Advisory for sustainable projects with Max Stirling (Associate Director @ JLL Energy & Infrastructure Advisory)

- How does that battery itself fit into their existing portfolio?

- Is there a change in the market? Is there something else happening here?

- So even though there are operational batteries, there's not necessarily opportunities for buyers to come acquire them.

- This concept that developers are making a killing because developers are charging too much isn't the case. Developers are saying here's some sites, do you want to buy them? And the world is bidding on them and it's pushing the price up.

- When you're buying a site, what you're looking at is you're looking forward into the future. So once I build this, how will it operate? And you've assessed what is the value of those cash flows that you have today.

- And so I think there is a world where what we'd call crazy prices for developer sites is actually the real value of these grid connections.

- If I'm a developer out there, try to get as much land as you can because it gives you that flexibility to move with the market.

- Hello, everybody. Welcome back to another episode of Modo The Podcast. Today, Q is joined by Max Stirling, Associate Director at JLL Energy and Infrastructure Advisory. If you're enjoying the podcast, please consider hitting like and subscribe. It really means the world to us. Let's jump in.

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- All right, so JLL. What does JLL stand for?

- What does it stand for? What is it meant to stand for?

- What does it mean?

- What does it mean? Well, it means Jones Lang LaSalle, but we're effectively a consultancy business. We work in advisory. We help our clients achieve what they look do.

So where do we sit within that? That's the energy and infrastructure advisory team. So we are effectively a pure play renewable energy boutique when it comes to financial advisory. So that's mergers and acquisitions, capital raising, strategic advisory, anything to do with investments or trying to sell down renewable energy assets or companies.

- So it's a lot bigger than that. So a lot of people know JLL for property stuff, right?

- Yes.

- And you guys are-- you're in a bit that does a lot more than that in the energy space.

- Yeah, JLL is over 100,000 employees globally. We're a team of-- I think we're now up to 44.

It's a very, very small drop in a very big lake.

But there is a lot of synergies there because JLL is an infrastructure advisory business. Renewable energy is a subset of infrastructure, and it's where a lot of that is moving.

- And you're in London, right? So there's 45 of you--

- No, so we have offices in London, Exeter, Edinburgh, Milan, Madrid, Warsaw, and soon to be Paris after summer. So quite a dispersed group of 45. It gives us decent coverage across EMEA, which is kind of where our team focuses.

- And JLL is as global-- You're on the New York Stock Exchange. There's 100,000 people globally. You do all sorts of stuff. And then you're in the bit that looks at energy and infrastructure in Europe, EMEA, right?

And what kind of things do you cover? We're going to talk about batteries a lot, but what else do you cover?

- Yeah, so the team started in its inception 12 years ago. It was kind of a spin off from what was EY's Energy M&A team. A couple of them moved over. And that, in its heyday, was a lot of onshore wind. That was kind of the birthplace of renewables in the UK. And over time, that looked to include solar PV, whether that was kind of CNI, residential, or utility scale.

And then as the energy sector has evolved, that's added a load of different services of what is energy and infrastructure. So we're active in, as you said, solar, wind, hydrogen's quite a big thing now, grid services are things like shunt reactors, synchronous [? conversators ?] looking for grid support.

We did gas peakers back in the day when they were a bit more trendy, and then batteries is really the big thing. And then there's some niche things, like vertical farming, things that don't really fit elsewhere, but they're part of that, I suppose, energy transition wide envelope which people like to push forward.

- And in basic terms, who is the customer and what do you do for them?

- Yeah, so our customers come from two subsets. It's either someone who owns a project or a company who is looking to raise funds into that project, or company, or sell out of it, or we work for something--

- It's like a battery site, for example. You own a battery site.

- Stick it to batteries. So you are a developer, you own this battery, and you want to sell it once it reaches planning consent to someone who will then come in and fund that construction and manage it through operations. So we will represent battery developer in selling down that either partially or entirely their share capital, or we could help them bring in debt financing. So go speak to a bank, bring in some project finance to help build that out.

That's opportunity one. That's kind of the sell side, which is either early stage developments. So bringing in funding to push it through development, mid-stage development, which is kind of selling it once it's consented, or it tends to be in operations, which is called the secondary market. So Brownfield assets, a battery that's operational ready, and then moving from one owner to another owner.

- So everything from a big old field somewhere with a good connection that someone wants to put a battery on, to ready to build, to operational and end of life, you will help the transaction happen. What does it mean? You work for the seller and you go and find a lot of buyers and they have to bid on it.

- Yeah, exactly. So we'll sit down with whoever our client is and we'll run through what is the asset in question. So what is it that makes that an attractive investment proposition? Is it a particular location in the UK, which has a high level of grid constraint? B6 boundaries are big.

Talking point for lots, but there's others emerging. I think EC5 and East Anglia where you've got all this offshore wind.

- We'll come to that in a second. Yeah.

- So we'll map kind of what makes this battery asset.

What's its USP, what adds value.

And by looking at that, you can then tell what kind of investor would see additional interest in from that. Because there's people that want to buy batteries because they want to expand their battery portfolio, but there's always strategic acquisitions, and it's how does that battery itself fit into their existing portfolio. And so we'll help our client and run a sales process to find that buyer, negotiate out the terms to completion, at which point the battery asset moves from seller to buyer.

