With Laurn's segle End from London and Gerard read from Berlin.

This is redefining energy.

Today.

On Redefining Energy, we're going to talk about the opportunities in the German battery market.

And it's going so crazy.

I call that a blitz.

But first of the well, from my partner.

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Back to the show, Yeah, that's a good way to put it all, right, absolutely, and it's huge amount of drivers in that market, Laurn starting with just price volatility, right, incredible.

What's going on before we introduce our guests, I've decided to bring on for a few minutes Zach Williams from Model Energy because Modo is really the best analysis of every battery market for three four minutes.

Zach is going to explain us what's the set of play in the German battery market.

Let's listen to Zach.

Zach, welcome and please give us a broad picture of what model analyzers and then a few key figures on the German battery market.

Yeah, thanks, Lauren murder Energy.

We look into how batteries are performing today and how they're going to perform in the future.

So we offer benchmarking services, power price and batchy revenue forecasts and also research into these markets.

So some of the key topics, challenges and risks behind that.

You follow GB Australia, Texas, California and you recently opened Germany.

Yeah, we originally started in GB and for about a year now we've been doing the US markets and Australia and most recently now expanding into Europe, so Spain, Germany, France and Italy next on the list.

So it seems the German market is very hot right now.

What's your assessment of the German market now and going forward.

Germany is a really hot market at the moment.

There's a lot of interest both from the local developers as well as a lot of foreign investments.

So a lot of companies that have got a lot of experience in gb that are looking how to get assets deployed in Germany as well.

The merchant case in Germany is particularly strong, so you've got really strong, robust merchant returns across the three key portions of the revenue stack.

So first of all, the fundamental case in the day ahead power market.

Germany has the strongest daily power spreads of Europe's major markets.

So there's over one hundred gigawatts of subsidized solar capacity and only eighty gigawatts of peak load.

So during peak solar hours, the grid is flooded with this additional solar energy which it can't consume.

So the result is you get these deep troughs in negative prices.

So Germany has the most frequent negative prices of Europe's major markets and the deepest negative prices.

So it's a dream for batches because you can charge during these periods of deep native prices and shift that energy to later in the day when power prices have returned.

So yeah, ultimately Germany has the strongest day head power price spreads in Europe.

On top of that, the market design in Germany means it has an extremely lucrative intra day market.

So why is that.

Essentially in Germany there's no central balancing mechanism like you have in markets like in the UK, and there's very strict imbalance penalties for being out of position.

So if you're a solar or a wind or thermal generator that's out of position, you deliver more energy or less energy than you agree to, you get charge to penalty.

So they're strongly incentivized to make sure they sell as much energy as they produce.

How this happens in practice is solar producers will forecast how much energy they produce in the day head market.

Let's say this is one hundred megawatts.

Then for the following twenty four hours, as the forecasts are updated, they get a clear idea of how much energy they're going to produce, they correct their forecast in the intra day continuous market.

So this creates a lot of intra day volatility which batchies can take advantage of.

So I've heard batteries can trade up to fifteen times as much volume as they actually deliver, so a lot of non physical trading in the inter day market.

And on top of that, you've also got the ancillary services.

So Germany requires about five point five gigawatts of total ancidary service demands which are not yet saturated.

And the star of the show in that market is the AFRR or Automatic Frequency Restoration Reserve, which you can bid two gigawats in either direction, and there's only around five to eight hundred megawats of batches registered in that service already.

So if you're an optimizer of bat trees, you've got these three really strong revenue streams which you can cross optimize between.

And that's why Germany is looking so strong and so attractive for so many different players.

Well, thank you very much.

So it's a very very out market.

Thank you so much for coming.

Thanks my preasure.

So Jerh, we've decided to bring a very special guest.

We could have brought a very established developer institutional, but we have decided to go for a pioneer commando absolutely.

So what we've decided to do is bring in Philip Mann, who's the CEO of a battery business called Terreller, very active in the German market, and some very interesting and pioneering agreements that they've put in place, which I think are very important for the future.

Of financing batteries, not just in Germany but across the world.

Yeah.

Absolutely, And one of the innovations well, first of all is vertical integration, but with partner at every step of the way.

But the second he has a master of toting agreements and a toning agreement.

Basically, you build the battery and you go contract with a trader and somehow it's a swap fix to viable, which means Talaa is going to get a fixed revenue.

So that's excellent because you can raise that on the top of that, and on the other side, the traders and these are big guys with that and fil they get access to the battery and they trade around it without having to invest in the battery exactly.

