14 - Investing in a green future with Ben Guest (Managing Director & Lead Fund Manager @ Gresham House New Energy)

[MUSIC PLAYING]

Cool. So here we are. I'm here with Ben, Ben Guest. We're in Gresham House's headquarters, your new headquarters, actually. You've been here for a year or so, something like that?

Not even, about six months.

And we are here--

thanks for coming on because I know

Thank you very much for having me.

Lots of people want it. And we are so pleased to have you on the podcast to talk about everything to do with batteries and Gresham House's journey and what next, really.

So Ben Guest, how is Ben Guest here as the energy storage fund guy?

What happened before this? And yeah, who are you?

OK, good question.

Big question.

Good question, Quentin.

I'm just giving you a full background so that people know.

I've been in the fund management industry since 1994, graduated as an engineer, and then joined Lazard Asset Management. At the time, it was called Lazard Investors. And it's a well-known fund manager in the city, actually overall merchant bank, as it was called in those days, a less-well-used term these days.

And I became a junior fund manager and junior analyst focusing on all sorts of different areas. But leveraged early on my knowledge of technology, being a recently graduated engineer and someone who studied electronics at A-level and various other things.

Back in the analog days.

Back in the early days of digital.

Yeah.

Not that old.

[LAUGHING]

I was just going to throw one out there, see if you'd catch it. Yeah.

The early days of digital, early days of fiber, early days of semiconductor--

well, relatively early days of semiconductors and microprocessors and so on and, dare I say, mobile phones and other things as well. Yeah. Emails were a new thing when I was working.

So I started there. And I learned my trade and fund management in what was, in those days and even today, I think, known as a value investing outfit and learned an awful lot about that. I focus on areas like TMT, Tech Media Telecom, as they became relevant areas towards the end of the '90s and early noughties. And then tried my hand at hedge fund management and did that within Lazard and then within another company that emerged from people who came from Lazard in 2003 and did that for three or four years.

So you run your own fund, hedge fund?

Absolutely, absolutely.

Oh, Wow.

Yeah. So I ran Europe's largest long-short tech fund. It was a billion dollars its peak. And then decided to wind all that up and pack it all in and set up my own business called Hazel Capital.

For a low-stress life instead, of course.

For a low-stress life, yeah, just before the financial crisis hit as well in 2008, which was very low stress, and found my way. And decided to make it an entirely, if I can use the expression, green or clean tech, popular expression in the day, focused company. So left all the knowledge I had behind other than, obviously, being able to use it in other ways within the new area.

And then quickly realized that the most interesting area from an investability perspective and scalability perspective was infrastructure. It wasn't about the manufacturers. It wasn't about other parts of the value chain. I was most interested in the infrastructure side.

And then eventually back filled, if you want to call it that, in the development side. So initially thought, well, fund managers, equity fund managers, whether long-short or otherwise, think it's a good year if they've made anywhere, depending on their risk profile, 5% to 20%. And I was thinking, you can buy a solar farm, especially in this environment in Southern Europe, because the UK didn't have any yet.

No sunshine, I guess.

No sunshine yet. In 2008 or 2009, you could actually buy solar farms with 20% IRRs.

And I was thinking, wow, you buy it. You look after it. But you don't have to go and pick stocks every year many, many times over and make sure you get that right and manage your risk. It's there, and it's there forever.

And I was very interested in that. And it was actually new to me as an investment area. And learnt the trade by trying and by doing.

And learned all about the underlying technologies and the O&M and the challenges from a legal perspective and due diligence and everything else. And basically cut my teeth buying, initially, distressed solar farm in Spain and then went from there. And then when the market emerged in 2010 for feed-in-tariff subsidized solar projects, we got heavily involved.

It was a great time.

We went for it and raised a couple of VCTs.

This is all Hazel Capital.

This is all Hazel Capital. And built four of the first circa 5-megawatt solar projects under the initial feed-in-tariff regime, which came to an abrupt end because of the realization that the UK might be making a similar mistake to what the Spanish made in terms of allowing too many megawatts getting built under a very generous subsidy scheme.

