Tolling agreements and the wider market impacts with Ben Guest (Managing Director, New Energy & Fund Manager @ Gresham House Energy Storage Fund)

How did Gresham House come to the decision that they wanted a toll agreement?

It's essentially finding other ways of accessing revenues linked to the requirement for flexibility.

This is, another evolution, which is ultimately the customer for you now is the utility, which is a completely different framing in in my mind, an evolution of the role that batteries can play in in the industry.

If each utility managed to balance their book, then there would be no need for national level balancing.

What's it been like, the the roller coaster that you've been on your personal journey in in in this?

I think we're now at the stage where these higher renewables levels, the lower battery prices, the greater need for batteries, and the trading the deep trading opportunity as it unlocks will unlock a, you know, a a very large next cycle.

Hello, and welcome back to Transmission.

In this episode, Quentin is joined by Ben Guest, managing director of New Energy and fund manager at Gresham House Energy Storage Fund.

Conversation covers the recent landmark tolling agreement with Octopus Energy, what this means for Gresham House and the wider battery landscape.

As always, if you are enjoying the podcast, please hit subscribe so you never miss an episode, and give us a rating wherever you listen.

With that, let's jump in.

Hello, Ben. Welcome to the podcast.

Hi, Quintin. Good to be back.

Yeah. Well, I should have said, sorry, welcome back to the podcast. Wow. We've got a lot to talk about today. It's over two years since you've been since we first sat down in Gresham House HQ and talked about all things about your portfolio and your vision for the future, and a lot's happened in the last two years.

Today's episode, we're gonna go really deep into your new deal with Octopus, which is either the biggest deal, the biggest offtake deal for batteries globally ever or it's close.

It's gigantic, and it's a big change for our industry.

Before we do that, though, should we just set the scene? What what is the deal? And, could we put some numbers around it?

So we signed a deal with the UK's largest utility, Octopus Energy, And the deal is to contract five hundred and sixty eight megawatts from our portfolio across it's across fourteen projects that for two years each that roll on and off respectively from between the second half of this year and and roll off, two years later, so in second half of twenty twenty six. And it's it's a fixed price deal in exchange for Octopus to be able to really use the batteries as they wish in the market within the technical parameters set.

And just some more details around it before we dig into why and all of the things that could happen. How many assets is this?

It's it's fourteen fourteen projects.

Fourteen different projects.

Of different durations as well.

And what size of projects are they in megawatts roughly?

We haven't disclosed the specific projects, and apologies. We're in listed funds, so we prefer not to to say exactly the detail. We may be at liberty to do so in the future. But, you know, they they start, you know, at at the smaller end, you know, sub well under fifty megawatts and and and and a couple of or above that.

We should have probably done a preamble to this, which is, of course, you run a public listed fund, and there's some things you can and can't say. But I gotta ask. So our analysis puts this at around fifty six thousand pounds per megawatt. Are we in the right ballpark for that as a price for this tolling agreement?

Yeah. So that that's that's in the ballpark. It's a it's a weighted average across the different durations and assumes that all the tolls are running concurrently. So, obviously, they're staggered at the front end and the back end, so that will change. But, yes, that's that's a that's a reasonable analysis.

And what percentage of the to put this in a wider Gresham House picture, what percentage of your portfolio is this? And another question is, why are you staggering it? Why don't you just get them all in right now?

The percentage is a little over fifty percent. I think fifty three percent, based on our target portfolio of a thousand and seventy two megawatts once we're fully built. Why Steiger? I think it's a practical practical thing.

So it it benefits both us and, the other side. It requires the installation of of controller boxes as there's a handover technical handover of the site. So they they need installing. They need mapping.

If you like. The the sites need to be mapped and reflected inside these boxes so that the batteries can be properly dispatched. So that just takes some time. So it's a practical thing.

And when you were first on this podcast, which is eighty episodes ago roughly, I asked you yeah. A lot a lot a lot has changed in eighty episodes. I asked you what you thought of floor agreements.

And, of course, the world's moved on since then, but we both agreed back then that the the way that floor prices were priced at the time was so low, and you're giving away so much upside that that wasn't worth it. And I think it's either your words or my words or all been dealing into one, which is if you're gonna invest in this asset class, then you can't you gotta be you gotta be cool with the market, and therefore, you also it's a volatility play, and you wanna catch that upside.

But then two years later, doing a tolling agreement where you got a fixed price is is a very different view on the world. So how what's changed in your your thinking and the rest of the team at Gresham House's thinking around this?

Sure. When when you're when you're evaluating a fixed price deal or even a fixed price element of a deal, you sort of ask yourself why why you you you take it on. You know, what's the trade off? So are you how much are you going to lose in revenues?

And historically, when we've looked at floor price contracts, we saw no scenario or plausible scenario. It was so far below the low case, if you like, in terms of the merchant models that that that which you'd be offered a floor with bearing in mind that those floors also required you to hand over your capacity market revenues. So the the safe revenues, you know, were were included in that sort of, fixed price element that that it it it didn't feel like it was a good trade.