And that's very important because people don't understand that the trading desk in those big company is very very far away from the industrial department.

So in fact it's faster to go through a third party than trying to organize something in.

House exactly exactly.

So as and Minor, we bring Pel upon the show.

Philip.

It's great to have you on the show.

Thank you very much for inviting me.

Philip.

We like to bring thriving on top onurs and I think you're one of them.

Three years ago your company did not exist.

You have managed to raise close to one hundred million of equity and debt, which is pretty phenomenal.

So how did you succeed so fast?

When we started November twenty two, we were still running our old company, which was a B to C luxury marketplace, and before that, I started my career at Glenkor.

So the way I think about it is it's kind of coming back home, back to energy, which way I started my career.

We've been able to move quite fast for the simple reason that there's this massive over indexing and renewable energy generation investment structurally too littless happening in grits and in storage, and so we felt very quickly on that this is probably one of the largest single asset capital deployment opportunities of our time.

Everything is about AIAI is fundamentally about built world, which is data centers and data centers about power.

We very quickly managed to create a differentiated value proposition and hypothesis, which, combined with attraction that we droped G attracted a lot of standout investors, and we've been very lucky too.

Yeah, i'd be just to hear what you think, are you as peers.

Yeah.

So when we started with this business, you know, we looked at storage.

In Germany November twenty two, there was under a gigawoud of grid scale bes.

So we said, okay, well, there's obviously not enough storage, but if you truly believe that this asset class will be as big as people think, we felt three things needed to happen to make a differentiation.

First one is aim there will be a lot of people that need flexibility, large CNI traders, utilities, et cetera.

It will not be practical for everyone to own and operate their own assets, so we said, somebody needs to build something like the Amazon Web Services for energy flexibility.

The second point that we made is that we said most people look at flexibility and best as just a development business.

But you know, storage is an active asset class.

If you build a PV plant, then you do nothing with it, still produces power when it's sunny.

You build a battery and you do nothing with it, well, it does nothing.

So I think a lot of the value is actually in the commercialization of the asset.

And the third thing that we said, is you need to ownly off take.

It's an infrastructure asset class in the making.

It looks like infrastructure, it's hard assets, it's on the ground that's power involved.

But if you actually look at storage, it's a volatile business in the very nature of it.

So we said, you need to enable to attract off takers to drive long term revenues and if you have these, they would scale with you on a global basis.

And we just closed two deals recently in Germany, one with RWE, one with button FID.

And while obviously electricity markets are local, Germany is different the France, France, it's different the Spain and so on, but the off takers are global.

So once you have somebody in Germany, you can expand to other markets for them.

And so these were three key hypothesis that drove what we built, so ultimately that led us to build terror Alayer.

What is terror Layer?

We are a integrated energy flexibility provider, so on the one side we kind of have two parts of the business.

On the one side, we are a quote unquote conventional best developer owner operator.

We develop in ourse with partners and we own fifty percent of a joint venture where we develop grid scale back batteries, currently one hundred percent focused on Germany, and on the back of that, we've built an off take platform that aggregates these batteries, virtualizes these batteries and essentially markets portfolios of these batteries by toilling them out or renting them out to large off takers in a way that you kind of circumvent the conventional way to monetize these assets, because typically today when you own a battery, you have one of two options, very simplified.

You can go to a trader called optimizer and they will trade your asset intra day day ahead.

Then in the ancillary services you get very high revenues potentially, but it's volatile cash laws or b you can go to utility and you can rent out the capacity, which is great because then you have fixed revenues, but all the upside is gone.

And also the problem is that currently in Germany ninety five percent of assets are below twenty megawats in size.

So we said you shouldn't have to choose fully risky or fully de risk the no upside.

So we've built a platform that aggregates assets across portfolios, building one large virtual battery across a portfolio, maybe Bavaria or across Frankfurt, and then gets off take us the ability to rent this capacity without the constraints of the individual assets.

Thank you for the sales speech.

I hope we didn't lose half of our listeners.

Let's be a bit granular.

You raise on hundred million.

How do you choose your first sights and choose your supplier?

Because I've been buying batteries that I can tell you it's a bit of a headache.

So explain that process and the type of team you have.

I would expect more established guys like in Caves or the classical solar developer to do that, but you managed to beat them.

So how did you really build your asset first before you market them.

Yeah.

On the development, there's two ways to develop.

