Why “Perfect” Battery Models Keep Failing in Reality - Harmony Energy

A set of architectural drawings is not a house. The drawings are precise, detailed, took months to produce, but between drawing and building things change. Groundworks don't go to plan, lead times shift. The drawing was always an intention, not a guaranteed outcome.

Battery storage is full of the same gaps between the revenue forecast and the actual returns, the capital structure that worked and the one that doesn't anymore, the market you modeled and the one you're actually operating in. The developers who survive that gap are the ones who designed for it from the start. This episode was filmed at the investing in battery energy storage conference and is a live recording. So I hope you enjoy being part of the audience.

Paul Mason is the chief investment officer of Harmony Energy, one of Britain's most active developers. This episode isn't about what the forecast said, it's about building a business that wins when plans change. For episodes like this, we often get follow-up questions. Perfect for asking to Ko, Moto Energy's AI analyst.

Check that out today. Link in the description. Then back to the episode. Let's jump in.

Thank you. Thank you for coming along today. Hopefully, my mic is kicking in. You can hear me. I think I can hear myself, which is slightly off putting.

Today is gonna be a bit of a a special treat. Usually when we record these episodes for transmission, we record them in a sort of small booth where there's only about three people there. So when you make the inevitable mistakes, can go back through and correct yourself. But today, we're gonna be held to account in front of a full audience, so that's gonna be a lot of fun.

Just to start off and to help me understand kind of who's here. For the people we have in the room, how many people here have listened to transmission before? Show of hands. Okay.

That's better than I expected. And how many people have been on transmission?

Yeah. Okay. Okay. I think I think well, there's another one here as well. Right? So so fun fact, Paul was guest number one of what is now, I think, episodes.

That's fine. It's it's yeah. It's beyond time to get you back on. So let's let's get into this. Right? So the one question I want to ask to start off with is what does everyone get wrong when they think about or talk about building an IPP?

Okay. I'm I'm not convinced there's one thing that people get wrong, but it's probably maybe helpful to think about things that I think we have done quite well.

We, Harmony, we started always as a developer always developed with the mindset that we would own and operate projects long term. And that's not always been the case. We've definitely sold some projects along the way, but it was always the intention to stay involved with projects. So when you start developing in that way, you look for the problems that you can expect and you deal with them early and it's much easier to design solutions when you're still at that planning and design stage than finding out once you've bought a project from another developer and you're trying to uncover what might go wrong.

So I think that sort of mindset has set us up really well from the outset. I think when you get into construction, we have tended to go down the route of full EPC contracts.

Despite that, we have insisted on having our own project managers very heavily involved.

Even when you've got that full wrap, there's a lot of issues around interaction between your contractors, grid connection, staying on top of DNO's, etcetera. Have they procured equipment that they should have done? So I think we've seen projects come online much quicker than some others, which were being built next door. In some cases, we saw some of our competitors have year long delays where our projects would come online because of that maybe slightly more detailed interactions through construction stage.

And I guess really just coming back to maybe your topic from the earlier talk, I think there's potentially a risk that people treat revenue forecasts like a detailed cash flow forecast that says in July twenty twenty six, you're going to earn exactly that much money and then get very upset when it doesn't arrive. So I think a bit of expectation management around what a forecast which is used for valuation purposes might, you know, might be used for and how that might be misinterpreted. So I don't know, maybe a few things along that I think we've tried to do well and really get into.

This is kind of saying more is more, right? So if you have the history and context of the sites when something then goes wrong, you're in a better position to manage it and that can both be from the physical operation of the site, so developing it, operating it, but it can also be from the revenue side as well in terms of okay, that forecast number, that's been up, that's been down, but I know that it's not a fixed cash flow number to be writing down and to be raising debt against. There's some uncertainty that comes with that figure.

Yeah, exactly. I think it's looking at a range of potential outcomes rather than looking at a central case and saying that's like factual expectation of what's going to happen, understanding that there's a huge range of potential outcomes and that it is quite wide. So, for example, when we took the early decision to go into two hour batteries, Lots of others were still doing probably mainly an hour, but some were probably still sub-one hour batteries getting built at that point. And your central case would tell you that the one hour battery or even less was the right thing to do because your revenue forecast said ancillary services were up here for a while and then they will come down.