- OK, cool. So that's the first part of business. So you work on behalf of people selling projects and stuff. Find buyers and make the deal happen.

- Exactly.

- What about the other side of the business?

- The other side of the business would be working on the buyer side. So an example of this is we did a large piece of work last year with BlackRock when they went into acquire KX Power, which was at the time the rebranding of Stillwater Green Technologies, which was an operational battery platform in the UK that had the Mannington site, which was on the first [INAUDIBLE] sites in the UK, and they also had a pipeline of sites at various stages of construction at early stage. And so we worked with BlackRock to help them analyze that opportunity and push that through to completion.

- How does that work? So does BlackRock come to JLL and say, right, we want to buy some batteries, we want in on this market, can you help us find something? Or do they say, we want to acquire this little company-- quite a big company actually, wasn't it? We've noticed this thing. We'd like to go and acquire it. Can you help us evaluate?

- Yeah, it's both, actually. So sometimes it happens where an entity will come to us and be like, well, we have this idea that we want to add some flexibility to our portfolio. That's going to be battery storage.

We kind of want to go into these markets, which could be UK or Italy, and then can you help us do that. And we'll go out and we can help them find the company, the target, and run that from start to finish, cradle to grave, you might say.

In the case of BlackRock, they'd already targeted this opportunity, but what they needed was an expert advisor to come in and help them progress that work through the valuation, the DD, work out what are the risks in the investment. But equally, what are those tangible upsides that they can bring in because, at the time, this is the first time that BlackRock had invested in energy storage globally out of their renewable energy fund. So as you can imagine, there's a lot more work that should take them on that journey, and we were there to help facilitate them as being the expert financial advisor within the battery energy storage sector.

- OK, cool.

So basically either side of the deal, you make deals happen. And what proportion of the battery market do you guys cover?

There's a lot of assets changing hands at the moment. And where does JLL sit amongst other deal makers?

- Yeah.

To date, we've been quite active in the market. We saw this as a target market back in 2016-- was our first deal, right at the nascence of the market. And I think the difference is we've stayed very active and committed to it since then. We saw this was an undeniable opportunity and something that needed to be invested into. So we went through the hard times in 2019 with derating this capacity market, taking away of monthly FFR.

So we've had quite a good position for a while. So I think to date we're now on 27 deals closed since 2016, which is a good majority over others in the market. But majority of that has been a lot of project level acquisitions, that selling of projects, the RTB, but recently--

- RTB.

- RTB being ready to build. So these are those consented projects. So once it has it's--

- So it's not a battery yet.

- It's not a battery yet. It has an accepted grid offer that allows it to connect into the distribution or transmission network. It has an option to lease that's either exercise or it can be exercised, so you can use the land, and then a full planning consent to allow you to build. You have all the ingredients you need to have a project. You just haven't put the project there on the ground. You haven't signed the construction agreement.

And that's where majority of the historic transactions have been just because this is quite a nascent market. More recently we've been more involved in the sell down of assets in construction or operation just because as the market evolves and there's more projects in construction or operation, that's where the transactions move, and that's probably been the big shift that we've seen in the last 12 months where it was 100% project right sales at RTB, ready to build, and now we're starting to see the sell down of assets at a later stage, or even kind of sell down of the companies that own those assets.

- So I guess there's two things there. One of the reasons might be there's just more assets built. So, of course, you're going to be selling more operational assets because they didn't exist before. But is there a change in the market? Is there something else happening here?

- Yeah, so it's twofold. I think, actually, there isn't enough assets built to create that market yet and you get something called a scarcity effect. So there is a growing appetite, which I'll come onto in a second in terms of getting operational sites, but there just isn't enough available. So you look at who holds operational batteries in the UK.

Gresham, Gore Street, Conrad, these big battery storage platforms that their whole MO is to build up huge volumes of operational batteries and hold onto them in perpetuity. So even though there are operational batteries, there's not necessarily opportunities for buyers to come acquire them. So that increases maybe the valuation that could be achieved because supply, demand. There's not a lot of supply, but there's an increase in demand.

- So why does a buyer need to acquire batteries?

- So why would they. So it all comes down to who is the company that looks to acquire it. So if we think about various investment funds or institutional investors, so pension funds, banks, et cetera, they have something called a risk profile that they can work within. So within their funds requirements, they can only acquire certain projects or companies, depending on where they are. And so there's things called development risk, which is the risk of getting from a grass in the site to that point of it being consented, that ready to build stage.

Then there's things called construction risk, which is what is the risk of going from signing a construction contract with a EPC and then it actually gets delivered on time, on cost, with nothing going wrong.

And not everyone can take that on. And that comes into what is their cost of capital. So these larger funds and institutional investors tend to have a lower cost of capital, which means they'll take a slightly lower return on their money to limit that risk.

- It's a bit like startup funding, right? So early stage seed startups, you're not going to get big institutional investors interested because there's just too much risk that most of them fail. And then that's kind of the green field as a piece of land somewhere. Then you get to series A, and there's more people interested, and they're willing to take the construction risk on you building this company, but really it's not until you're fully operational and fully profitable and you're a machine that there's a massive amount of investors that are interested in those kind of businesses.

