looking at Germany. How. Yeah, what, what do you rank?
- [16:24]
B
So we. So, so we do look for sort of renew renewable penetration as an indicator of, you know, how much storage are you. Are you going to need? But we look for, and we want to see a market size where we can get a reasonable scale and not be, you know, 90% of the market. We're looking at like 20% of the market as a maximum, absolute maximum that
- [16:47]
A
we would want what's reasonable, like 100 megawatts a gigawatt.
- [16:50]
B
Well, when we started off going into these new markets, we were talking like 200 megawatts and each team we've gone with has totally smashed that. And we're in gigawatts everywhere now. But it was, it was modest targets.
- [17:03]
A
We have a nice title for the episode now, Gigawatts everywhere.
- [17:07]
B
But yeah, I mean it was. But you've got to put it back to. We entered France in 22. At the time, projects were still sort of 50 megawatts. So you're looking for say four 50 megawatt projects to make it work. And that's enough to figure out that you'll get your development capital back, make a decent return on it. It's probably not enough to say you want to be in there long term, owning, operating, but as I say, we started off as a developer in that sense.
- [17:39]
A
Really interesting questions come through on the timing to those markets. As you say, lots of markets need batteries and gigawatts everywhere. How do you. The question is around, do you try and get into markets really early and so you capture those kind of early frequency response revenues or do you see. Are you very happy to go into a market when that market is sort of saturated, the frequency response market and it's much more a wholesale play. Do you mind?
- [18:02]
B
I think it's less about the Revenues, it's more about how much grid can you get. Right. So we got into France quite early and we're always very grid led. Coming back to your sort of, how do you. There was a question around selecting sites. Well, basic, basic development stuff. You want your site to be as close to the grid connection as possible and you want the grid connection to have as much capacity as possible. So you know, basics. Yeah, but so France, we took a view, looking at the system, a lot of players were looking at slightly bigger sites. Transmission connected, we are still looking transmission connected, but lower, lower voltage, which allowed us to bring in lead times and then make that case around getting in early with less, less curtailment risk and looking at the. Trying to pick up a bit of the ancillary service revenue before it, before it falls. We've turned on our first French project in December, so we're just picking up a bit of that. But we have seen it come down from where it was a year or so ago. I think if you're investing in any of these markets on the basis that if your business plan requires you to pick up the high ancillary service revenues, I think you're onto a loser to start with. You need to be assuming your business case is working off a merchant sort of energy arbitrage model.
- [19:29]
A
Ultimately, that's a really core message, right. For any investors considering any market, unless you're being incredibly sort of gung ho and you're in a market that no one else is considering, then you absolutely need to be based on.
- [19:41]
B
There's obviously you can take, you look at some of the Nordic markets, right, where you could get in, you could have probably paid your battery back within about six months. Okay, fine, that's a. If you can do that and you can scale it, great. But I don't think that would, that's. That's certainly not the norm for the way that we would look at markets. And we would tend to just say ultimately ancillary services will be saturated, they will be priced against what you can do in wholesale and balancing markets. Those are the deeper markets. So, so let's assume that's happening.
- [20:12]
A
And just to go back a step, so you talk sort of strategically, you like to think about markets in terms of renewable penetration. And then sort of tactically, you were saying, well, how do I actually get into that market? How do I get a grid connection? Of all the markets that you've looked at, have you seen grid connections done well, or is that like a thing that could never happen? Where would you say the Best markets are for that. And what have they done?
- [20:32]
B
Well, yeah, I don't know. It's a difficult one because the grid is always the challenging element and it could always be, always be done better. I think where we see it going, you know, making life more difficult is when you've got real uncertainty around what's happening. Take, you know, could connections reform now?
- [20:51]
A
Is.
- [20:51]
B
Is sort of the. The I in the uk, the idea behind that is. Is very sensible, but the result of going through that process means there's a huge amount of uncertainty, which means stuff stops happening which would otherwise be done. Right. So we've got projects that are ready to build that probably would have started construction by now. We've got. We're pretty confident that they will come through this because we know what the queue in front of us looks like. But until it's written down, it's difficult to get an investor to sign off on that.
- [21:24]
A
And so that grid connection problem in GB has certainly been well documented and well talked about. Is there anywhere that you felt that the grid connection queue has been better than gb?
- [21:33]
B
I mean, that's a good question. I think the early projects that we picked up in France, I think, have been relatively smooth because we got in at a sensible voltage. There weren't loads of other competing projects at that time, but it's now really hard to pick up anything new. So growing that pipeline beyond where we're at is really challenging. Germany's got its own challenges, as you know, around what's happening with grid fees. Post 29 could be. Could be some upside, could be some downside. Again, it's creating a sort of artificial
- [22:07]
A
cliff edge, critically uncertainty, which means financiers really struggle to get into that market.