But it didn't take a lot of sensitizing to say, well, what happens if that happens a year earlier or two years earlier, and all of a sudden your central IRR tanked in your one hour case and your two hour case dropped a tiny little bit. So it's around looking at those range of range of outcomes and designing the right solution from from the beginning. So sort of feeding that view back through the development team, making sure we're developing the right projects, getting planning for the right projects, and then procuring the right kit.

Yeah. And I think what what's really interesting, right, is for the Harmony team, you've done an element of sort of the full life cycle. Right? So you have developed in the UK, you built those projects, you've operated those projects, and you've sold those projects as well.

That's something that I think a lot of people in this room will will sort of move towards at some point. Maybe they won't sell them. Maybe they would say that now. Maybe they might sell them in the future.

We'll we'll find out.

But what's quite interesting for me is that you were one of few groups who's actually seen that. So on that process, what are your sort of tips for others who are looking at that space? What are a few things that you learned along the way?

I think it comes back to that development from the outset and looking longer term, but we didn't necessarily go out with the idea that those projects that we built would be sold within a four or five year window, where the idea was obviously that we would create a listed fund that would buy projects off us as a development group for many years into the future. We would grow that platform, expand its mandate, you know, all the rest of it. Being flexible, I suppose, to understand what's going on with markets, take a look at the Fund's inability to fulfill that primary purpose of buying projects and take a more rational view about how do we continue to develop and to grow and in order to do that, we have to take a decision to sell, which wasn't something we wanted to do. Luckily, we're still involved in managing those assets, so they still feel part of the family under this different ownership.

But yeah, I mean, coming back to the question, I think it really is around design the right project, understand those range of outcomes, find the right pool of capital at the right time. I think the listed space was the right mechanism when we launched it and I think we talked about this back on the first episode, but it was a very different week. As you know, I've been trying to raise money into batteries for a long time prior to that and that originally started with talking to individual investors about big ticket investment into a portfolio of projects.

That comes with a lot of detailed questions, back in twenty sixteen, twenty seventeen, twenty eighteen no one had the answers to because it was a new thing. So there was lots of theory that said it should work, but not much track record.

That was easier to sell in the listed space, where you're talking to fund managers who manage billions of pounds and you're saying: can you give me three million or four pounds or five million pounds This is the story, is why it works and people are willing to take that sort of punt. So that's why we ended up with most of the batteries in the UK being owned by listed funds, because that story was much easier to sell at that point. Yes. But as soon as the capital starts flowing out of that space, out of London, those funds can't operate in the way that they need to.

So it's You need to look for other sources cash.

Exactly. And because we were always a developer first, we were never set up to be a fund manager, that sort of was happening by default, because we wanted to have a friendly off taker for our projects and stay involved in them. It meant that we were much more open, I suppose, than somebody who is predominantly a fund manager, who wants to remain being a fund manager. We're much more open to to saying to shareholders, look, this clearly isn't working. Your projects are being valued at at some points thirty percent of the real the real value and we believe we can prove it.

So, yeah, essentially you had assets that were being valued better privately than they were through Yes.

Through the the That was that that was the theory and everyone goes through their quarterly valuations and the numbers all were coming out up here and there was a big question mark from investors, I guess, around whether whether those values are real.

We felt very strongly that they they were and thankfully took it took it to market, went through the process and and then came out came out good.

And let's talk about that in in a moment, but I just want to reflect back on something you said earlier around sort of the the variability of revenues, where they come from, how much they bounce around. In your first interview, which I happened to listen to yesterday, there was a lot of conversation in that about whether batteries could ever take part in the balancing mechanism. That was to give people kind of context of kind of how far this this space has come, there was a I don't know whether Roger Hollies is here, but there was a shout out for Arenco and some of the earlier work that that was done in terms of like testing out the balancing mechanism. And now it feels so second nature to us that this would be like what a battery would do. When we look at the fleet, we see all of the batteries in those markets providing those services. Yeah. So maybe just to go back to see what history can teach us, that revenue stack has just changed so much over the last few years.