- Exactly. And at the point of operations, you've probably got a medium to long-term contract for the off-take. So you've secured what that looks like. Yet, all your operations, repowering strategy, that's all kind of locked in. And so at that point it's a very de-risked asset, and then that's the point when these people enter in. And so this comes to what has changed recently. Well, I think over the last 18 months, we've seen a rise in gas prices.

- We should probably timestamp this conversation. So you and I are talking on the 25th of May, 2023.

And we're about to talk about the current state of the market from JLL, who are all over this market. So this is very-- it's about now. If you're listening to this in the future, this is what it was like.

- Yes.

And so in the last 18 months, so unfortunately what's happened in Eastern Europe and Ukraine, gas prices, wholesale prices across the continent have gone haywire.

And so that's caused stay ahead and intraday power prices to rise, but also those spreads. And what's that shown is actually not in a few years, once we get more renewables penetration on the system, but today there's a really meaningful opportunity to deliver value not just in the ancillary services but also in arbitrage and balancing.

And that's been very apparent to everyone, not just those, like me and you who are involved in this sector day to day, but people on the periphery. And that's really changed what is the value for these projects but also what is the requirement and need for them going forward. We see that we need to balance our power efficiently to be able to allow customers not to have to pay extortionate energy bills and to have a resilient system.

And so that's caused a huge influx of new investors to see the sector as a requirement as part of that energy transition. Equally alongside the increase in the revenue potential, you've all seen advancements in technology. We've obviously moved from predominantly NMC to LFP, which has certain--

- The move in-- just to be-- for folks listening, this is a move in cell chemistry types from NMC to LFP, which is-- NMC is the nickel manganese cobalt.

And that's where we need a lot of cobalt from mines in Africa, and that's not so good. But really, really high energy density, very good for electric vehicles. It's still the leader, really. And then now a lot of assets are being built with LFP, which you'll have to remind me exactly how to say that.

- Lithium phosphate.

- Lithium phosphate. Lithium ion phosphate. And that is lower energy density.

Some say you can get more cycles, better thermal characteristics. We'll see what's marketing and what isn't.

- The key point there is actually fire safety, and part of it is to do with the chemistry and part of it has to do with the cooling systems. We've moved from air cooled cooling system to liquid cooled cooling systems, and all that has done is it's reduced the risk of thermal runaway, which is the point that the batteries heat up so much that they catch fire and it propagates, which was amplified by, obviously, the [INAUDIBLE] fire in Liverpool and the Tesla fire in Australia and became a huge concern for the sector.

So technological advancements have kind of de-risked what that was there. We've had introductions of international protocols in terms of how much do we space batteries apart. In our space, batteries 3 meters apart so that fire can't jump from one battery to the next. And all this has done is it's improved the technologies, advanced it, it's reduced the perceived risk alongside revenues increasing as they're made as this slightly more attractive investment piece for people coming in, which has caught the attention of a lot of these institutional investors to move in.

In parallel with that, we've seen traditional renewables and infrastructure investment returns dropping. Everyone talks about solar being a race to the lowest cost of capital before where we were a year ago. So I'm talking early 2022 when interest rates went awry, costs of capital for solar-- so the returns we were looking at was anywhere between 4% and 6%, depending which country you were in the UK.

- I can't even imagine that now.

- Is incredibly low considering that where we are today, interest rates in the UK are around about 5%. So what you are seeing is traditional--

- My student loan is 5.5%.

- There we go.

- Actually, well, that's not even bad. I'm plan one. If you're listening to this and you're on the later plans, very sorry.

- Good luck.

But as I say, so as you see, the return thresholds in other energy transition technologies have been hurt.

Meanwhile, you've got returns increasing in battery storage and the perceived technology risk coming down. Therefore, those who need to look for high single digit, double digit returns, battery storage is the be all and end all there, and it suddenly became almost somewhat sexy as an investment to put that crude word in there. And that's caused an influx of investors looking to come into the sector.

- So I'm going to say some things now which are throwaway comments on purpose. So I've heard people say there's a wall of money looking to buy battery assets, which is a bit of a silly phrase, but is that true?

- Yes, to an extent.

So it's a caveated answer.

There's a lot of money being raised that's publicly available, data.

For example, you've seen Equitix have just set up a new fund that includes battery storage of the UK Investment Bank. There's a number of others that have been set up off the back of that really dedicating energy storage. And I think there is a huge volume of people that see this as a really interesting asset class. It's relatively low risk once you get it contracted, and it can deliver quite high returns, and it will be profitable.

The caveat to that is it's not money for anything. This isn't dumb money, as you might say. This is educated [INAUDIBLE] a specific ask. And the key caveat that is projects that are either going to connect in the near term or are already connected. We obviously have a systemic problem in the UK with connection dates.

We saw a connection date comeback of 2044. I have no idea what we'll be doing there. No one knows if battery storage will be a part of the system by then. We might be at small modular nuclear reactors if you listen to the government today. So that's unpalatable, and that's the problem that we have right now. So there's not just a drought of projects that are in operation, but there's also a slight drought in projects that are tangible today.

- So there's a lot more investor appetite, or a lot bigger pool of investors and different types of investors, but they do want quality. They want quality assets that will be coming online soon that are built properly and really do make sense.

- Yes.

- So what about on the developer side? So companies or people that-- all companies are people, I guess. But people who go out and find sites and develop them and get them ready for build and then they sell them to someone else.