- [22:11]
B
If you know what the charge is beyond that point, it's fine. You can. It goes in the model and the value of the project changes. That's fine. But whilst it's totally uncertain, it's. Some investors will take a view, right, that the grid needs batteries and therefore whatever comes in is not going to completely kill the business case. Others will be more cautious.
- [22:31]
A
So we've talked about the sort of finding markets and then building in those markets. The next phase, I think that's interesting for people, is the phase around once those assets are live, and that might be a position that people in the room haven't necessarily had their assets get to that point. What have been some of the things that have allowed you to get the most out of a fleet that has been operating?
- [22:51]
B
Yeah, a couple of things. So the right kit Coming back to it earlier, you know, making sure duration is right, that you've got good kit, good availability. It's not available, it's not making any money. Grid is another issue there. In terms of grid outages, what does
- [23:08]
A
good availability mean as a ballpark percentage?
- [23:11]
B
Ballpark percentage. I mean, in terms of our kit availability, we're generally sort of 99% plus availability. Where it drops below that tends to be grid outages which are not necessarily foreseeable. They will even out over the life of the asset. But when they. It can look pretty bad for a given month or year, even. So I think you've got to keep it available. But I think coming the topic that was discussed earlier around being on your optimizers and working with them to look at strategies. So we, we worked very closely with Tesla on those projects that we bought online, did quite a few trials. We put stuff into the BM, you know, as a 100% take. Don't do any ancillary service, don't do any wholesale, just go BM trading and see what happens. And I think that sort of thing is really important because all of the trading algorithms are based on effectively understanding what's the opportunity cost. So you're bidding day ahead, how much capacity do you want to put in day ahead versus what might you make if you leave capacity for tomorrow and if your data on what the opportunity cost of the BM is based on what it looked like in 2021, you're not going to be making the right decisions around how you bid today and you don't get data unless you try things. I think an openness to trial and actually running things which might look suboptimal for a while, just to get data and better learning. I think it's been a good thing for us.
- [24:44]
A
So how do you. So I think the hard thing here, right, is that the traders know a lot, right? They have a lot of access to information. They can see every single half hour. They see multiple markets. Asset owners tend not to have that level of information. So how do you find that right balance? Because you don't want to be in their sort of face all the time asking questions about everything, because they will, you know, they have their own businesses to run. So how do you strike the right balance of trying to encourage them to look at things that maybe aren't on their radar to begin with?
- [25:12]
B
Yeah. So, I mean, if you, if you walk into our office in London, there's a. Soon as you walk in, there's a big screen which shows charts of what all of our batteries are doing live real time. So we do keep look at every half hour as it, as it's happening. Not necessarily it's somebody's job to sit there and watch that screen all day, but there's a lot of attention that goes onto that. It tends to be managed through, you know, regular meetings where you will review what's happened. And I think understanding that you shouldn't be calling out an optimizer because on one day it looks like they did a really bad job because, you know, algorithms are algorithms and some will work well under some conditions and less well under other conditions. Right. So I think you've got to take a longer period of time. But if you see trends where there's other assets which are consistently doing something different and it looks interesting, obviously we talk about that sort of thing, but equally when we see things not happening, like for example, BM usage, where we think logically there ought to be more value, it's a case of understanding what's the approach. And we do that when we select optimizers as well. We sort of. When, when people started tendering for optimizers, I think there was a phase and I was on working with Orsted at one point and sort of on actually helping them respond to some of these tenders and they were pretty painful in terms of very long questionnaires with lots of requests for backcast data and forecasts and the rest of it. And it's all a little bit of a nonsense really, given it's going to be totally different when you, when you, when you get there. And the way that back tests were working were not particularly insightful, I don't think. But we've moved much more to an approach of we'll go and just spend a couple of hours with Optimizer, speak to their traders, speak to their data scientists, understand how we would all work together. What are they prioritizing, how do they see optimizing a battery walk through the day, what's going on, what decisions are we making, at what point, where is it AI, where is it a person overriding it and that sort of thing.
- [27:24]
A
Because in a tender process you might think, oh, that's not possible, I can't go and ask them those questions. From your experience, you know that I can go and visit them in their office, I can talk through what this looks like.
- [27:33]
B
And they tend to be quite nice people.
- [27:35]
A
Well, yeah, indeed.
- [27:36]
B
Contrary to what might have been said about some of the traders.