Fast forward two years, admittedly knowing incrementally what we know about the market, which has become a bit difficult. And, you know, we've talked a lot about that in various different channels, including our formal reporting.

We we've we've now struck an agreement, not with an optimizer, but with a utility. And admittedly, some utilities also have optimization functions and trading desks that perform strictly optimization activities. But we've we've struck a deal with a utility that's offering us a well, what in this market, a a very competitive deal to to secure a hundred percent of our revenues, and we also keep the Centimeters revenue on top, Aston Martin revenue on top.

So it's just a very different offer.

And that's a key part of it, isn't it? Because you've got in Gresham, how I'm sure there's things I don't wanna say anything you're not allowed to say, but you've got a range of capacity market contracts and a range of values, range of derating factors. And so this is x those capacity market contracts, some of which are as much as in the twenty thousand pounds a megawatt ish plus some derating. So there there's there's quite a one question about I'm gonna get straight into the details. Sorry. So what happens in a tolling agreement? If you've got a capacity market contract, which is separate to the tolling agreement, who's responsible for dispatch in a capacity event?

Good question. Yeah. Well, first of all, it's worth saying for for the, uninitiated. There's never there has never been a capacity event or a stress event as the legals would call it. But but if there was one, there's an obligation to dispatch, and that's written into the agreement as being an obligation of the operator of the site, whether it's us or Octopus in this case.

It's a hell of a penalty if you if you if you miss it. Right? But then again, there's never been one.

There's never been one. There's never been one. Yeah.

To to come back sorry.

I've got straight into detail there. I get excited by this stuff. How how did Gresham House come to the decision that they wanted a total agreement? How did you decide this is what you're gonna do?

Was it that you approached by utilities and they said, do you want this? And he said, yes. Or did you say, this is a kind of contract that we wanna structure. It's the first of its kind in the UK, isn't it?

This is the kind of structure that we want. Let's go and find who can give us the best price. How do you do that process? Because it's never been done before.

To get a very short story, we we've talked to the market probably frustratingly for some because it's sort of not a lot of detail provided about seeking alternative revenues. And to sort of lift a little a little bit on that, it's essentially finding other ways of accessing revenues linked to the requirement for flexibility.

And of course, at the moment, we know the UK market as and then almost all markets, you know, are national markets where there's a requirement to balance the market.

Why is there a requirement to balance the market? Well, first, electricity needs to be perfectly balanced in in in real time, you know, sub second by second. But ironically, all the contracts out there don't require the suppliers or the offtake or the consumers to to dictate exactly what they will supply or consume.

So there are always imbalances that's left to effectively a clearing agent, system operator, the ESO in our country, to to to execute. And but we're aware that every single utility in the market has a supply base and an offtake book and has to balance those two as well. And so the alternative revenue exploration has been in that context and has extended to us potentially sourcing our own source of supply or and or offtake. Don't necessarily have to do both. And that's obviously a very complicated, iteration to our business model to ex and embark on something like that. But that's been on our mind for a long time.

And suddenly, over the last twelve months, it's become clear that balancing of the electricity markets is being done somewhat inefficiently as a function of the, skip rates on batteries and so on and reduced our our revenue opportunity.

And so we've explored what's possible at a what we call subnational level or a corporate level, in other words, utility scale level and and utility level and and discovered, you know, an opportunity to partner with frankly more than one utility, but but the one that's that's worked well, is is clearly the one with Octopus. But I suspect there will be new entrants as well.

Yeah. I mean, one of the things that is striking about this is to provide these kind of offtake agreements or tolling agreements, you really do need scale. You need to be trading a lot of volume.

And, what's implied is that you can on top of the money that Gresham House with an optimizer could make, you actually have this additional value to your overall portfolio of having these assets as part of your portfolio, whether that's, you know, reducing your imbalance penalties or penalties costs, and whatnot. And that only really comes with scale, which is a big change in the market because we actually have some there are some fantastic small, nimble optimizer businesses in the market. But they by by by design, they they structurally cannot provide these kind of offtake agreements because they don't have such a big supply business.

Do you have any thoughts on that?

We'll we'll see how the market evolves. There's some fantastic optimizers out there. The the reason why we've done this optimization agreement is because because of this value of of of of the hedge to the utility.

And this is our inference, this is not necessarily, you know, fact. It could could be wrong, but I'm pretty sure it's it's it's close to the truth, if not the truth. The value of this hedging capacity is is is incremental to the to the value of the asset. And and so it gives the opportunity for a win win. You know? You you're prepared to pay for hedging capacity as opposed to just wearing imbalanced costs sometimes, especially during extreme events. And who knows if we see another Ukraine situation.

But so so I I can't help thinking that more utilities will get into this market and maybe offer, you know, tolls of different durations.