Another thing that is sort of being whispered in the market is this thing about developer premium. So developers are now making a-- they're charging a lot more for these sites because there's so much interest in them.

I'm interested to know what you think about that.

I got two comments. Firstly, developing sites is hard.

It's one of those things that everyone thinks is easy, and my days, it's difficult to do. It's just painful. It's like going through treacle.

There's that bit. So they should be rewarded.

Secondly, I remember from the solar days, everyone always bashes the developers.

Whatever happens, it's the developer's fault.

So they get it from both sides.

Are they charging too much in their premiums, or are they charging an appropriate amount?

Is our expectations too high because of what happened in dynamic containment being really high priced such a long time? What's the state of developers?

- There's two points to that. One, I suppose, is a misconception there in terms of what is paid for in a transaction.

It's not like you go into next and you want to buy some jeans and they are charging you 25.99 pounds for those jeans.

The seller doesn't really define the price. The seller defines the metrics that are there and then the buyer will run a valuation on that.

So, actually, it's defined, well, what is the buyer willing to pay? It's more of a Far East Asian haggle on the markets that you might have done in a gap year or something, rather than going into a store and them defining what the purchase price is. So, actually, the question is, are buyers trying to pay too much, willing to pay too much? So what is driving that?

Well, two things drove those rise. One was obviously the power prices went up, so the outlook on forecast did increase over the last 18 months until recently, and the second thing was--

- No comment.

- Over time, there was a compression in discount rates. So what people did historically need, because it was more of a risky asset, they've then lowered those return expectations.

- Compression and discount rates. What does that mean in English?

- What does it mean in English. So we talked about what is the return for these investors. I'm going to pick a normal number. This is not me saying what it is.

It's to say historically someone needed a 12% return because this was that level of risk for an asset. As the technology improves--

- So over 15 years, they're going to make 12%--

- On your money.

- On your money.

- And so historically-- say that was 12% because the technology was quite risky and new. We didn't know how that would work, and it was hard to see, actually, [INAUDIBLE] vibe on the market today or were you baking something in the future. That all improved. There was a lot of advancement. It was de-risked.

And then maybe instead of wanting a 12% return, you wanted a 10% return. And so because you need a low return on your money, you can then pay more for the asset because you need to take less out of the operational cash flows. So that along with an increase in the outlook in revenue, the power prices, increase the valuations, and that took us to just before October, 2022, where we probably had the peak in market valuations.

Revenues are looking great. DC is looking phenomenal. There's even an arbitrage play, a few of the assets are trading in the balancing market.

And this is a really exciting time for battery storage.

People are dropping their return thresholds because it looks like a nicer asset.

And then we hit our first hurdle. Interest rates.

So interest rates have risen steadily over the last-- what are we now, 9, 10 months?

Since Trussonomics. What that basically means is the risk-free rate, so the rate that the Bank of England will give if you buy a bond, has increased. And so any return you make in investment needs to be relative to that risk-free rate.

So if the risk-free rate is 2% and you're making 10%, effectively you're getting an 8% premium on what is a notional investment. And because that risk-free rate went up, that then meant people had to then potentially return slightly more to account for that because they need to go back to their shareholders and say, well, we've achieved X percent above the risk-free rate. It's all kind of relative.

- So if you get a 5% pay rise, but inflation is 10%, you're still out of pocket.

- Exactly, 5%. And that's the same for these funds and financial investors. So that is one thing that has impacted valuations. The second is, again, as we're all aware, gas prices since January '23 have somewhat collapsed on themselves.

- Man, I think it's $31 this morning. This market is incredible.

- And we're seeing negative pricing across the continent, which is pretty new for some countries, maybe not for the UK in certain assessments periods.

- It's not even summer yet.

- I know, exactly. Although, we are seeing--

- Actually, it's quite warm today.

- --the Middle East talking about there might be a tightening in oil prices, which will feed through, but we're definitely beyond the high days of last summer.

And weather is getting better, so might not come through. But what that has meant is what we thought was maybe going to be a two-year period of very elevated power prices has fallen away. So when people are looking forward, well, what is the revenue I can achieve? That's kind of fallen somewhat.

But really only for those next kind of two or three years, long-term, that is going to be driven by kind of penetration of renewables, increasing kind of vol in the system. There's a mismatch between supply and demand, long-term, but there was almost a short-term period that's fallen away because it was really derived on the gas prices.

- So I think I understand two things you said there, which is, one, this concept that developers are making a killing because developers are charging too much isn't the case. Developers are saying, here's some sites, do you want to buy them? And the world is bidding on them and it's pushing the price up. Secondly to that, at the end of last year, we saw sites were the most expensive they'd been. But it started to come off now because the world has changed around us.

- Exactly. There's a different environment. And when you're valuing a site, what you're looking at is you're looking forward into the future. So once I build this, how will it operate. And you assess what is the value of those cash flows that you have today, because those cash flows are slightly lower, that impacts. And because maybe you need a slightly higher return on those cash flow, that impacts it.

- So how much is it to develop sites? Is it 10 grand a megawatt, 50 grand a megawatt, 100 grand a megawatt, 150 grand a megawatt?

- That is the magic question. There's a lot of things that feed into that.

- Roughly, though.