So that was cut short.

So there was a hiatus immediately after that. I don't know if you remember that.

But we went from there and developed and all managed about 300 megawatts in the first few years of Hazel Capital. And then when the subsidies came to an end--

and at the similar time, the ability to invest through tax-efficient schemes into renewables also came to an end--

we started to pivot into new areas and looked at many areas.

But one of the areas that really took hold in around 2015 was the batteries. It was as long ago as 2015 and built initial projects with contracts in FFR, so commercial FFR as opposed to EFR, where we just saw everyone heading at that market and being overly basically competitive in the auction. So if you win at an auction, my rule of thumb is you've actually lost, not won. So it's probably not a fair comparison every time, but it's an indicator that you've obviously paid the most.

Well, yeah. I mean, we saw projects where I think EDF went down to 7 pounds for that project.

I think that was the last price in the clearing.

And we had it for our prices at like 15, 20 quid.

Well, no. In those days, the FFR prices were in the 20s.

Wow. Yeah.

And our lowest price was, I think, about 18, I think.

It's like everybody do the EFR thing. Really, the play was don't go there. Look over here instead.

Look over here.

And, of course EFR was for years.

Of course.

FFR was for two. It was still generous in those days for new projects. And we built our first 70 megawatts, and that became the seed portfolio for the Gresham House Energy Storage Fund. And of course, while we're building those, us having lots of conversations with Gresham House and coming inside to really sort of continue the story in energy storage and go from there.

So how did that work? So Gresham House existed before Hazel--

did Hazel Capital get bought by Gresham House?

Correct.

And you changed the name to Gresham House, too?

No. No.

Gresham House acquired actually the business of Hazel Capital, so it didn't buy the entity. It just bought the business--

Yeah.

--of Hazel Capital. And everyone that was within Hazel Capital also came over to Gresham House.

OK. So if I've got this right, originally an engineer. Were you a chemical engineer?

No.

No?

Mechanical.

Mechanical. But also did lots of electronics stuff as well?

Yeah. Some.

Moved into investing. Hedge fund manager for a while.

That would have been crazy.

Yeah.

And then left all that behind and started a brand new thing, getting into solar. Solar, here's our capital. Moved really, really fast and then got into batteries.

Correct.

Pretty much 2015, which was early back then--

Yeah, very early.

--looking that far at other things.

Yeah.

OK.

And so you were doing this for a long time, and you've been in batteries for a long time. I want to talk about batteries specifically, and it's almost a silly question because it's so big. But what have been the big learnings along the way? I mean, would you say that the market is mature now?

Is this a mature technology? Is this a mature investment class? Are we there yet? And along the way, what do we have to do to get there?

So is it mature? In some ways, it's mature in that I think it's fully investable. You've got technologies that are available, that are reliable, that mean that you can put them in the ground. The business model is visible, clear, likely to keep developing favorably. So I think that makes it very, very investable and, therefore, sufficiently mature as a sector to grow. In terms of maturity, from where will we end up versus where we are now, I think we'll look at our earlier plants in 5 or 10 years' time and go, well, they still work.

They're still generating good returns.

But isn't it funny how we used to do things that way or that way?

Easy examples are the fact that our first batteries weren't containerized by the manufacturer of those battery cells, so it was done by the EPC contractor. So they did a very good job, but there are very much shipping containers that have been containerized, in which the batteries have been containerized. Well, now, everything is made for purpose.

Yeah.

And that's extracting cost. And I think there'll be a cost curve, especially on the system side, that will be pretty significant.

And so there'll be standardization, more standardization. But other areas where there's maturity, when we first got involved, one of the partners we were working with actually wrote the control system, developed the APIs for the interfaces with the batteries for the first time. All of these are now readily provided by the optimizers and/or other companies that specifically provide, you could call, the "glue" whenever you've got a missing piece.

Yeah.

And examples of that would be the funds that we've subsequently raised were used to acquire some EFR projects. Those EFR projects were also the early projects, commissioned in 2018. So some of those have got relatively rudimentary control systems, layering on software onto that provided by third parties. That just speaks to the maturity, the fact that that's even possible.