And it might bring utilities and and optimizers closer together because I think optimizers are really teed up to, you know, do that very well while utilities will have to think about the combination of, you know, national market optimization and, you know, hedging of of books at the same time, and that will require a a pretty sophisticated trading desk. It'll be interesting to see whether that does bring, you know, independent optimizers and utilities together. That that would be, you know, a guess at what might happen incremental in this market.

One of the things I found fascinating about it is well, about the the role of batteries in the energy system in general just evolves over time.

And this is another evolution, which is batteries rather than providing services to grid and just being there for the system operator. Now batteries are being almost rented by utility. And, you know, the utility might get some frequency response contracts and then service services and other stuff. But, ultimately, the customer for you now is a utility, not necessarily National Grid. It's up to them what how they manage it, which is a completely different framing in, in my mind, an evolution of the role that batteries can play in in the industry.

Yeah. If you if you I the way I think about it logically is if each utility managed to balance their book, then there would be no need for national level balancing.

So if the national operator is not gonna go and do it or do it well, let's go and find another element of the market to do it. And that's effectively what's happening at the margin here. It's very early days, but that's that's what we're doing. It's it's sort of helping helping the man market be balanced somehow with batteries being used in preference to, you know, our constant known, which is CCGTs, which can go into if you like.

But I wanna ask you some bits about the nitty gritty.

I mean, when when when you and I first met, I was trying to sell optimization services to Gresham House. And back then, twenty sixteen, twenty seventeen, there wasn't any standardization of contracts, and writing contracts for optimize optimization agreements was actually a very difficult thing to do. And they're all different. Lots of lawyers made lots of money, and I'm not sure we got it right, to be honest. But in in in the years since, there's been quite a bit of standardization and market norms.

And in a one of the key parts in optimization agreement is about around availability. You know, if the battery's available, then the optimizer can do what it needs to do with it. But if if the battery's not available, that that that that affects the optimizer as well as the asset owner. And I wonder in a agreement like this tolling agreement, which is a new form of contract, how do you guys handle availability? Because it's an unlikely even with the best one in the world, it's unlikely that over a two year period, you're gonna have fourteen assets that are available a hundred percent of the time. So how do you think about writing that down into some sort of legal contract? And and how is it different from the arrangement you would have with an optimizer?

There are similarities and differences. Bear in mind that long term PPAs and other sorts of tolling agreements do exist in the renewable space. So as a starting point, there is there's quite a lot of precedent. And then there are optimization agreements.

So the the requirement for technical availability, the requirement for batteries to be optimized and or told within technical limits, the the the need to meet certain availability standards to secure the revenues that are that are contracted or or or feature without giving too much detail away because we're under confidentiality. But, you know, common sense would suggest that, you know, there's an allowance for unavailability naturally for whatever reason, whether it's maintenance, pausing to do a capacity market capacity test, or or, natural outages that take place on the network. You know, there needs to be an allowance for that.

And there is in the long term PPA and and and and there will be in this kind of contract as well. So there's there's a lot of standard elements that would be immediately recognisable in a contract like this. So it's it's it's it was it wasn't earth shatteringly new and complex and so on to to to to work through.

Another question. It's a little bit of a silly question, but it's important. How do you price a contract like this? How do you come up with that number?

We we don't. It's offered to us. And if it works, it works. But but in terms of how a utility might think about this in general is and this is this is how I've thought about it. And, again, it might be wrong because it's an inference is I I get some hedging capacity from these batteries.

What can I make from them in the marketplace in the merchant market? It'll be x. If the tolling fee paid to us is x plus ten percent based on the latest merchant environment, that's that's ten percent. Let's say that ten percent is equivalent to five thousand pounds per megawatt per year.

You divide that through by eighty seven sixty, which is your hours of the year, and that that incremental you know, that shortfall that that you're not getting covered in the merchant market is your is the cost of the of of that of that hedging capacity.

That number, you know, it's it's a pound or less in the example I've just given you. That ain't a lot on a retail price of two hundred pounds or whatever the number is nowadays.

So, you know, it's it's it's something I'd certainly be thinking about if I was, you know, a utility because it's it's it doesn't doesn't feel expensive. It feels like, you know, a good a good a good trade. Of course, there's a risk of that that that x falls and then the premium to x becomes much more than ten percent, but it also could go the other way. So that's that's, you know, that's that's the risk you take, but but the the risk is is relatively managed because you're paying something in the region of of where the market is.