- It could be anywhere between nothing because you have very high grid cost to all the way up to north of 100K a megawatt because you have a very attractive site, low grid connection, right place in the country. There's a lot of things that feed into it. A lot of it is grid connection, debt and costs because it's quite a binary impact.

And the other point there is what is the buyer's procurement power?

Why does procurement power matter? What does that mean?

At the end of the day, the person who buys the project rights are going to have to build it. They're going to have to BYD, CATL, Fluence, to name a few, get a battery from them, and put it on site. And the cost of doing that is going to impact the value of that project itself.

- Yeah, so if you're Gresham House and you build a load of sites all the time--

- And you have a framework agreement with CATL--

- And all the big suppliers want to supply it to you and they've got they've got slots in the factory for you to come buy more batteries, you're in a different position to a few folks who have just pulled together a limited company and want to go build a battery.

- Exactly. But at the same time, but you might also have a strategic investor who maybe they had an agreement with an EPC and that project has been delayed. So therefore they don't need to draw that down in that time period so they can reallocate that supply, and that's when you get those strategic buyers that maybe pushes them beyond where a normal investor would look, and that's when you get those super high valuations, which developers love to see.

And why did I mention that again is I said a lot of negative news for battery storage there in terms of interest rates and power prices. The good news is for the first time in about 2 and 1/2 years, we're starting to see construction costs come down, which is great news. You just look at what is the commodity price for lithium carbonate since January.

After doing-- what was it, 3,000%, or 3,000 times increase over the last two years? It's starting to fall.

- It was just like the everything bubble for a bit.

- It was the everything bubble. And that dropped down very aggressively in Q1. We didn't see that translate through because, obviously, EPCs are very fast to raise their prices and slow to drop them, but rightly so because they take a lot of risk when they sign a contract, they fix a price.

But we're now starting to see the cost of batteries, the cost of freight, the cost of shipping. It's all starting to come down.

So that's almost leveling off that negative news I gave. So where are we? We're probably at a very similar place to where we were at the end of last year, but a lot of those drivers have moved substantially. And it just shows it's a very dynamic market.

- So I have this opinion.

No one ever asked me my opinion on this podcast, but I'm going to give it now.

My contrarian view would be that the market still hasn't got to grips with the true value of grid connections. And I think, really, there is such scarcity-- I don't want to call myself an expert because that's always a dangerous thing to do. But as an electrical engineer who understands the fundamentals of this electricity system and transmission networks, I believe, the future of connections and the physical constraints on the network are much harder to shift.

It's not necessarily bureaucracy and paperwork. This is real physical metal.

And so I think there is a world where what we would call crazy prices for developed sites is actually the real value of these grid connections because they are so, so scarce going forward. And I can't see, apart from if we do some clever optimization or government suddenly becomes really good at doing these kind of things, which governments aren't, really.

I can't see a world where we sort that out quickly.

It's depressing, right? Because that means that net zero takes longer. But I think these grid connections really are magic bits of paper.

- Yes. And actually, more so than you probably think. We always talk about with people coming to market, what is the point of value crystallization? What does that mean?

When is actual value created in the development process? You're right. It's the point of grid, but it's the point of having a firm grid offer. So if that's transmission, it's the point of them giving you the offer because they will tell you, you have this amount of tech and it will connect at this point and that is firm.

Or if you're a distribution connected offer, you probably have to go through something called statement of works where the DNO will speak to the transmission operator and they will confirm that capacities there.

- I'm getting PTSD from hearing those words.

- Exactly. That could be nine months down the line, and that's when your 2044 connection comes out. And so the point at which you get that all OK from the DNO and the TSO that the capacity is there and you can connect here for this cost, that's the point of value crystallization because planning risk is not benign. We're starting to see battery projects getting declined for various reasons, but it is significantly lower risk when you think of solar, and it's a completely different ballpark compared to wind. So you can take a view on that, and as long as you've done the right precautions, there's a good way to get through that.

- So yeah, you're close to the market. So does that mean that batteries are-- So you said batteries are starting to get declines from local authorities on planning. Is that a change?

- I think it's more of a fact that there's more batteries going into the planning system. So eventually you're going to hit a difficult planner, and it's things like-- potentially things like noise because you might be close to residential dwelling and that could then impact it, but the main one tends to be from things like being built on a [? Greenbelt ?] because that is a gray area, which I'm not going to claim I'm a planning expert on, but not all things can be built in a [?

Greenbelt, ?] and it's maybe a bit ambiguous if batteries can be built there. We've seen them go to [? secondary ?]

state and kind of win that through on national appeal, but that is a bit of a gray area.

- A pretty inoffensive thing.

- It's a pretty inoffensive thing. And it tends to be built right next to a substation, which is somewhat a larger project itself depending on where you are. But let's just say planning which is relatively benign.

At the point of having grid, you tend to have your land. So that is where you have this value crystallization. Does it get valued like that today? No.

There's actually another point that feeds into that, and I think there's a massive concern-- not a massive. A massive thing that gets addressed when you're looking at investment, and it is kind of, well, what is market obsolescence? So what does that mean? Well, what happens if the battery market completely fails to be a thing and it isn't really needed anymore? What's your kind of downside protection here?