Totally and I think there's still a way to go, right, in terms of I almost think looking at revenue stacks now is a bit of an odd concept, because all of the revenue streams are effectively just a way of buying or selling power. People are not bidding into ancillary services to get the money for providing those services now. They're bidding in because by providing those services they're either charging up the battery or discharging and that's the most efficient way that whatever optimization algorithm is running says that you either buy or sell power. So I think to try and split it up is a really difficult thing because you'll end up with some revenue streams looking negative. Yes. Right?

And we we saw this last month for the first time that the fleet in GB effectively looked like it was losing money in the wholesale market. Whereas in reality what it's doing is it's charging from the wholesale market and discharging into the balancing mechanism.

And this I can't remember whether we talked about this five years ago but it was always an issue where even back then you were more likely to get export volume through the balancing mechanism than import. I was talking to Roger about this last night and sort of catching up over those early days where we were both trying to make that story work, I think I still feel that in theory you could do without ancillary services and you could run a battery fully in balancing mechanism and it should do very well. The issue is still that it doesn't necessarily get that fair shot against other technologies.

At least now we're seeing it gets a fair shot against other batteries, so you can sort of price yourself against your competitors, but there's still a big piece of the pie that's missing there.

That's still there. Okay. Let's come back to then the sale process of those assets to Foresight. And I think the thing I'm really interested in is do you see in the same way that the solar space had? Do do you see there being like a cost of capital shootout in the battery space? And ultimately, we're gonna end up with six players all at sort of very low cost of debt that hoover up all of the projects that are in this room? Or do you think there's a world in which we have thirty or forty battery players that continue to own and operate portfolios?

It's probably something in between that. I think you've still got investors who want to hold batteries for quite different reasons. So you've got the pure financials where it comes down to cost of capital. I think you will start to see more of that.

I think you probably start to see migrate more towards what we saw in offshore wind, where you get players who are developing, building, getting things operating and then looking to sell down minority stakes to that more passive low cost of capital and that's certainly the way we see Sort of a classic utility, right?

Own fifty one percent and then forty nine percent comes from somewhere else.

Exactly. And that, you know, there's still a lot of complexity around operating, optimizing the battery tech. So it's not pure passive where you're just you pay your money, you collect your check every month. It requires a bit more active management than that. So I think to keep whoever's managing the asset actively involved in owning the majority share, think, is probably a requirement for that lower cost of capital to be happy to sit in there.

Okay. Let let's go let's go to the future. Let's leave GB. I know you're now starting to look at other markets across Europe. One of the questions that's come up on on screen, which I think is a really good one, which is sort of what criteria is is is important when you're looking to select new new sites.

When you're looking at a new market like Germany, what are the sort of standout features that you need to see in order to be able to commit to those markets?

Yeah. So I think as a developer, it's quite easy to take a view on new markets in terms of we're pretty sure renewables are coming everywhere. Where you've got renewables, you've got a need for storage. So if as a developer you can go and find some land, get some planning and connect it to the grid, you've created something that's of value. The cost of getting that is relatively low. Yes, there's risk, there's binary risk around it, but we can make that quite easy. So it's a different story when you're looking to actually build it, right, and operate it and then you're much more into how am I going to monetize this, what's the volatility around that potential range of outcomes and therefore can I commit the construction capital?

But when we've gone in To push you on it, what does that list look like?

What does say the top three things you're looking at in How yeah. What do you rank?

So we so so we do look for sort of renewable penetration as an indicator of, you know, how much storage are you are you going to need. But we look for and we want to see a market size where we can get a reasonable scale and not be, you know, ninety percent of the market.

Looking at like twenty percent of the market as a maximum absolute maximum that we would want to What's reasonable?

You talking about one hundred megawatts or gigawatt?

Well, when we started off going into these new markets, we were talking, like, two hundred megawatts, and each team we've gone with has totally smashed that, we're in gigawatts everywhere now. But it was it was modest modest targets.

We have a nice title for the episode now, Gigawatts Everywhere.