Now, Of course, the markets like to move very significantly one way or the other, you know, most likely upwards given that there are so many tailwinds building such as way more renewables being deployed, especially offshore wind, but lots of other things, meaning that we're heading towards a world of more than fifty percent solar and wind in the UK. You know, ESO needs to start using batteries properly or the costs of balancing are gonna go and and the fact that the OBP is in train and will hopefully result in a in a in a in a, you know, well functioning market in due course as well. So

likelihood is that the cost the the the cost of of this hedging capacity goes negative, and it's good for everyone if it does because while we won't while we'll certainly not capture all the revenues, you know, it's it's it's it's speaks to a positive outlook for the fund beyond the tolling period and for the uncontracted assets. Of of course, the the trick, it would be to, as a manager, would be to fix a toll for as long as possible at the top at at the top of the merchant market. You know, that would be an ambition to try and achieve because, ultimately, the the revenues that you can lock in on a long term toll will be a function of that merchant element, the bit that you can recoup from that tolling cost, plus you're hedging the value of that hedge.

And the value of that hedge will move around, but I think the merchant revenue assumed that could be captured from a battery will move around as well. And right now, it's I think it's quite low. You know? Who knows?

In a couple of years, we could potentially reprice it at a at a higher level. That might not be the case. We'll see. Time will tell.

But you can imagine how we would would, be looking to do this. I just wanna touch on one other point quickly is is which is you mentioned scale. I think scale was really important on our side as well. You know, a large utility would would would would need to scale to to embark on a deal like this.

But, you know you know, the the the obvious point is also that, you know, in seeking a large portfolio to to use to hedge their book supply and offtake. They they're looking for a large operator as well. And at the size that we've done it at, I don't think anyone in the UK right now is is would have been capable of doing it.

So that's the advantage of of of of of having some scale in the country.

And so many questions.

I'll ask another one about the contract, and then I wanna ask about how this changes Gresham House's operating philosophy.

But how did you decide that two years was the right duration for a contract like this? What do you think what does that mean about your view of the market over the next couple of years? And then the other parameter, how do you do how do you decide that fifty percent of your portfolio is the right number? Why not hedge the whole lot, or why not just hedge twenty percent? How does how do you think about this as someone who who manages assets for a living?

Look. It's a judgment call. There's a degree to which this is a judgment call. Call.

If you the the on both fronts. On the duration front, I do I do have a fairly strong view that the market will right itself for batteries. I I I think that the slight tangent, but I think is relevant, is the the market's very focused partly because of how it's been talked about about skip rates within settlement period. But I actually think the problem lies within reserve.

So the pre reserving of of assets. I do think that that starts to fix itself through the various milestones that we do see coming in the open balancing platform.

Could we go down that that that cul de sac for a second? So yeah. So how what what does that mean that the problem is in reserve?

In reserve. The problem is that the batteries are being traded within a half hourly period.

But by the time you get to real time, the flexibility provided by CCTTs have already been contracted hours in advance because they need to be, you know, they need to be warmed up as the later. That's the term actually used for cold plants. But, essentially, it's the same thing. They need to be started up and ramped up gradually.

And so they're contracted well ahead of real time. And so if you think about the market, or ESO contracted with CCGTs, they have complete visibility as to what they're gonna get. And if they don't take it in advance, they lose it.

In contrast, they could compare what's the cost of a battery in two hours, three hours time, but there's no contractual regime to secure them in that advanced period. So they go, okay. Well, the price right now for them is x, but that price could be two x, zero x, you know, or or they might not be there at all. And then if we want to run them for three hours, which is what the CCCT is offering at any level to be flexed, we've got a daisy chain six sets of batteries together because there's a thirty minute rule.

So, you know, you very quickly realize that it's easier and more transparent and to to just go with with what's been there so far. But with the BDO bulk dispatch optimizer, the ability to trade lots of batteries together, the state of energy rule, which will mean that the thirty minute rule goes away in about a year, a bit less, hopefully, and the launch of things like quick reserve, which allows for the precontracting of batteries in a competitive regime with CCDTs, but pretty much expecting batteries to win that, you end up with a situation where you've got batteries able to be effectively contracted, locked in in advance with that and therefore takes away the need for for for alternative sources of flex to be contracted in advance, for fear that batteries might not show up.

And and then in a world where we're heading in in combination to that, in a world where we're heading towards over fifty percent solar and wind up from about forty percent now and then upwards of that, in a world where in this country, that combination our combination of weather and renewables means that renewables can generate zero to twice the expected average output over, at any moment in time. You end up with this really wild range of outcomes. You know, just moving from forty to fifty percent is gonna be massively, impactful on on the challenge of balancing the market. And so I can't help thinking that that combination of things is gonna is gonna sort sort themselves out are gonna sort themselves out over the next two years, hence the term that we chose.

Okay. So the, yeah, the implication is the change is happening in the balancing mechanism and to the system in general. You reckon the world will look quite different for batteries in the next couple of years, and that's why you don't wanna lock in longer than that.

Yep. Basically. It's two years because, you know, if you look at the front end of a of of a curve provided by Moda or others, you know, it's it's it's increasingly just pretty weak now and ramping up to to a to a long term stable level, which is discounting probably a bit of a flat market now, naturally, but, and also imperfect market in terms of how it's dispatched. Yeah. And I think things improve from in the next two years.