Yeah.

Yeah. It's definitely moved on a lot.

Interfaces on interfaces there.

It is interfaces on interfaces, so it works well. It's just more counterparties you have to deal with. Yeah.

Actually, let's put some numbers around it. Because some of the folks who are listening, I'd imagine Gresham House doesn't really need much introduction, but let's do it anyway.

Sure.

So how big is the portfolio now? How big are we talking?

Sure. So the portfolio is 425 megawatts of operational assets. We've got 415 megawatts of assets in construction.

We've got a portfolio that we've announced, which, if you include the operational portfolio, the in-construction portfolio, and the remainder of the pipeline, it totals 1.557 megawatts.

Wow.

Gigawatts, sorry.

As much as you got built now, you've got under construction already.

Pretty much.

So it's things going in the ground.

Yeah.

And then on top of that, you've got another sort of 60%, 70% as well on top of. My math isn't great.

Yeah. Yeah. But almost the same again.

What's the end game? How big does Gresham House go with this?

That's a really good question. I mean, it depends what time horizon you take.

Is there ever an end point for a company?

Probably not. It's a continuum. But if you were to sort of--

Actually, if you ask me the question about Modo, I'd probably just freak out. Yeah.

Oh, I see.

I don't know. There is no end.

You're right.

Exactly.

What's sort of really clear is and if you sort of take a global perspective or a very macro perspective, you realize that the energy market is colossal, which is why I got into this. Sort of just to give you a little bit of background. When I was in TMT and in tech in particular, my expertise was in understanding cost curves and in the development of industries and just how quickly they developed.

It'd sort of take decades for TVs to penetrate the entire population. It took a decade for mobile phones to penetrate the global population, pretty much.

So just how different it was. And then I thought, well, where is the next big S curve from a career perspective that I can also add value in?

And what do I also care about? Which is the green agenda. And I was just amazed by how big the energy market is compared to the tech sector, for example.

And if you think that the entire energy market is historically subdivided into oil consumption, gas consumption, and electricity consumption and all of that is now going to become electricity and all of that is generated by renewables and then it dawns on you that you need batteries sitting alongside all of those renewables, you realize that, while the renewable sector is absolutely colossal or will be, it's very big already but it will be absolutely colossal, the same goes for energy storage.

And then you realize just how big a thing we have embarked on. And I was running some numbers the other day. In the US, the penetration of renewables is really under 20% if you think of wind and solar. And that will obviously go to 100%, but then you're talking about overall electricity consumption probably going up 3 times.

Yeah. It makes my brain hurt.

Yes.

Electrification of everything. And then I believe--

I know some people don't agree with this. But energy consumption is a key driver of general opportunity and bringing up the whole world to a standard of living that is necessary. I don't think we can do it without increasing consumption. So you've got those two things, electrification of everything plus that, and you've got a market which most people would kill to be involved in.

Well, they're welcome to join.

Yeah.

[LAUGHING]

So I guess also part of the story is so you guys have got a gigawatt, two gigawatts in a couple of years. That's the kind of numbers we're talking about, but that might end up being a drop in the ocean in 15, 20 years' time.

Yes.

So maybe you have to go even faster and even bigger. I don't know.

I don't know about faster. Certainly, we're growing fast enough.

Yeah.

We're very busy.

But bigger, for sure. I mean, it's my view that being gigawatt-scale will not make you a large player in the electricity market longer-term. It'll be multi-gigawatt, maybe deca-gigawatt. That will be a player that is significant. Because if we can be a gigawatt-plus in the UK, which represents about 1% of the global electricity market, it gives you an idea of just how big the global electricity market is.

Yeah.

So it just happens to be that the UK has been forward-thinking for a bunch of reasons. Ofgem Base National Grid, the investor set, everybody, so the events could come together to result in a sort of early emerging battery sector.

So I've got to ask you. So you're the fund manager. Right?

Yeah.