Well, it is the great connection because when you sign up and you get your grid connection you have those rights in perpetuity forever. Your transformer is probably 50 to 60 year operational life. It might not be a lithium ion battery. It might be sodium ion, but there will be some form of flexible technology there, and you just have a plot of a couple of acres that you can build on. And we already said planning is probably not a problem.

- I think we should-- I completely agree with you. We've got all this-- is a bit of a controversial thing to say as well, but we've got all these diesel peakers out there that are never running. They've got capacity market contracts. They're set on incredible grid connections, and they're never running.

I understand why, because they've got 15 year capacity market contracts and they make good money, but there is serious wastage of grid connections going on out there, and that's where I would look to fix some of this.

- Look at what happened to the old Green Frog portfolio. Obviously IMCO came in, acquired the remnants of that, and then our repurposing on a load of those diesel sites to then be batteries. Great idea.

- Good for them.

- Exactly. Instant access to the grid.

The plots are similar sizes as well. And so they kind of needed to--

- The neighbors prefer you, I imagine.

- Exactly. I think going from-- We saw, actually-- so the end of gas peakers. So gas peakers was a huge wave up until 2019 when capacity markets got derated, but think of that CM16 contract. It was hugely valuable, and there was a huge wave of gas peakers built out in the system. A bit controversial because it's really a transition--

- Is that the 22 pound 50 year?

- Yeah.

Pretty high before that.

But what we had is there was a lot of-- that market collapsed on itself because of a number of factors. The capacity market fell away, carbon pricing went up, et cetera. And what you had was a lot of stranded gas peaking sites then became battery storage sites. And there's a number of developers who have built a very large business of repurposing them. And that just goes to show is the value in a grid connection is inherent.

- Yeah. If you can get the DNO to allow you to convert.

- Exactly.

- Which is another game. But I guess if you're used to speaking to the DNOs to converting those things, you're probably a pretty good lit. But even the operational sites. I mean, there are operational sites out there with diesel units on it that never run.

- Yeah, but the problem you have is not just diesel, but if you have gas peakers as well, they probably had a phenomenal winter where gas prices were.

And so for those that are operating, they're having a great time. I doubt very many more will be built out. But eventually there'll be a come up where those will be phased out and they will be turned into maybe battery storage.

Maybe it's further in the future and we're doing hydrogen peakers. That's a completely different conversation.

But they will be transitioned into something else, and there is a value in these grid connections. There's only a value if you maybe get enough land. So there is always-- if I'm a developer out there, try to get as much land as you can because it gives you that flexibility to move with the market.

- So do people generally-- So you say people lease the land. What proportion of sites own land versus lease it?

- Very small proportion. It is an increasing commonality-- probably not the right word-- going forward. It tends to happen in areas where land is cheaper. So Scotland, for example, the cost of land is much cheaper than if you're looking at East Anglia or South of London. So actually, market rates for battery leases don't vary that much depending where you are. There's a slight variation, but it tends to be a going rate. So it's actually cost effective to just acquire the land in some locations.

- And what are these? A couple of grand a megawatt, something like that, isn't it?

- Yeah, it's anywhere between 1 and 1/2 and 2 grand a megawatt per year, index, et cetera. And that goes on for-- a typical lease would be a base of 20 to 25 years with kind of options to extend that out to kind of 35, 40, 45 years. And we think about those various repowering so you can have a longer project, whether that is lithium ion, that is sodium ion, or that's another technology. You're kind of getting that ability to repurpose in future.

- It's pretty sweet if you're a farmer and you own this land, right?

- Oh, it's great.

- So you're a farmer-- what's the Jeremy Clarkson thing, right? Somehow is back in my good books. I like him again.

- That's your contrarian comment.

- Maybe that's my contrarian comment. I don't know. I'm a big Top Gear fan as well, but old Top Gear. Back before the silliness. But so if you're a farmer and you've got the choice between getting up at 4 o'clock in the morning and working just literally all day, every day, slaving away, and then you have a really dry summer and it's game over. Or you get 100 megawatts of batteries on your land and you make a couple of hundred grand a year in rent. It's pretty good.

- It's pretty good. If you give away 4, 6 acres. You somehow have a land under a pylon that has capacity that can be tapped into, maybe it's usually a plot of land that's probably not the best agricultural as well, that's great. And actually, landlords love it. This is a very unintrusive technology, and this maybe comes back to kind of the JLL side of the business. We're very involved in property.

We're very involved in land, and we get a lot of inundated requests from various landlords and farmers, whether that's industrial landlords or that's agricultural, saying we've got a plot of land, it's near a pylon, we've heard this thing about batteries, can we do it? And so we actually have a sister team within our business. It's a planning and development advisory team. And so they are specialists in putting assets through planning, they work with the likes of SSC and TagEnergy in terms of consenting their projects, but they also help in kind of development advisory.

And they get loads of requests from these landlords. And lots of the time, there's not capacity on those pylons, but it's almost the same or there's probably too many landlords that would like to do this because this is an easy way for them to make money. Relatively unobtrusive, and it could be saving to a farm that's going through struggling.

The removal of EU subsidies has been quite a tough time for a lot. I actually finished the Clarkson's Farm season two last night as well. So yeah, I can see where that point comes from, but it's a good deal for the landlords.

- And so I want to ask you about some of the recent deals you've worked on because you've been involved in some of the big ones, right?