Yeah. And on the fifty fifty point, how did you choose fifty percent of your portfolio?

Again, judgment call. We want to maintain some upside in in in case we're wrong. You know?

Where do you settle? Well, you know, there was a degree of demand. So there there was gonna be a minimum level that would have been acceptable to to Octopus. That combined with the fact that we wanted to maintain some upside and not be overhead, if that's the right word. I'm not sure it is, or too heavily, you know, contracted given that there's potential for upside from here. We did enough to make sure that there was no risk of the debt facilities getting into a risky territory or or anything else.

And can I ask you about how this changes Gresham House from a operations standpoint? Because surely for the fifty percent of the portfolio that you've now hedged, the the key performance indicators for that business have actually changed where they used to be revenue KPIs.

And now, surely, it's a, you know, traditional asset management, availability, asset, health, you know, kind of nuts and spanners stuff rather than being so close to the market and making sure bid prices are right. And so does that mean there's a simplification in your business and that you can focus more on asset quality than you could before with with the limited resources that a business has?

I think what it highlights is that when you simplify the revenue regime, it it reveals the importance of the technical aspect in either scenario really heavy you know, really clearly. Because, no, the the reality is uptime, state of health, and lots of other things are absolutely key in either. Because if you don't have an operational asset or an asset that's on, you're not gonna make any money out of it. So whether that's in a toll environment or in a merchant environment, it's the same.

But it just highlights that that that point really, really clearly. So I'm glad you've asked the question. But it does does simplify the the commercial asset management. You know?

You're not you you you know, we've we've had quite a lot of optimizers, on our books, and we still do. But worrying about the twists and turns in the merchant market dials down by definition. But still there. It's still there because we still want that upside to come whether it's, you know, the there's an extraordinary aspect of the UK market that's rarely talked about.

It's just how low demand is.

Demand has fallen twenty percent since two thousand and seven and has yet to tick up when it's been forecast to do so for some time. So it's it's it's I don't know if it's the only market in the world, but most of the markets have seen growing electricity demand, or at least, you know, less less than substantially falling.

But since about two thousand seven, we've seen about twenty percent decline, and that's through probably efficiency standards and the degree of offshoring around things like manufacturing or just greater efficiencies. So that that that trend will reverse. But right now, we've got a system size for a higher level of demand. That will normalize. That's a cyclical point. That combined with the structural points of, you know, underlying EV demand and all things driving up demand, more renewables, and the mark market sort of correcting itself in terms of the OBP rollout and so on, you know, really, really, you know, should should unlock quite a lot of, you know, incremental tightness or flexibility requirement.

And now I wanna ask you about Gresham House and the overall market because, I I know there's some things you kinda can't say, so I'll let you be the figure figure that one out. Gresham House is trading at a a the only way to be described is a massive discount to NAV, and that has implications for the business, for capital raising, for all sorts. It also is a it's a Gresham House's stock price is an indicator for the rest of the industry.

And so how are you thinking about how the market is pricing grid?

And Yeah.

As you say, lots of thoughts. There are there are a few things to consider here, which start, first of all, be outside of grid itself. And when you say Gresham House, just want for for listeners. Gresham House Energy Storage Fund as opposed to the Grushing House previously PLC or now limited, which is the manager of the fund.

So so, essentially, we're a listed business in the in the and and a listed investment trust company. In the years of zero interest rates, investment trusts were the, for many investors, the go to place for yield, yield seeking investors as a proxy to bonds, which were offering very little or other savings accounts, which were offering very little. Since interest rates have gone up, naturally, there's been, a a significant, amount of selling of investment trusts because you can earn four or five percent on the on the cash account or on bonds. And so there's naturally there's been natural selling out of the investment trust sector.

That's number one. Generally, when interest rates go up anyway, you know, this is sort of the same point but not quite the same, discount rates go up and therefore assets that that are yielding go to a higher yield and and and fall in value. And in that scenario, discount rates tend to go up, but the market has corrected whether it's the infrastructure space, the housing space or wheat space, if you will, the the renewable space and also the energy storage space gone to a discount despite interest rates and to sort of discount rates going up, in in terms of valuing. So our NAV has come down from based on partly mostly lower revenues actually in our case, but also high discount rates from a hundred and fifty five to a hundred and thirty with stock price even after a significant recovery still trading at seventy.

So so the discount is is very significant.

Now specific on the energy storage space, the simple reality is that the market's been more volatile on revenues than expected.

And whenever you get a disappointment in the stock market, you have sellers. And when you've got sellers who are significantly disappointed and potentially also worried around liquidity, debt. And in addition to that, it's an illiquid space. So there's thinly traded stocks despite the size of the companies.

Things move sharply and that's precisely what's happened here. And then it went to very, very significant discount, I think up to about seventy percent at one stage. And that's that's the nature of stock markets. When you've got thinly traded markets, the share price moves can be very significant.