So excuse my ignorance, but part of your job as a fund manager is fundraising. Right? And so if you've been doing this for a long time, you would have seen how the narrative or the story has changed over time with raising capital and getting investors comfortable with these kind of assets. So I wonder whether you'd just comment on that.

Where are we now, and how far have we come?

And are investors now comfortable with this thing?

It seems so normal to us now, because we're in it every day. But there's lots of folks out there who still they hear about it for the first time and it sounds like space-age stuff. So how does that work, and what are you seeing?

It's a really good question.

First of all, our narrative in terms of what we tell investors has not changed.

We've consistently talked to the thesis that this is all about the intermittency of renewables, that batteries enable a cost-effective transition by avoiding curtailments, and the need to fill in troughs in supply with gas or something else. And therefore, it makes it cost-effective from a CO2 budget perspective and a cost perspective.

Generally, you're saving electricity. And that has been the mainstay for what we say. That is the reason you build these batteries. Everything else is ancillary, literally.

And a nice business to be in if you can make money out of it and use your batteries more gently, as we have over the last few years. But that is our core thesis. Of course, lots of investors are still becoming familiar with this and still have elementary questions, which are completely fair, around, is there a risk of obsolescence?

What's the risk around competition? Are you going to arbitrage your returns away?

And the answer to that is yes, but it's going to take about three decades and not to zero.

And other questions around just, what is the business model? What is trading? How does it work? How are power prices set? In some cases, it's difficult to know what questions to ask if you don't the electricity market, because it's so familiar to us.

But it's not an industry which lends itself to outside-in learning, because we almost have to know where to look. It's very hard to find decent primers and so on. It's getting probably better.

National Grid is getting increasingly transparent with useful web pages and the like, and you can learn from others as well. But it is a relatively challenging industry to get to know. And if you don't understand the principles of electricity on top of that or the wholesale market mechanism or how the networks are set up, it's probably a challenge. If you come from a background of something tangential, whether it's infrastructure or something else, you probably have a head start.

Yeah, it's definitely challenging in that sense for our investor or prospective investor base.

But one of the key messages we share is that, especially one of the things that has really challenged investors, is the fact that it's a merchant business model, so the fact that we don't fully contract our revenues in a space where fully-contracted revenues are attractive. And you can contract them, as you know. Certainly, in terms of floor prices, but we don't see the value in that and our investors haven't expected that of us at this stage.

That's interesting.

Yeah. And equally interestingly, is nor have our lenders.

So we secured debt last year. And I had prior to that thought, well, maybe we have to start contracting some of our revenues in order to secure debt at attractive levels in terms of the total quantum but also cost of money. And that hasn't been the case.

Wow.

They got comfortable with a sufficiently low--

and the levels we wanted, 25%, 30% leverage, which increases returns. But we're securing 3%, 3.5% money. That is exciting because it means that the industry has moved on.

That is so contrary to, I think, conventional thinking about this, which is that the reason why you have a floor price is because institutional investors and debt need floor prices. Because otherwise, they can't get comfortable because this thing is so new and blah, blah. And so what you're saying is that's not the case. Maybe that's because it's Gresham House. Right?

I think there's a case for that.

Our debt facility is what's called a "CapEx facility," so we draw it down as new investments come through. It's not leveraging the existing portfolio. But the existing portfolio there has a strong cash flow, which can service the debt as it comes through. So it provides an extra protection for the lender. If you look at the rates that we're talking about, they're certainly a premium to what solar and wind projects get debt at.

But given the higher returns, the servicing of that debt is covered by or largely covered by our CM contracts, for example. And so there's really strong coverage and security there, so it's worked out very well that there is good coverage at sensible levels of debt that haven't spooked investors into the idea. That we have a portfolio has obviously helped. Yeah.

Can I ask you on that?

So I would have thought that a floor price would be really attractive to you, Ben Guest at Gresham House.

And it sounds like, from you speaking, it's not. Or the way that they're currently offered isn't. Is that because you have to pay a premium for them or because the numbers are too low and you are far more bullish on energy storage, as I am, than many of the floor prices offer? How are you thinking about it?