But, yeah, I mean, it was but you've got to put it back to where we entered France in twenty two.

At the time, projects were still sort of fifty MW at pop. So you're looking for, say, four fifty MW projects to make it work and you can that's enough to figure out that you'll get your development capital back, make a decent return on it. It's probably not enough to say you want to be in there long term owning, operating.

But as I say, we started off as a developer in that sense.

Really interesting questions come through on the timings of those markets. As you say, lots of markets need batteries and gigawatts everywhere.

How do you the question is around the do you try and get into markets really early and so you capture those kind of early frequency response revenues or do you see are you very happy to go into a market when that market is sort of saturated, the frequency response market and it's much more a wholesale play? Do you mind?

I think it's less about the revenues, it's more about how much grid can you get, right? So we got into France quite early and we are always very grid led coming back to your sort of how do you I think there was a question around selecting sites. Well, basic development stuff: you want your site to be as close to the grid connection as possible and you want the grid connection to have as much capacity as possible, so basics. But so France, we took a view looking at the system, a lot of players were looking at slightly bigger sites, transmission connected.

We are still looking transmission connected, but lower voltage, which allowed us to bring in lead times and then make that case around getting in early with curtailment risk and looking at the trying to pick up a bit of the ancillary service revenue before it falls. We've turned on our first French project in December, so we're just picking up a bit of that, but we have seen it come down from where it was a year or so ago. I think if you're investing in any of these markets on the basis that if your business plan requires you to pick up the high ancillary service revenues, I think you're on to a loser to start with.

You need to be assuming your business case is working off a merchant sort of energy arbitrage model ultimately That's a really core message, right, for any investors considering any market. Unless you're being incredibly sort of gung ho and you're in a market that no one else is considering, then you absolutely need to be based You can there's obviously you you can take you look at some of the Nordic market markets, right, where you could get in, you could have probably paid your battery back within about six months.

Okay. Fine. That's a if you can do that and you can scale it, great.

But I don't think that's certainly not the norm for the way that we would look at markets and we would tend to just say ultimately ancillary services will be saturated, they will be priced against what you can do in wholesale and balancing markets. Those are the deeper markets, so let's assume that's happening.

And just to go back a step, you talked sort of strategically, you like to think about markets in terms of renewable penetration and then sort of tactically you were saying, well, do I actually get into that market? How do I get a grid connection? Of all the markets that you've looked at, have you seen grid connections done well or is that like a thing that could never happen?

Where would you say the best markets are for that and what have they done well?

Yeah. I don't know.

It's a difficult one because they're always the the grid is always the challenging element and it could always be be done better.

I think where we see it going, you know, making life more difficult is when you've got real uncertainty around what's happening. Take, you know, could connections reform now is is sort of the the in the UK, the idea behind that is is very sensible, but the result of going through that process means there's a huge amount of uncertainty, which means stuff stops happening, which would otherwise be done. Right? So we've got projects that are ready to build that probably would have started construction by now. We're pretty confident that they will come through this because we know what the queue in front of us looks like, but until it's written down, you it's difficult to get an an investor to to sign off on that.

And so that that grid connection problem in GB has certainly been well documented and well talked about. Is there any way that you felt that the grid connection queue has been better than GB?

I mean, that's a that's a good question. Think the early projects that we picked up in France, I think, have been relatively smooth because we got in at a sensible voltage. There weren't loads of other competing projects at that time, but it's now really hard to pick up anything new. So growing that pipeline beyond where we're at is really challenging. Germany has got its own challenges, as you know, around what's happening with grid fees post 'twenty nine.

It could be some upside, could be some downside. Again, it's creating a sort of artificial cliff edge.

Critically uncertainty, which means finances really struggle to get into that Exactly.

If you know what the charge is beyond that point, it's fine. It goes in the model and the value of the project changes. That's fine. But whilst it's totally uncertain, some investors will take a view, right, that the grid needs batteries and therefore whatever comes in is not going to completely kill the business case. Others will be more cautious.

Yeah.

So so we've talked about the the sort of finding markets and then building in those markets.