Obviously it's our quantity, but I think it's also very much more quality.

And we've been fortunate in the approach that we didn't just develop in house.

So we very early on started developing with co developers, started a company with an engineering company from Hamburg, a greenfield development JV of which we owned fifty percent, and then also we did greenfield development in house and so from very early days we essentially developed across all forty SO zones in Germany.

We currently developed in thirty three DSO zones.

And the reason why we were able to do this faster than others was we had very fortunate timing to the market, but b we didn't have this romance of doing everything greenfield in house.

We were happy to leave some economics on the table and have our partners make money as well to kind of parallelize the greenfield development efforts with many teams.

So I think that enabled us to very quickly develop and as a result, we currently have two assets life in Germany, we have six assets in construction.

We're about to sign another nine assets into constructions in Germany.

And also we focused very quickly on the medium voltage, which is kind of typically ten to thirty megawads in commercial zones because it's faster to be permitted.

As for the second part of the question, how do we choose the suppliers, We have a team from from Affluence from O rwe from A Noah from g on the team.

We could in theory do full EPC in ours, but we buy fully repped, so we go to strong EPC partners like be Storage for instance in Germany or Axola and by fully repped.

We have a team that is very active as a customer.

You know, we drive to the sites every week, we look at how the systems are packaged, et cetera.

But we decided to focus on where we think drives the most value with our skill set, and that's the development process and the commercialization process.

Can I ask just to talk a little bit about the German market because what we hear is two hundred gigawats of batteries potentially in planning, and then we hear that you've got the distribution companies like the eises By our nets are blocking every single battery coming onto their system.

So just talk a little bit about the dynamic there and that also what that means for your business going forward and how do you deal with that.

There's a German saying, which is everything is cooked hotter than it is eaten.

What that fundamentally means is, you know, people talk about development a lot more than what is actually developed.

So what you mentioned with buying there, etcetera.

Is absolutely correct.

And there are these publications about two hundred gigawats of grid reservations et cetera.

But at the moment, and this is this is changing, and this is good for the industry.

But up until very recently, you know, everyone with a mother and a dog was able to submit the grid application with just the power of attorney, with a piece of land without having to secure that.

But the quality of a lot of these applications is really low or these are people that actually don't have the financial means or the engineering means or the capabilities to realize these projects.

And so what you see a lot in Germany is there's a lot of talk about all these grid applications and a lot of the disls and thesos just shut down these processes and they're now asking for proxies that help them determine seriousness.

For instance, they want to see, do you already have that a system designer place?

You have you already submitted the building permit?

Are you able to prepay a portion of the grid connection?

Charts the b KT about cost and sushus and so this is how they're kind of trying to triage now who's actually able.

But the numbers that you just mentioned, I mean I read about them too, and you read about battery tsunami, et cetera.

But I do think the people that are actually able to realize, construct, finance and operate assets this is a very small number in Germany.

I am not that concerned about this flood coming because I think a lot of this stuff is just not high quality.

You're smart, you have good partners, whether it's the EPC, the engineering.

You start building your batteries, when do you decide to go for the tolling very early on, like almost before the construction or once the construction is finished.

So how does the tolling and turn into the process.

So basically, the layer platform that we build allows us to aggregate many assets and for a single API to give the off taker one virtual battery.

The deal that we did with button file, for instance, is eight assets spread across the tenet region.

So what we basically do every quarter is we assemble a cohorede of assets which we bundle and virtualize.

Once these assets are a ready to build or before ready to build, we run a competitive auction with different offtaker partners like button File and Rwe We typically then sell fifty percent of the capacity upfront at pretty much at the same time as we mandate the EPCs.

The acids then get into construction.

Typically this takes give a take twelve months once they're alive.

And then once the assets arelive, we have fifty percent capacity already told typically right now between five and a half and seven years.

This will go longer over time, and then fifty percent is merchant.

Now the merchant size the way that we operated, we auction it off on a daily basis to a multitude of bidders.

If it does not clear above the hurdle price that we internally set, it falls back to conventional optimizers that are designated optimizer partners that help us.

The idea, however, is from the kind of fifty to fifty to upsize over time to call it sixty seventy or maybe eighty percent tolling, but just that the capacity once the assets are cod is instantly available, and we believe you will be able to achieve a higher price for the tolling if it's click and tall and you can have it straight away rather than in twelve months.

That's very impressive the fact that you have signed two tolling agreements, because I read recently on PEGSA Park that there have been only five toolling agreements are in Germany, so you're forty percent of the market.