Yeah. Ultimately, it's what you put in your financial model if you have a floor price contract and what do you put in your model if you've got merchant contracts.

And they're very different numbers, so I'll go with the merchant contract. Thanks very much. And it is the confidence in understanding the market and that goes to one of the key messages we share with our shareholders, which is this is a fundamentally profitable business model.

So when you use the word "trading" to people in the finance industry, they might think short-term trading, derivatives, speculation, potential for loss on a daily basis. It's not that. It's not any of that. You are dealing with a positive spread that exists as a function of supply-demand imbalances that nothing else can store or capture. And so we capture those spreads. Our investors and lenders have all understood that and, therefore, it's about a positive return.

And where that positive return lands, that's the uncertainty. But that's not such a bad thing. At least, our investors got comfortable that it's not such a bad thing to have that variability given that the starting point is substantially positive. And so if you're looking at a starting return where even the lower end of a likely outcome is probably better than you'd get on a renewables project, it's not a bad investment.

Yeah.

Surely, question mark.

It's like if you're an investor and you're going to invest in Gresham House or a fund or you're going to buy battery assets or a bit of one, you've got to wrap your head around the whole macro picture anyway. So you're going to have to get comfortable with how a merchant works and exactly as you say.

So if you're going to go to all the trouble of figuring out how that works and you're in the asset class because you understand its need and all this stuff that we've been talking about, then why give away a bit of that to a floor price, just to another counterparty who sort of agrees with you but not quite as much?

You just read my mind.

Yeah.

Exactly that. Yeah.

OK. I want to talk about optimize for a second. Because Gresham House, of course, you've got 425 megawatts now. You're going to have a lot more megawatts.

And so I think all of these assets are out at the moment or most of them are with optimizers. And of course, that will happen. You just signed a big deal with Arenko. Congratulations on that.

How do you think about optimizing the space? And you've used a lot of different ones. Right?

Some of which I've been on the end of in previous lives. So how do you think about how optimized have come on in the last few years? And what are you're excited about to do with optimizers, and how do you choose one?

Well, just sort of going full circle, that's another area where maturity has sort of emerged. When we first got involved, we were sort of interrogating, if that's the right word, or interviewing the optimizers and ensuring--

They were tough interviews, by the way. I was on the other side of the table.

Oh, I see.

Yes. Go back a slide. What does that chart mean? Exactly what they're trying.

Well, we really wanted to understand how our optimizers made money. Because that's one of the big challenges with batteries, is how does a battery get entered into the market, whether it's a BM, balancing mechanism, or wholesale market, and make money given that it's got to choose when it charges? Which, in effect, means when it makes itself available in due course for export.

And that's so different to gas peakers and other dispatchable assets, where it's just basically around the cost of the fuel. And if the power price is higher than the cost of fuel, you run it and you keep running it because there's no end of battery life. You just keep running it and you just keep it up. So those are the two big differences. It's sort of a variable short-run marginal cost for a battery in its function of its Import, cost, and the fact that you can only run it for a finite amount of time. Those are the two fundamental difference. We make the equation for how you run these assets completely different.

So we got our heads around that, but we just wanted to see who else could do this. And fortunately, a handful of companies, quite extraordinarily really, emerging to do exactly that. They literally made their entire business about that. Habitat Energy and Arenko being two great examples as well as in-house optimization teams at places like EDF and Flexitricity.

So they really understood the need to move away from human-based Excel sheet trading. And unfortunately, that was there and, therefore, as our initial FFR contracts and our seed assets rolled off, we could actually allocate capacity to these companies. And they've been extremely impressive in how they've developed.

What's mad is you've been around the whole market. You've worked with most of the optimizers once, I think. And you've learned all this stuff.

And you're still now saying, you know what? We're not going to do this in-house. So that must mean, A, you're getting a pretty good service from these optimizers or you're comfortable now with the work that they do and that they're worth it, which actually--

my personal thought is I think the job of an optimizer's becomes so much more difficult and it's been impressive how some in particular have really stepped up.