- [27:39]
A
Oh, well, yeah, very good. Okay. So I think one's quite Interesting for Harmony is that you've traditionally sort of been quite GB focused. You've now got lots of projects coming through, say in Germany as well as France. Does that mean that the space for GB is something of a sort of old hat to you? Do you get excited about GB or do you not?
- [28:00]
B
Yeah, I think we still get excited about gb. You know, we're excited that we're building our first project in GB for a long time. It's only a tiny little one by today's standards.
- [28:09]
A
What's tiny little?
- [28:10]
B
35 megawatts.
- [28:10]
A
Oh, that's tiny and little. At least a gigawatt these days, so.
- [28:14]
B
But no, we're still excited about gb. Lots of. Lots of opportunity. But yeah, other, other markets. It's fun to be getting into other markets and understanding everything that we don't know about those other markets and what we did learn about gb. And we spent a lot of time getting into a lot of detail in GB and I think that's why we were able to sort of do so well. So we were trying to follow that same route and selecting teams to go into those markets has been the real key for us. So we've taken good teams that we've had prior relationships with through either selling them projects, advising them, we might have been working with suppliers.
- [28:59]
A
This is so important, isn't it? Kind of having people on the ground who are familiar with it. You can't just be sort of a GB head and then sort of parachute it in. You have to have experience.
- [29:08]
B
It just fundamentally doesn't work in our opinion. You need to be on the ground properly motivated to go out and find as time matters. Right, so we'll come back to grid connection. So you need people who are properly motivated to get high quality projects and they can learn from what we've done around identifying where there's more likely to be grid connections, red flags and site selection, avoiding. And again, it's all basic stuff, but it's obvious once you've done it. Yes, it was always the case. Right. The stuff you don't know is what will trip you up. So we can take the learnings from the uk, take them into other markets, get a team of highly experienced professionals just running hard at it and I think being able to point at projects that were operating with Harmony logos on, I think was really helpful for them to go out to landowners and say, look, we're a real player here. We're not just a one man band developer who may or may not ever build this project. This is something that will Happen.
- [30:12]
A
We've done this before. You can trust us. We've got the track record, we know how to handle the supply chain. You can keep the harmony hat on if you like, but let's also feel free to take it off. We've got a couple of questions that come through from the audience, which is very nice to be able to do. So first question, what have you learned so far about the real economics of colocation of solar and storage versus the theoretical benefits? Because I think most of what you talked about here is standalone, right?
- [30:36]
B
Yeah. To be honest, we've only built standalone best. We've developed some colocation. We've tended to sell solar projects that we've developed, whether that be standalone, solar or co located. And I think that comes back to the ethos really of us focusing on our core strength and where we have a good reputation is in best and that's the expertise.
- [30:59]
A
So that's been. You kind of played where your edges. Right. And that's a really important message for everyone. Let's see if we can get through one more of these. So is there a material risk that best projects face? A similar revenue cannibalization like solar projects in Spain? That's a fun story. Or wind in Nordics due to quick market saturation? How do we tackle that? You've talked a little bit about market saturation, but what's the 22nd answer to that?
- [31:24]
B
I mean, I think the risk is mitigated by looking at those energy markets. You've got got, I think a fundamental upside to most forecasts around. Batteries have an ability to make money when things go wrong. So prices are higher right now because gas prices are higher. They were higher back in 22. In 2016 you had all the French nuclear fleet out, the prices were higher. Right.
- [31:53]
A
So batteries are exposed to that market volatility.
- [31:56]
B
There's upside exposure to that sort of stuff. And it's impossible for you to build it into a revenue forecast that you're going to bank or even base your equity base case on. But you know it's there and you know if you hold the asset for long enough, you know you'll get some of it.
- [32:11]
A
Yeah, it's interesting. You know it's there. Right. But can you convince a financier that it's there? That's the hard part.
- [32:16]
B
No, that's what I'm saying. It's not your base case. It's just upside that you.
- [32:20]
A
So this is outside of the debt piece, but.
- [32:22]
B
Exactly.
- [32:23]
A
You as an owner use an operator. Okay, last. Last question from me. To wrap up. If tomorrow you were in charge of European power, what is one thing you would do differently?
- [32:36]
B
A proper quick grid reform that removes the uncertainty. Right where we have a fair playing field. Projects that are ready to connect can connect in a fair, transparent way that
- [32:50]
A
allows people to wiping the floor on connections and going first. Ready? First serve. Let's get things connected.
- [32:55]
B
Yes.
- [32:56]
A
Love it. Paul, thank you very much for coming on transmission. You've been a wonderful guest. Thank you.