Yeah.

Is there a market price for tolling or is it really location dependent?

The short answer is there is no market price.

I would say there is a range, but I think there's a lot of parameters that dictate tolling price.

I think it's a contract size B.

There is a little bit of an element which tears all Zonia in, but it's not really a big difference.

And see it's you know, when you start to deliver, is it you know this year?

Is it next year?

As at the after?

And then there's a lot of structuring that goes into tolling thinks that impact price that you wouldn't think that impact price, for instance, the credits.

So if you want to do a seven year tall and needs a single asset, let's say fifty megawats one hundred megawatts.

We've seen off takers that wanted two years of tolling fee sitting in your bank accounts as a guarantee.

So if you have one hundred megawat TALL and I'm just going to invent a number, and you have one hundred thousand euros so ten million a year, it wants a twenty million kind of sitting in your bank account of a letter of credit, and that obviously eats into your economics, and so I don't think there is a market.

That's why we created what we believe is a differentiated product because we think that we can create the market standard together with strong partners like Rwe like button File and other large utilities.

But there is no stig price yet.

The way you can say, that's the index and that's exactly the price, and then there's you know how many cycles a day, et cetera.

So it's a rabbit you can get really into.

So there's no such thing as the toll and that's the price.

Philip, can I ask you, is the business model then to be an independent power producer going forward?

Or do you at some point he just sell the assets to somebody else.

Look, I think we're both.

There's a lot of differences.

But someone who we admire and think has similarities to us as Octopus Energy.

On the one side, they have the utility that's our best business, and on the other side there have Kraden, which is our layer business.

At the moment.

There's a lot of synergy and we are yes, an ipp or ifp At the moment, I think over time we will run more and more other people's best assets on our infrastructure and we will add them structure tolleling, have them structured emergent deals, and become the operating platform for the business, hopefully partnering with other utilities, partnering with other optimizers, et cetera.

We very much want to build this in an open way where we don't compete with utilities or optimizers.

Well there as an owners Does that mean in the future that we may not own assets potentially, but I think we very much like asset ownership.

We want to own assets.

It's a very big part of our DNA and at the moment, I think something that goes very strongly hand in hand.

The interesting part and again, tell me if I'm wrong in the fact that you're only totaling fifty percent of your capacity.

In fact, you're giving them a seniority, meaning that if some of the battery don't work or only work at says seventy five percent, they still get their fifty percent.

Is that correct?

Or if the battery is only worth eleven So basically there's a bit of a trenching being done.

And if you have a technical problem, you absorb it through not having the capacity to trade on the daily business.

Is that correct?

It's absolutely correct.

Basically, the long term contracts always have priority.

So for instance, button file has a fifty five megawats seven year toll.

That's a portfolio just over one hundred megawats that they have, so around fifty percent.

And this is compiled of eight assets, so if any assets are down, we have fifty headroom to always make sure button file gets what they signed up for.

Anything that is spare is then auctioned kind of day ahead and so for the off take.

And the benefit is you have much larger resilience because you don't have one brick connection with one very large asset.

You have multiple assets in one TIERSO zone.

You have much better resilience.

You have one API which goes into your trading workflow, so you don't need to integrate many assets.

We are the balancing responsible party for the innsillary services.

It's one stop shop solution.

And the beauty about it is also depending on how the customer accounts, this can have benefits from an accounting perspective for them because it's balance sheet light.

Depending on their accounting treatment.

Now, once you get those stuning agreements, can you bring them to banks and say, wow, I love this, I'm going to lend you.

I not know eighty cents on the yuo or fifty cents on the yuo.

So is it a good go at their own?

Absolutely.

The reason for the tolling, of course is you want to do risk your revenues, but you also want to drive your bankability.

And there are a lot of local German banks that are happy to finance fully merchant, but that was because the fully merchant was the only option.

Now that you see tolling deals starting to happen, banks very much want to favor tolling contracts, especially when you finance larger assets and b it allows you to push the gearing.

The tolling is really important to drive bankability.

But I would also say not all tolls are born equal.

If you have a blue chip utility that is rated, that makes a big difference.

If you have a.

Super smart hedge fund style trader, they gave you a higher price, but they are not rated, so that's not really going to help you with your financing.

All that's going to mean you have an I margin need to pay that at a bank, and so there's really a lot of elements that go into tolling.

We always see this on panels at conferences.

People go, yeah, you just total the asset.