- Yeah.

- I don't know which ones you're allowed to talk about, but can you talk about the ones that you are allowed to talk about, please?

- That's a very broad question. I think the interesting recent deals we've been involved in is-- last year we did a number of transactions where we advised in the sale of some projects to AMP Energy, who were talking about earlier. Some very large, 400 megawatt, 800 megawatt hour batteries. And why is that interesting?

Well, historically, everything we dealt with was between 20 and 49.9 megawatts. And then as of two years ago when they removed the planning limitation, batteries got bigger, and then they got very bigger quick, and suddenly we had these mega batteries.

What was interesting there was seeing an investor coming in, seeing the value of large scale battery, but it wasn't just that. It was seeing the value of large scale battery in specific locations. This portfolio is located round about the central belt of Scotland.

So we said we'd speak about this later, the B6 boundary. Obviously trying to look as a turn down measure in terms of generation around about the Central Belt in Scotland because of excess wind generation, whether that's--

- So let's talk about-- so what's a boundary?

- Boundary. So National Grid, ESO, divide the transmission network into certain areas so they can say what is happening in various places, and those are their transmission boundaries. And so the B6 is effectively--

- But they've all got numbers and letters.

- They've all got numbers. So there's like a 6A, 6B, et cetera.

B6 is just the border between Scotland and England, and all that is talking about is there is a very large amount of on and offshore wind being built at the moment in Scotland, which is high power generation during windy times, then traveling through to transmission corridors, two key transmission lines, into England. And that often could then increase the load that can actually be carried by those transmission lines. So today, what do we do? National Grid--

- So it's too much power from Scotland to England through these two transmission corridors, which are big 400 keV super grid overhead lines.

- Exactly.

- And sometimes there's nowhere else to put that power.

- And it's like you can just think of a funnel. You can pour lots of water into a funnel, but if you pour too much, it can only take a certain capacity and it spills over. You need to take some of that water out so that it can flow through properly.

And today that's done through wind curtailment. You'll see there's a very popular news article at the moment.

600 pounds million pounds spent a year on curtailing wind farms, and all that means is National Grid signals to a wind farm, stall your wind turbines, stop turning, so we don't produce too much energy and trip out the system.

- So we switch wind off in Scotland. Stop wind generating in Scotland because of this boundary constraint.

- Exactly.

That's a terrible headline.

It's not good for renewable energy. It's not good for anyone. It's good for the wind farms because they're getting paid quite nicely for it to not do anything, but it's not really good--

- It's not their fault.

- It's not their fault. It's an energy system that has not been designed to transport power or shift it, and that's that kind of mismatch of supply and demand. Because if this was 5:00 to 7:00 in the evening in Scotland, there'd be enough residual demand in Scotland to take a lot of that power off the system. And so battery storage is a great way to address that. We can build some very large assets around Scotland. They can charge up during those windy periods, reduce the power flow through the B6 boundary, and then discharge later when we actually need it.

So instead of that power being wasted and it being a bad headline in the daily mail, actually, we're reutilizing that power another time for useful. And that's a value add to these batteries because likelihood they'll probably be paid to do that. So there was obviously a year and a half ago all these different pathfinders released by National Grid, which were effectively auctions set up to see can we try to do things differently, is there different ways of paying for services that would allow us to facilitate things? And then if they work, they'll implement them much larger.

And one of those was the constraint margin pathfinder. This was National Grid ESO looking at, well, this curtailing windfarms isn't great. It's cost a lot of money and it's really bad press and it's wasting energy. Can we do something different? And so what they did was, well, what if we turn up demand in a certain area?

And that's basically looking at batteries or large industrial users to kind of match that in terms of a different way, and you look at that, and there was a number of batteries that were not-- I think, Zenobe's, is it the Wishaw site? 50 megawatt. It won a contract in that, and that's now going to be operating in that to charge at periods when there's excess generation.

- But so the point you're making is there are certain parts of the network which there is perceived value for assets more than other parts, and it depends how you cut it. So I'm not-- I actually struggle with some of the assumptions that are made. I see lots of development sites, decks, from people send them to me and say, what do you think or whatever? And I generally don't really say what I think, so stay out of that stuff. But I do struggle with some of the sales and marketing around locational benefits of assets.

- Yeah, it's a hard one, and I hope this is not a dig at me because I know you've looked at some of the things we've done.

- No, no.

- But I think it's hard. So I think today there is a signal for it, whether that is getting the Pathfinder contract or system actions in the BMs. There's already some form of locational balancing signal in the BM. It's not as profound as it should be, but it is enacted on.

So no doubt balancing market is not equal in every location.

It's not as location as it should be.

But then there's [? Remer, ?] which is looking to kind of redesign our whole energy system. And part of that might be, do we want more granular locational pricing signals? Do we want to move from a UK wide wholesale price to a zonal price?

So you think South of Scotland is one price, North of Scotland is another, or do we look at nodal? So this node on the transmission grid, this substation has a set price of electricity. And if that comes through, suddenly all this locational malarkey becomes very profound and, actually, very transparent as well.

- There's something-- I think it was Joe Latimer from Shell or someone who said that I thought it was a very clever thing to say the other day, and I remembered it. Was that we already have a nodal system-- nodal pricing in the UK, just there's two nodes. There's Scotland and then there's South of Scotland. I thought that was a very concise way to describe the current situation.