And, of course, another really important point is that this is a yield seeking sector. You know, a lot of retirees, savers, and so on look to this sector. And when you have to cut your dividend, which is what we've done to preserve capital and to just navigate through this period, as a as a cash generative business, that creates the greatest disappointment of all, I think. And we've naturally ups disappointed and and possibly lost investors in in that.

And it takes a long time to regain that trust, and we're gonna work hard to do that.

But that's that's a a the the the hard reality of of what we're living through. And in time, we'll we'll navigate out of this confident that the market will recover, that the stock should not be trading at a discount to its replacement value, And this industry has scope to grow and therefore is justification alone for things trading at a premium to cost. Otherwise, no one will build anything. You know, who wants to lose money on every pound that they invest?

So but that is that is what we've got, and that is, you know, hopefully, a strong message to whoever's can influence this in among regulators, among decision makers, policymakers, and so on. This is what happens when you you create uncertainty in the market.

And my next question is, how has it been for you? And what what's it been like running a business like? Firstly, to set a scene, it's not really a secret that you personally have a huge amount of skin in the game and personally invested time, energy, you know, capital, everything into this business.

And I'm just interested I'm sure our listeners would be too. What's it been like, the the roller coaster that you've been on your personal journey in in this? Could Could you talk to that for a minute?

Sure. I mean, it's naturally tough. I've been a hedge fund manager in the past. I've been an entrepreneur in the past. I I've invested in all sorts of things and managed all sorts of businesses and and and know what it what what what it takes to manage through different different businesses with different risk profiles.

So the the experience is there to to navigate through this rather than, you know, panic and run for the doors.

But it's it's it's it's naturally very challenging. And the the the the greatest thing that I found myself doing is not just applying my experience as a fund manager, which is, you know, what you always do. You evaluate an investment, and and in the context of of other investment opportunities in the portfolio, and you crack on with it and you evaluate and you, of course, have specific rules around infrastructure such as, you know, maximize the return on day one because it's infrastructure. So you're living with that cost base forever, the capital costs in particular.

And on the other contracted costs, that's a key rule of infrastructure. And you're always trying to drive value out of projects and so on is absolutely key. But if if other other parts of the market don't function, and this is one of those markets where, you know, end elements of the market are dependent on other elements of the market functioning correctly. You know, you're not selling widgets to a consumer who couldn't care less whether they need to be interplay with with something else.

You know? We're not selling a widget with with a funny shaped plug that doesn't fit into the to the to the plug hole. You know? This this is something that that is functioning and and and should be used correctly, but but has turned out not to be.

And, you know, there there are growing pains in the market. That's, you know, just one way of describing it. And this meant that, we've had to get on the front foot, around that. And one thing that I've realized, and this is a very honest comment, is that we entered the market because of its commercial merits way back in the day.

You know, we entered the FFR market and realized there was no need to wait for the EFR market. The FFR market was there for us if we wanted to enter into it. We we knew that the wholesale market would be there in due course when when it became the more interesting opportunity or at least hoped it would and then BM would be a key part of that.

Turns out not not to have been the case. But in entering a market, without the need for subsidies, for political support, for other kinds of sort of championing by courses outside of yourself, you realize that there's no opportunity for whether it's government or the regulator or anyone else to really get up the curve around the importance of this sector and to really get comfortable. And if you think about what's going on in other countries, you know, whether it's in Italy with the MATSE or the capacity market scheme, other countries like, yeah, incre incremented Germany or even Poland, certainly the US, either through a a very vibrant market system in ERCOT or or a RA environment in California.

You know, the the market's set up or be being set up to to ease the the the the path of batteries. That hasn't happened at all here. In fact, if anything, there's this sense that batteries are not the suitable suitable technology to provide flexibility because of the potential for a long duration issue, which is when the wind doesn't shine sort of blow or sun doesn't shine for long enough that the batteries are exhausted. And this idea that batteries only solve short short duration issues, which is nonsense, frankly.

But there are various, you saw we basically had to get on the front foot with our industry colleagues to to really get the message out there of the importance of batteries and draw comparisons with other markets that are functioning. But that's that's that's that's the extra job that's required here. And it's it's it's not an easy one because it's, you know, it's it's not financial analysis, and it's not, you know, sort of technical. You know, the areas that you sort of lean on as a skill sets that you need in renewables infrastructure.

This is, you know, policy level work. Some people might call it lobbying, but it's essentially work at that level. And and I hope the work we're doing helps unlock, you know, the the need for batteries and prioritizing this really cost effective technology for flexibility. And if we do need long duration backup, you know, let's rely on what's there right now, gas and then other stuff that becomes commercial, but not try and confuse things by by leaning on stuff that's either not technically capable or like to be available or cost competitive. So it's been a it's been a that thing that's the biggest element And and, yeah, and and and seeking for alternative opportunities, which is like such as the tolling deal.