But to your point level, right, how many tolls have been made and tolling is really complicated, and so we're very proud that we did amongst the first tolls in Germany.

I think we did the first multi asset capacity tolled globally with Buttonfile and then the second one with RWE, and we're hoping to bring further innovation to this.

If I look at the spreads in Germany, I just go, this is an all equity play.

Why would I bother bringing debt into this because the returns are just so good and so quick.

Yep, what's your thoughts on that?

Yes, it depends how much equity you have.

Your right, spreads are massive, But if we actually look at between twenty nineteen twenty twenty four, the difference between spreads kind of daily press spread has increased two hundred and eighty eight percent, So you're absolutely right.

Obviously there will be some compression at some point potentially, but this is something that works all equity as well.

I do think, however, as a independent player such as ourselves, which is very much about pushing the equity returns for our shareholders, we think leverage, if done in a healthy way, is a good instrument to drive up those returns.

But you absolutely right, this also works as a full equity play in Germany.

Right now, I.

Would say the following the moment your spread compress, the totaling prize is going to compress as well, so in a certain way, and I guess your business model fit correct me if I'm wrong, is to create an integrated value chain.

But that every level you there is by partnering.

Absolutely so we focus on two parts, the development and the commercialization, and everything else which is not core ip or does not drive core value relative to the skills that we have in house because we try to run this as a lean machine with only forty people at the moment we partner with others.

You said something, Oh, yes, you know, spreads may come down.

It's important to kind of cascade the revenue stack.

So if we look at ancillary services, there will be a saturation in FCR and AFR similar to what we've seen in the UK.

I think it's going to take longer but it will happen if you actually look at the power demand in Germany versus the UK, and twenty two Germany was at eighty two gigawadds versus forty four in the UK, so there's a much deeper market in the intra day in the day heads.

So I think we may see some compression, but it's going to be mostly in the ancillary services.

And then I would say, even if there was compression in the spreads the kapeks, the rates that we're seeing right now are falling so fast that actually future cohorts of best assets, even two, three, four, five years out, if you assume this trend to continue, will likely be even more profitable than today's assets, even at lower spreads.

And if you then actually just look at the rate of wind solar deployment in Germany, I mean we had seventy four gigs of win today, We're going to two hundred thirty gigs and twenty forty five.

And if we look at solar, we're ninety five today, We're going to two hundred fifteen in five years and to four hundred gig awads in twenty forty five.

So I think there's a reason to believe spreads will actually stay or continue, but even if they compress, the kapex comes down a lot.

Philip as I listened to here, So that begs the question, really, what you are a tech player?

Are you an infrastructure player?

Or what are you?

How do you see yourself?

We often get this question and we don't think about it this way.

I would say the cheesy answers were infra tech, but the honest answer is what the customer wants from us, whether that's the utility, data center trader.

They want flexibility.

They want flexibility without the need to own the assets, without the development of the assets and operating the assets.

They don't care if you are a venture technology company or an infrastructure type with the infrapev company, they want flexibility, and we believe that by owning the assets, operating the assets, and having differentiated software, we can deliver this value best to them.

At the moment we happen to own most of the assets, we will continue on boarding more and more assets of other people.

But I think it's a very good symbiotic relationship.

We show that what we do make sense for our own asset base, and then we can prove these higher returns to others.

So I think we're both.

I think we are differentiated infrastructure operators.

And so far it's been really great having our own asset base and our own software and it's been making it more compelling for our take our customers and other asset operator customers as well.

Well.

Thank you so much for coming on the show.

Very interesting to understand this battery Ossian Germany.

We wish you the best or a thank you very much for inviting me.

Thanks a lot, Philip Lauren.

You call it the blitz.

It's a great way to describe that market opportunity in the next few years.

And sorry I say next few years.

You really have to be quick, Okay, yes, simple as that.

Yeah, things are happening now.

This market is going to trouble in the next two years.

But even if you compare to gb you know, we could go to thirty gigawat no problem.

So this market has at least five years of extraordinary growth in front of it.

And to quote Alec Baldwin in this famous speech in Glenn Guy Glen Oz, this guy as brass balls.

Yeah, well said, well said, and we wish Fillip all the best.

Actually with that, you know, the opportunity in the German market.

Well, Joab, I tell all our listeners watch out for the German market.

It's red hot, absolutely sure is okay.

I took to you next week.

Good look forward to it.

Thank you for listening to Redefining Energy.

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