And not just performance but also on reporting and all the other stuff that they have to do. But what's cool is you guys have been around the whole market. You must have considered, we can do this in-house. We could build this in-house. And you're still saying, you know what? We're going to give this stuff to other people.

Yeah.

So how do you make that decision?

Well, if you think about what makes up an optimizer, it's not what we have in-house.

It's software engineers. It's people who understand the market and trading as well as they breathe. This is really, really well. And people who can develop machine-learning algorithms or other AI concepts to really make the decisions. And then they have to be able to create the IT infrastructure that can process incredible amounts of data and, therefore, understand the need for a highly, highly reliable and redundant IT system as well. These are skills that we just don't have in-house.

Yeah.

We could absolutely bring them in-house and do that. But as you get bigger, you get better terms on optimization agreement and you get that as a function of your scale. You don't need to go through the challenge of doing that yourself and making mistakes and/or getting it right, but there's that risk.

Yeah.

And so why introduce that risk when there's a robust set of optimizes out there?

And a highly competitive market for them, which is pushing them against each--

there's so much innovation in that space.

Yeah. Absolutely. So even though they're all, especially the leaders, are extremely smart, there is more than one of them. So there is a degree of competition, so obviously we benefit from that. So if you think about what we want to achieve, it's achieving scale and returns for our shareholders.

Well, sort of returns for our shareholders and there's a function of scale and there's a function of good fund management, which is a function of good capital discipline, good in equity market terms "stock selection," selecting the right projects, designing them well, contracting well, negotiating well. And that's our core skill set and doing that more than trying our hand at optimization when it's not necessary, it's just not necessary. And when you achieve scale through a simple, focused strategy, that's how you come out with the decisions where you don't do anything.

I'm just thinking, as an infrastructure play, like this game that you guys are in--

call it everything's a game. But I guess there's the idea of, in the financial world, that past performance doesn't indicate future performance or whatever that word is, that phrase that comes over on the radio and on the news whenever they--

Sure. That's right.

But I guess, if you're an asset business, it kind of does. Right? It has to.

Because every time you build an asset, every time you run an asset, every moment that you're running an asset, you're learning. And it's about your "learn rate," in startup parlance. It's a learn rate thing.

So it's just a funny one to think about, although I guess all of that would be priced in. I'm just going around in my head. How does that sit? Anyway, I'm going down a rabbit hole in my own mind here.

Well, it's interesting. I mean, consistency of performance speaks to investment process. And also, then given that each of these projects is sort of operating business, the sustainability of the operating environment will determine whether their own returns slip or commoditize or whatever.

But I'm very much taking the view that we need to be, in inverted commas, "paranoid," assume that we might enter another COVID environment where electricity demand collapses and gas prices are sort of setting prices in the 20s. And this is my own personal goal, is to be able to hit our dividend even in that horrible environment.

And we're confident we're going to get there. Because having been a student of markets and companies and industries for so long, you realize that all industries eventually commoditize.

Yeah.

And it doesn't mean that the leading company in that industry can't make good returns. We want to be that company.

You just got to win.

You got to be that company.

Well, that brings us on to consolidation. What are you thinking about consolidation in this market?

Because at the moment, it's wild how many new entrants there are, assets.

There's talk of various new funds. They've got three big funds now. There's talk of new ones this year. We've got utilities buying assets, oil companies getting involved in assets. There's so much.

Real estate funds, property funds, supermarket funds. There's all sorts of folks in this place now. So what happens next? Will there be consolidation, or is there enough space for everybody?

I think we've been through one phase of consolidation, which is the sale by most of the EFR assets. And we bought 120 of, I think, the 200 meg that got awarded contracts in 2016 and got built in 2018. So that was one phase of consolidation, where we bought assets from those exiting the sector and then one other asset as well from a player exiting the sector. So that is a first wave, I think, of people entering the market and going, yeah, not for us or whatever they decided.