But I'll round out the answer by saying I think we've now gone through a big first cycle for batteries. We've gone for you know, since we started in in twenty fifteen, sixteen, seventeen in terms of early operational projects, we've seen a big cycle and reduction in battery prices. We've seen a big innovation cycle in terms of batteries becoming denser from a fire perspective, you know, safer.

And by denser, I just mean smaller, and that means that you can fit more onto a site and, you know, sort of megawatt hours per acre has gone through the roof despite the need for spacing for safety for fire safety and so on. We've seen a big increase in renewables. So we've gone from a world of sub thirty percent to sub above thirty percent, even fifty percent pretty soon. And, and we've gone from a world where we're looking beyond in almost every market, the frequency response as the first border call we're moving towards as trading regime.

And we're identifying and realizing in many markets that that's not quite ready, you know, GB included. So I think we're now at the stage where, these higher renewables levels, the lower battery prices, the greater need for batteries, and the trading the deep trading opportunity as it unlocks will unlock a, you know, a a very large next cycle. And anyone who's entering this market will need the team and or experience, the pipeline, and the capital to execute. And I think that's where we're heading, and we're trying to position ourselves well for that.

And just to bring it all back to the deal, how we started this conversation, the first thing I thought when the Modo folks came up with a number was that back when you could bid for two year FFR contracts, you actually would have been quite happy at fifty six grand a megawatt plus a capacity market contract, maybe with some additional triad revenue. And so it's the the market has come up. We've gone through a huge cycle of higher expectations and higher expectations and higher expectations for revenue, and we're now settling down back to back to numbers that were actually quite reasonable only five years ago. It's a relative thing, not a absolute number thing.

And then, of course, with CapEx coming down, it's an entirely different Well, we're quickly on that.

You know, sort of the business cases evolve. So our view and again, you know, hopefully, some policymakers are listening.

Batteries, I think, in this country will go to at least ten hour duration. I think the business case for four hours is getting very close, at the margin. And, you know, a year or two ago, one to two hours was sort of the the trade off. Two to four hours is now rapidly becoming the trade off at at at current incremental prices and and thanks to the density that's available. So, yeah, it's gonna keep evolving.

I I don't think revenue expectations have have gone through too much of a cycle. I remember the very first effort. And maybe maybe it's because we got in there before others got in there. But, you know, frequency response contracts initially priced when we were looking at the market was pricing in the twenties pounds per megawatt per hour, sort of one hundred and fifty ks per megawatt for a half hour battery or forty minute battery.

So they were pretty chunky, and you had the triads. But not a lot going on the trading side because, you know, renewable penetration was too low still, and therefore, the volatility wasn't really there yet. That came later. So, you know, we have a chart that we put in our publications that, you know, would show month by month revenues, which which show the extraordinary range in revenues that our batteries have earned, you know, very decent in twenty eighteen, nineteen, early twenty, then the collapse due to COVID when demand disappeared and the BM wasn't ready.

The, you know, the shoot up with frequency response, or the dynamic suite of frequency response services being launched. And then, you know, the the the the purple patch, if you like, through the very volatile gas price period through twenty twenty two, then the saturation in in early twenty three of frequency response, the flattening of the market, and the realization the BM wasn't functioning correctly to the nadir that we saw at the beginning of this year. And who knows? We might be on another cycle.

But it certainly, for investors, turned out to be more volatile, but the the average has still been relatively healthy. But, yeah, certainly, it's been a big cycle set of cycles there.

And you're still building megawatts. You're still building lots of megawatts. Do you wanna just well, plea please, could you just share the latest on on that?

Sure. We started the year at six hundred ninety megawatts at an average duration of about a little over one point one hours. We're through this year, and, you know, we've largely built a lot of our projects, and we we're we're getting now to the point where we're commissioning our projects. So we're we're we're we're we're moving higher. And because because this could be published at any stage, I I won't I won't mention exactly where we are now, but look on our RNS feed and and and see where we are. But we're heading towards a thousand and seventy two by the end of this year.

Or to timestamp this, there's still a conservative government. Who knows what's gonna happen?

Indeed. Yeah. That's an interesting topic of its own. And then we're heading towards about one point six hours, and we think there's further potential for upgrade to my earlier point around sort of longer duration starting to make sense and so on. So there's a lot of value to extract from this portfolio even beyond where we're heading now. So a relatively small amount of incremental capital is being deployed this year to unlock a lot of, megawatt hours that that that become tradable as as a function of that. And, you know, to use an Americanism as you're based in America, you know, our earnings power is going up on the back of that.

Ben, I've gotta ask you about international diversification.

So over the last couple of year, Gresham House was originally just just GB, and then your board approved I think it was thirty percent international or something like that. And then I can't remember all the exact numbers. It's been a while. But how are you guys thinking about international? And yeah. What what's the thinking, and then what's what's the plan?