But I understand that there's lots of folks who are selling sites who need to-- the last thing-- it's not a commoditized play. There are benefits of different things in different places. I get that. But I do struggle with some of the marketing. But that's certainly not JLL.

I'm saying that in general. I think some of the stuff can be taken with a pinch of salt.

- Yeah, and I don't think, to be honest, no one applies as-- there is an uplift today, but it's not a material uplift. But I think when we think about it, as we talked about what are those risks that investors have to challenge, and one of the biggest risks at the moment is what is going to be the impact of [? Remer. ?] We'll know in October this year the more likely minded to position, but if it does go to nodal, I want to make sure that I'm located in a node that makes sense.

And so you guys are obviously looking and expanding globally. Texas, huge market at the moment, nodal market. This presence in terms of what that looks like. Zonal, well, they have zone on Italy.

They have zone on the Nordics. These aren't new things to the power system. They're just new for the UK. And so you can draw parallels from those markets like, well, what is a good location?

- But I 100% agree. And there are certain boundaries where clearly you get more system actions in the BM and all that stuff. I get it. And one of the things I saw recently was there was a deck and someone had taken [?

Piccolo ?] figures. So it was an extra high voltage connection, ENO connection, for a site. I think it was like 50 megawatts, something like that, battery site.

It's a decent size.

And they said the location is fantastic because [? Piccolo ?] have had a local energy market thing here and someone made some money. It's like, dude, that's like a 6 KeV transformer somewhere on the distribution network. That's not going to impact this [INAUDIBLE] connection.

- I think we're talking about different things here. Obviously, the DSO flex market is great. Those contracts are very small and they're not really focused at large scale batteries. What we're looking at here is managing transmission constraints. So these are things because of-- is there an onshore substation for a very large wind farm that is going to have huge swings in power that needs to be dealt with?

Are you locating very close to a high demand area that might need locational balancing? We're looking at big swings of power here across boundaries. We're not looking at Southwest Devon and there's a slight swing and you need two demands of turn down at 5:00 to 7:00 PM four days a year. I think that's maybe different, but we're talking about these big kind of--

- I 100% agree. I just think there's a of naughtiness going on at the moment.

And I'm certainly not going to police it. I don't know. I'm not an expert in this, but there is quite a bit of naughtiness going around. Now, I want to get to the fun part.

So two things, is there anything you want to plug? So anything that you guys are working on that you think the world needs to know about.

And then the second question is, what is your contrarian view? But let's do the plug first.

- Shamelessly, I don't really have anything to plug. I think the overarching message is kind of the battery market is still open despite the falling energy prices, the rises in interest rates that are coming through. There's still a very liquid market there because there's a huge demand for this product in the UK, especially, but also across the continent, and that's the really exciting thing that we see is these deals popping up, and Italy's a really interesting market.

So Poland, because you look at it as a country that's going from 13% renewables to 70% renewables in 10 years.

They'll never get it. It's crazy.

But that's a huge opportunity for flex. So nothing really to plug, but just to say the market is still there, it's still very buoyant, and there's a lot of growth that's still there.

What is my contrarian view? I suppose bigger is not always necessarily better, which is maybe a slight caveat to what I was saying earlier about these big batteries because you get 400 megawatt batteries, but then you see those things in the planning system, 1.5 gigawatts.

- They're very attention grabbing, aren't they?

- Very attention grabbing. That's a huge bit of electrical construction, and there's a lot of complexities around that. Are you going to treat that as 1 unit? Are you going to treat that as 10 units? Are you going to have a floor in half of it, a profit share in the other?

How you actually going to be able to get that-- How are you going to get that many batteries delivered on site? Can you actually swing 1.5 gigawatts, totaling 3 gigawatts, from 0 to 100 at one go? And I think there's some complications there.

- Well, yeah, I imagine so. 1 and 1/2 gigawatts. So Hinkley Point sees 3.2 gigawatts, right?

- Yeah.

- So if you're looking at that from a grid perspective, you can go from positive of 1 and 1/2 gigawatts to negative 1 and 1/2 gigawatts.

- 3 gigawatts swing.

- So it's like 3 gigawatts of swing, and you're going to do it, what? In less than a second? It's like switching Hinkley Point C off.

- Exactly. It's like tripping the system. It almost feels like a couple of years ago when that offshore wind farm tripped and there was all these--

- And everyone was stuck on the underground somewhere.

- Exactly.

- Someone got the blame for that in the end, didn't they?

- Did they actually?

- I think the finger was pointed.

- That's brutal.

That's brutal.

And so I think size is great. It gives scale advantages and procurement. I think it really helps if you're trying to alleviate that congestion and transmission system, but there's a point at which maybe it's too big.

And so that's just a cautious kind of view. But everyone is that kind of American style, bigger, badder, bigger, better. Maybe not always better, that's the caveat.

- All right. Well, you heard it here first. Bigger is not always better. And we're going to leave it there.

I want to say massive thank you for coming on the podcast. If you're listening to this, we do say it because it does make a difference. So please do hit like, subscribe, and any of the nice buttons on your app. It makes our world much, much better.

And we can carry on doing this kind of content for you. Thanks a lot.

- Cheers.

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