The next phase, I think, that's interesting for people is is the phase around once those assets are alive, and that might be a position that people in the room haven't necessarily had their assets get to that point, Like, what have been some of the things that have allowed you to get the most out of a fleet that has been operating?

Yeah. A couple of things. So right the right kit coming back to earlier, you know, making sure duration is is right, that you've got good kit, good availability, it's not available, it's not making any money.

Grid is another issue there in terms of grid outages.

What does good availability mean?

As ballpark percentage?

Ballpark percentage, I mean, in terms of our kit availability, we're generally sort of ninety nine percent plus availability.

Where it drops below that tends to be grid outages which are not necessarily foreseeable. They will even out over the life of the asset, but when they it can look pretty bad for a given month or year even. So I think you've got to keep it available.

But I think coming, you know, the topic that was discussed earlier around being on your optimizers and working with them to look at strategies. So we worked very closely with Tesla on those projects that we bought online, did quite a few trials, we put stuff into the BM, you know, as a one hundred percent take don't do any ancillary service, don't do any wholesale, just go BM trading and see what happens. And I think that sort of thing is really important, because all of the trading algorithms are based on effectively understanding what's the opportunity cost. So you're bidding day ahead, how much capacity do you want to put in day ahead versus what might you make if you leave capacity for tomorrow.

And if your data on what the opportunity cost of the BM is based on what it looked like in twenty twenty one, you're not going to be making the right decisions around how you bid today. So you need and you don't get data unless you try things. So I think an openness to trial and actually running things which might look suboptimal for a while just to get data and better learning, think it's been it's been a good thing for us.

So how do you so I think the hard thing here, right, is that the traders know a lot. Right? They have a lot of access to information. They can see every single half hour.

They see multiple markets. Asset owners tend not to have that level of information. So how do you find that right balance? Because you don't wanna be in their in their sort of face all the time asking questions about everything because they will, you know, they they have their own businesses to run.

So how do you strike the right balance of trying to encourage them to look at things that maybe aren't on their radar to begin with?

Yeah. So I mean, if you if well, if you walk into our office in London, there's as soon as you walk in, there's a big screen which shows charts of what all of our batteries are doing live real time, so we do look at every half hour as it's happening. Not necessarily it's somebody's job to sit there and watch that screen all day, but there's a lot of attention that goes on to that. It tends to be managed through regular meetings where you will review what's happened and I think understanding that you shouldn't be calling out an optimizer because on one day it looks like they did a really bad job because you know, algorithms are algorithms and some will work well under some conditions and less well under other conditions, right?

So I think you've got to take a longer period of time. But if you see trends where there's other assets which are consistently doing something different and it looks interesting, we talk about that sort of thing. But equally, when we see things not happening, like for example BM usage where we think logically there ought to be more value. It's a case of understanding what's the approach to that.

We do that when we select optimizers as well. When people started tendering for optimizers, I think there was phase and I was working with Orsted at one point and sort of actually helping them respond to some of these tenders and they were pretty painful in terms of very long questionnaires with lots of requests for backcast data and forecasts and the rest of it. It's all a little bit of a nonsense really, given it's going to be totally different when you get there and the way that backcast tests were working.

Particularly insightful, I don't think.

But we've moved much more to an approach of we'll go and just spend a couple of hours with optimizers, speak to their traders, speak to their data scientists, understand how we would all work together, what are they prioritizing, how do they, you know, see optimizing a battery? Walk through the day? What's going on? What decisions are we making at what point? Where is it AI? Where is it a person overriding it? And that sort of thing.

Because in a tender process, you might think, no, that's not possible. I can't go and ask them those questions. Yeah. From your experience, you know that I can go and visit them in their office. I can talk through what this looks like.

And they tend to be quite, you know, nice people.

Very well. Yeah. Indeed.

Contrary to what what what might have been said about some of the traders Oh, well.

Yeah. Very good. Okay. So think what's quite what's quite interesting for Harmony is that you've traditionally sort of been quite GB focused. You've now got lots of projects coming through, say, in Germany as well as France.

Does that mean that the the space for GB is something of a a sort of old hat to you? Do get excited about GB or do you not?