There's bound to be a second wave or third wave and to the extent that there are waves or whether it becomes continuous. You sort of have people who build assets, choose to run them for a bit, whether they think they're going to get a better return as a result of doing something like that, and then sell them or just pivot into something else. Whatever the reasons are, there's bound to be consolidation. But at the moment, as you say, I'm not sure the right word is "fragmentation," but there's certainly a lot of new entrants and a lot of new players.

And we'll see how they all get on. There's a lot of--

It's kind of comforting, because it means there's loads of new players who are saying, this is the place to put my money. But then it's kind of uncomfortable, too, because then you can turn it on its head and say, if there's so much interest, then I'm glad I'm first or I'm big or whatever. But that also makes me feel uncomfortable.

It makes you feel uncomfortable.

I don't know in that sense. I don't own my house, and that does well for me. But that's about it.

Yeah.

Yeah. It does make me feel uncomfortable.

If you have growth of interest in the sector forever, to a point, there's too much growth of interest in the sector, I guess. I don't think we're there yet. It's just something that I'm also thinking up.

No, I think we're far from that.

And then I've just got a couple more questions. So a bit of a silly question really, but have you guys looked internationally? So most of what you do is in Great Britain at the moment. I think all of it is in Great Britain?

Great Britain and we have an initial pipeline project that we've disclosed in Ireland.

OK.

180-meg project.

I don't need to say anything you haven't disclosed--

Sure.

I'm sure you guys are looking around the world. So what are you thinking about about international markets? Is that something that is important to Gresham House right now?

It's something we're always exploring.

One of the great things about this sector is electricity is the same wherever you go.

If you put in a battery system, you're going to put in a similar battery system wherever you go. The analysis is different in terms of what the market is.

But ultimately, even the generation mix will be a version of what you have in the UK. It'll be renewables, gas, maybe coal, maybe nuclear, maybe hydro and in different mixes and with crucially different weather patterns.

But all that does is alter the equation and the output in terms of what you might build. But ultimately, you're still going to build a battery system with probably the same technology. So that does mean that the industry's skills or our knowledge could be exported abroad, but we haven't made any commitments abroad beyond Ireland.

What strikes me is we're looking internationally in various different markets and will be in various different markets soon, that's all very exciting. But you learn the Great British market and you learn about frequency response and fast response and the balancing mechanism. And you think, oh, I've got to go and learn all these other markets again. But they're very similar. It's a bit like learning French when you speak English.

There's so much crossover. Actually, I don't speak great French.

I was going to say--

[LAUGHING]

--not a good example.

We should do this in French. Oh, no. I think they'll start talking to me in French.

I could do that.

No.

But that's a really bad example. Well, my point is that you may have a different type of auction structure or different rules or different settlement period thing. But actually, the general principles are the same, whether you're looking at here. You need frequency response.

You need a deep merchant market. You need a deep balancing market, eventually. You need access to these markets, and everything is moving towards real time. So as long as you get your head around that, the new markets aren't that complicated.

That's what I've thought, but maybe that's my arrogance coming through here.

I don't think it's arrogance. I think it's a good summary. Of course, there's a devil in the detail.

Yeah.

Not every market is a wholesale market structure, so that sort of displaces certain markets.

And of course, there could be complexities on other levels, whether it's at the development stage, interconnection sort of before, the pre-commissioning stage.

And there are complexities in those areas. But again, they are all just shades of gray.

The way I observe it for the time being is that every market has the same requirements. So you still have to worry about whether it's called a construction license or planning permission or something else or interconnection or enduring connection or just a connection offer. It's just parlance and jargon.

But different regulations, laws, rules seem to be emphasized and applied differently depending on the country but more as a function of history. But ultimately, those rules all exist.

Yeah.

And exist for a good reason.

So I want to ask you one last question, and I'm going to come back to this endgame point. Right?

What's the vision? So where does energy storage--

you're deep in energy storage now. Right? Where does energy storage fit in the future energy system?

How important is it? How much stuff is it doing? And what's the impact that it has on humanity? A bit of a big question.

Big question. Rather than taking the global view this time, I'll take the UK view.

Yeah.

We have best estimate, off top of my head, is probably at 37 gigawatts of average demand for power through the year. Huge variability intraday and seasonally, but that's the level. But electricity represents 20% or so of total energy consumption. So that 20% is going to go to 100%.