The thinking and the plan is to do so to internationally to diversify internationally. I think certain markets are evolving to be, you know, very investable. Places like California are really interesting where you can secure long term contracts. Other markets where there's a leg up, you know, whether it's capacity type arrangements, which is a bit like what you see in California, are all interesting and and and bankable as well. And I think probably the right way for markets to evolve, especially after the that we've witnessed here in GB.

So absolutely, we've been studying a lot of these markets. I've been with and and other colleagues have been traveling to to explore other opportunities stateside Australia parts of Europe are probably the major markets. There are a lot of deep markets that are similar to TB in terms of or in terms of, you know, that echo with our experience in in, in general. So in terms of what you'd install, the levels of renewables, the levels of renewables growth, the, but but but sometimes more attractive as a function of either the returns that are available or or or the degree of contract revenues. So, yeah, definitely an exciting, set of opportunities internationally.

And then, Ben, another hot topic at the moment is asset disposals.

Question House has got some assets for sale, and that must have been a big decision for you. Could you just talk us through how you decided to put assets up for sale? What why you did that? And then as much as you can, I understand you there's some things you can't say, but how's the process going?

So a frequently used term in fund management and portfolio portfolio management is capital allocation or asset allocation.

And in a world where you can't raise additional capital, you you have to raise it somehow because, you know, a a a mantra we followed is trying to turn a pound into a pound something, you know, thirty, fifty, whatever to create the upside. And the capital growth of this investment trust has enjoyed as the NAV has NAV per share has grown, it's really been a function of the IRR of projects being at a at a at a premium to the discount rate despite the discount rate being pretty high. That's that's how you create capital growth in this sector. And you, you know, create this, you know, that also creates a big margin of safety to make sure that you preserve value if revenue expectations come short, which they are at the moment. So if how do you raise funds if you if you can't tap the market? You you recycle capital.

And so that's what the the, significant premise for this deal is. And, that's what we look forward to to executing on. It also, you know, has all the benefits such as, you know, creating a evaluation event in in demonstrating the value of these assets at at at whatever level prevails, but, you know, we can't communicate that. But we we look forward to executing something and communicating that and something at scale, not not just a sort of small transaction that that helps, you know, the expression is proving the NAV, you know, or or as close as possible one way or the other. So so I think capital recycling is is a hot topic in the investment trust sector because you can't raise funds when, you're trading below your NAV. And so, you know, proving that your NAV is is is a correct valuation and recycling capital are are the motivations, amongst a couple of others.

You know, portfolio rationalization and so on are are the factors in our case. And we look forward to to executing on that.

It's gonna be fascinating to see because Question House has got assets for sale, and Harmony Energy's got assets for sale. And by I know you can't comment on this, but but I can because we see the market. There's a lot of interest in these operational assets. And so there's a world where the the share price is trading at trading at a forty percent discount, and then there's asset sales above NAV.

And you have this huge imbalance between a market event and the the the real value and then the, publicly priced value. It's just it's gonna be a a can't wait to see what happens. I know we've got a few more months to go to to to see what happens there, but let's see. Let's see.

Yeah. Let's see. You know, when when when the investment trust sector has gone to a steep discount in the past, eventually, that discount closes. Some of it might be NAV resetting as we've seen a degree of. But, of course, generally, if we get another interest rate cycle where interest rates start heading downwards, it'll be interesting to see what what what happens in the market. And, you know, transactions that evidence value will only support that.

Excellent.

Excellent. Lastly, is there anything else that we haven't touched on that you'd like to share with our listeners? Or any thoughts before we finish?

Oh, Especially, you've been very thorough with your questions.

Thank you very much for having me on. And, you know, it's it's it's ultimately a a long game. And, you know, cycles do turn pretty quickly, especially in energy markets. So let's see where we go from here.

But the opportunity is still ahead of us. We are going to a world where we have upwards of twenty gigawatts of batteries by the end of the decade, probably upwards of fifty to seventy if we do go up to the higher demand levels that everyone's projecting. And I do think that, you know, just to reiterate, batteries can do the vast majority of the necessary storage. And we should be looking at demand side solutions rather than storage or fuel solutions for those long duration requirements, demand side.

That's that's really important.

Alright. You had it here first. Ben, thank you as ever for coming on the podcast. It's great to have you on, to hear your view on the market.

Very, very unique position, and congratulations on this deal. We're gonna be tracking it in detail as you can imagine. The the the the good news is it's win win. Either the comp the price comes in below fifty six over the next two years, and you think, my god.

I'm glad that we did that. Or the price is well above fifty six, and the other half of your portfolio does well, and we're out of the cycle, which is good for you guys as well. So we'll we'll be watching, in in anticipation.

Thank you very much. No. I'm I'm delighted to have done it, and, you know, let's see what else we we do we do over the next couple of years. And I'm sure north of what's gonna happen if it's if it's another two years before we we speak in in on the podcast. So it'd be very exciting to see what what happens next, but there's there's a lot coming in this market.

Thank you for listening to Transmission, a MODO Energy podcast.

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