Yeah. I think we still get excited about GB. We're, you know, we're excited that we're building our first project in GB for a long time. It's only a tiny little one by today's standards.

What's tiny little Thirty five megawatts.

Oh, that's tiny and little. Like, at least a gigawatt these days.

So but, no, we're still excited about GB. Lots of lots of opportunity. But, yeah, other other markets it's fun to be getting into other markets and understanding everything that we don't know about those other markets and what we did learn about GB and we spent a lot of time getting into a lot of detail in GB and I think that's why we were able to do so well. We're trying to follow that same route and selecting teams to go into those markets has been the real key for us. We've taken good teams that we've had prior relationships with through either selling them projects, advising them, working with suppliers.

This is so important, isn't it?

The kind of having people on the ground who are familiar with it. You can't just be sort of a GB head and then sort of parachute it in. You have to have experience.

It it it fundamentally doesn't work in our opinion. Need you need to be on on the ground, properly motivated to go out and find as time matters, right? So we'll come back to grid connections. So you need people who are properly motivated to get high quality projects and they can learn from what we've done around, you know, identifying where there's more likely to be grid connections, red flags and site selection, avoiding, you know, it's and again, it's all it's all basic stuff, but it's it's obvious once you've done it.

Yes. The you know, it's always the case. Right? The stuff you don't know is what what will trip you up.

That we can take the learnings from the UK, take them into other markets, get a team of highly experienced professionals just running running hard at it. And I think being able to point at projects that were operating with Harmony logos on, I think, was really helpful for them to go out to landowners and say, look. We're a real player here. We're not not just a one man band developer who may or may not ever build this project.

This is something that will happen.

Done it before.

You can trust us. We've got the track record. Exactly. We know how to handle the supply chain.

Yeah. Let's let's you can keep the Harmony hat on if you like, but let's also feel free to take it off. We've got a couple of questions that come through from the audience, which is very nice to be able to do. So first question, what have you learned from the what have you learned so far about the real economics of colocation of solar and storage versus the theoretical benefits?

Because I think most of what you talked about here is stand alone. Right?

Yeah. We we we to be honest, we've only built stand alone best. We've developed some colocation. We've tended to sell solar projects that we've developed, so whether that be stand alone solar or or colocated. And I think that comes back to the ethos really of us focusing on our core strengths and where we have a good reputation is in Bess and that's that's the expertise.

So that's that's been you've you've kind of played where your edge is. Right? And that's a really important message for for everyone. Let's see if we can get through one more of these.

So is there a material risk that best projects face a similar revenue cannibalization like solar projects in Spain? That's a fun story. Or wind in Nordics due to quick market saturation. How do we tackle that?

You talked a little bit about market saturation, but what's the what's the twenty second answer to that?

I mean, I I think the risk is mitigated by by looking at those energy markets. You've got, I think, a fundamental upside to most forecasts around batteries having an ability to make money when things go wrong. So prices are higher right now because gas prices are higher. They were higher back in twenty twenty two. In twenty sixteen, you had all the French nuclear fleet out. The prices were higher, right?

So batteries are exposed to that market volatility.

When there are upside exposure to that sort of stuff, it's impossible for you to build it into a revenue forecast that you're gonna bank or even base your equity base case on.

But you know it's there, and you know it. If you hold the asset for long enough, you know you'll get some of it.

Yeah. It's interesting. You know it's there. Right? But but can you convince a financier that it's there? That's the hard part.

No. That's what I'm saying. It's not your base case.

It's it's just upside that you So this is outside of the debt piece, but you Exactly.

You as a you as an owner, you as an operator. Okay. Last last question from me to wrap up. If tomorrow you were in charge of European power, what is one thing you would do differently?

A a proper quick grid reform that removes the uncertainty, right, where we have a fair playing field, projects that are ready to connect can can connect in a in a in a fair transparent way. Okay.

Yeah. Wiping the floor on connections and going first ready, serve. Let's get things connected.

Yes. Love it. Paul, thank you very much for coming on transmission. You've been a wonderful guest.

Thank you.