It doesn't mean that we go up five times because electric cars are more efficient than petrol cars, much more gas. Heating is much less efficient than heat pumps, which are at least twice as efficient.

So we might see electricity demand double or triple, though, especially with some economic growth.

And maybe we even onshore something. Who knows.

As opposed to having gone the other way for decades.

Within that larger electricity pie, we will see renewables become 8% to 100% of the total if we want to hit net zero and we need to do that. I think it's entirely possible based on the resource that we have, especially offshore wind.

You'll need the energy storage, and you'll need two forms of energy storage. You'll need energy storage as we know it, which will cover a huge percentage of situations. And you'll need what's called "long duration energy storage," which might not end up being long duration energy storage.

It might end up being, when we have a 500-hour under generation from wind fleet event, it might just be gas with sequestered CO2. And where we've got overgeneration--

Or interconnectors? I'm back in interconnectors.

Yeah.

I've always scratched my head about interconnectors. Yeah, in many situations, they might help.

In other situations, they might just prove that they don't help. If it's super sunny and windy and blustery or something across all of Europe, everyone's wanting to export to everyone else, it doesn't really solve the problem.

Yeah.

So that's my slightly tongue-in-cheek example, but I've been using that one for a while or versions of it. And same goes the other way around. If it's surprisingly still winter's evening, you've got no solar, you've got no wind. All of Europe will be stuck with--

Does it matter when you get the capacity market contract in both ends of your interconnector?

Well, that's a commercial question.

Yeah. Yeah.

And that speaks to--

Talking to the one out there.

Do you care about solving the problem, or do you care about making money? And I think we need to focus on achieving both.

Yeah.

No. I think you end up with the shortfalls in generation over long duration events, which doesn't really apply to what we're doing except in certain circumstances being achieved. Well, the only technology I know of today would be a gas engine, which is dispatchable and can be flexible from a zero set point, give or take. When you oversupply, well, maybe we end up onshoring some energy-intensive industries.

I never thought about this before. So instead of doing long duration energy storage, we have lots of short duration energy storage. And then when we have the really sort of almost black swan event that we're talking about, we just run gas and make it really efficient gas.

We're OK with that. I've never considered that before.

OK. Well, I mean, this just goes to the core of how you think about these things. It's like don't plug in a technology that doesn't exist yet, because it might never come along.

And I don't know of a single technology that does solve it. Even an interseasonal battery has a self-discharge rate that makes it relatively ineffective if the oversupply event comes in the earlier part of the year and then the under-supply event comes later in the year. When you need it, you've already self-discharged because batteries self-discharge. Of course, you can keep them topped up but that in effect speaks to--

It's like evaporation, yeah. In a pump pipe.

Exactly right. Exactly. Very good example. And I haven't thought of that.

Well, I'll swap. I'll use yours.

Swap, yeah. Exactly. I like that. So essentially, I think those are sort of the three underpinnings in the future in whatever mix within the renewables and in whatever mix we end up seeing within the key, quote-unquote, "storage segments," because actually one of them might just be more gas, which is decarbonized.

But it's big. The numbers you're talking about there are two or three times peak, two or three times average load now. So that's like almost triple, almost 100 gigs of energy, of electricity, and mass electrification. And we're going to get there with mostly renewables. So let's say above 50 gigawatts, but it could be 75, 80.

Of nameplate capacity, I would have thought as another 100.

Yeah. Because you--

It's less effective.

Yeah. And then you need a lot of batteries, so we've got a long way to go. We could be doing one of these in 10 years' time and still talking.

We could.

Figuring out what on Earth were we talking about 10 years ago?

Let's agree to do that.

And that's probably a good time to wrap up, Ben. I just want to say thank you so much for coming on and taking time out your day. I'm sure everybody listening absolutely loved that conversation. If you've got comments, please do let us know in the comments or subscribe on Spotify or wherever you're listening. And until next time, we'll see you soon.

Thank you very much.

Thank you.

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