How Germany’s Green Flexibility will spend its $455m battery fund

pv magazine: You founded Green Flexibility. It went under the radar for a while but now we’re seeing more and more of the company. What are your plans?
In the beginning, it always went under the radar simply because a lot of things had to be prepared. We’re still young; we’ve only been around for about 14 months. Our goal is to make a significant difference in Europe. Although we’re currently focused on Germany, we also want to look at other European markets. From our point of view, a significant difference is that we can’t just do a project here and there but that we can enter the market on a massive scale and build so much [energy] storage capacity that it makes a real difference and helps the energy system solve the problems associated with the energy transition. We want to help find solutions and establish our storage facilities as an active component of regional grid support.

So it’s not just about serving the market, which can make a lot of money?
Yes, otherwise it doesn’t make sense. Of course, as an entrepreneur, you always want, and need to make money. But why become an entrepreneur in this industry and not somewhere else? Because you want to make a contribution here. The idea behind [energy] storage has always been to reduce the volatility that leads to economically pointless things like the curtailment of wind turbines and electricity that isn’t generated but still receives compensation. The theme was similar at Sonnen when we founded the company 15 years ago.

How will the large-scale storage facilities benefit the grid?
Our first project is a joint venture with Allgäuer Überlandwerke, a regional electricity supplier right here [in Germany]. The Allgäu is a special region with a very specific profile in both [electricity] generation and consumption. For example, we have a lot of solar and hydropower here but hardly any wind. When you market [an energy] storage facility on the European electricity exchange, you get a price signal that is an aggregate of the supply and demand situations across Europe. We have, therefore, made an agreement with the grid operator, Allgäu Netz, that allows them to temporarily intervene in the operation of the storage facility and ensure that it does not become a regional burden.

Does that interfere with your trading strategy?
It interferes with our trading strategy simply because, as a company, we naturally try to optimize our economic results. If I act according to the signals of the European electricity market, I use the [energy] storage facility in the most economical way. If the grid operator intervenes, I use it less optimally, in this sense. However, the question is: How can this goodwill be rewarded? In most cases, the grid operator is willing to offer something in return. There are agreements in this regard that are acceptable to both sides. For example, a reduced construction cost subsidy [applied by German grid companies to grid-connected projects]. Or compensation for an intervention. Solutions can be found.

How much capacity do you want to build?
To be significant, we’re already thinking about at least 10 GW in the next 10 years, which is in line with our current pipeline. We’re very fortunate to have a financially very strong co-shareholder, in Partners Group, and to have an initial tranche of €400 million in equity provided. Partners Group is very comfortable with larger projects and typically works with amounts of €1.5 billion in equity per portfolio company. If we leverage this with debt at the project level, we’ve solved the capital issue. Our task now is to ensure that this capital flows to projects where the best possible long-term return can be achieved under the best possible conditions.

You develop projects yourself. Do you also purchase projects?
Yes, we do both. At Green Flexibility, we wear two hats, so to speak. On the one hand, we are project developers but, at the same time, we are also investors because we finance the projects ourselves and don’t sell them. So, we invest in both our own developed projects and our acquired projects. On the other hand, we are also an EPC [engineering, procurement, and construction services company] because we build the projects ourselves and, of course, ultimately act as the long-term operator.

What do you look for in project offers?
Unlike a pure financial investor, we are not dependent on a project seller offering us a project that is already finished, i.e. ready-to-build. However, we do want a grid connection to be guaranteed. In practice, that is the bottleneck. The project should be larger than 10 MW. We also have a preference for being connected to the grid by 2028 at the latest, but this is not a mandatory requirement. The reason is: the further in the future the project lies, the less I can estimate how I will amortize the price I have to pay today. We can also do co-developments, where something is developed together and where we contribute what the other partner doesn’t have.

Is the market already at the point where you’re receiving many project offers, and are there any regular annoyances?
Yes, we’re receiving many project offers. What’s currently being referred to as the “gold rush” mentality means that many people are developing various project activities related to [energy] storage. This is causing inquiries to explode to the grid operator. Currently, there are cases where the grid operator wants a 50% down payment of the construction cost subsidy before making a grid commitment. The construction cost subsidy is roughly between €50,000[/MW] and €150,000/MW, I’d say. Banks don’t like to finance this either, so many are eliminated because they don’t have the money. In these cases, the developers are looking for someone to step in. That’s why we’re receiving quite a few projects on offer at the moment. The quality varies greatly. Most sellers say they have a great project in ready-to-build status. But upon closer inspection, it’s not always ready-to-build. This is an experience that many investors in the field have.

Skipping the construction phase, once the energy storage facility is complete it needs to be marketed. How do you do that?
You’d expect us to have a clear, long-term strategy here but this market is still very young and it’s important to us to test out the various marketing options, such as tolling [when an end-customer pays a fixed leasing fee to operate the battery]. However, most tolling offers are still relatively unattractive. Last year, a fully merchant model achieved good economics. A two-hour [energy] storage facility in [unsubsidized] full marketing fetched around €300,000/MW. With tolling, it’s closer to €150,000. This means you’re handing over half of the value you can achieve to the toller. That’s a lot, and not very attractive. At the same time, you could find yourself in a situation where you’re desperately dependent on [a tolling agreement]. If you want to finance a large part of the project with debt from a bank, some banks insist that the project be tolled. We conducted a very detailed analysis process and looked at almost 20 tolling providers. We believe that the market is still young and developing.

Incidentally, tolling also entails risks that cannot be overlooked.
Yes. [Energy] storage technology is not without risk. For example, a storage facility burned down in California not too long ago. That’s a very extreme case but you will have downtimes for various reasons and may also experience negative surprises such as a storage facility degrading much faster, i.e., the storage capacity decreasing much faster than expected. Downtimes are sometimes heavily penalized in tolling [agreements] with penalties, so you may not be able to afford them. So you not only forgo 50% of the upside but also incur penalty payments if something goes wrong. These can cost you, as an operator, your head because you are no longer able to service your debt.

It’s unclear what will happen to the current [German] battery exemption from grid fees, after 2028. Is that a risk you can live with?
Yes. We see that too but there are many other issues, such as the continued expansion of renewables and the actual expansion of [energy] storage facilities. How will the balancing energy markets develop? There are so many uncertainties and they all impact the market price, which is crucial for profitability. I hear the discussion about the exemption from grid fees but, compared to the other uncertainties, I’m less concerned about it. The regulators will recognize, or have already recognized, that [energy] storage is needed.

This means that your confidence as an investor stems from your belief that energy storage is needed and that there will be a way to build it.
Exactly. It is needed and therefore there will be a way that enables market participants, grid operators, investors, and whoever else the market participants may be, to implement this required solution under economic conditions.

Christoph Ostermann will attend the Battery Business & Development Forum in Frankfurt, organized in partnership between Conexio, Solar Power Europe and pv magazine, on July 16. The event is intended for anyone planning or investing in large-scale battery energy storage systems and who wants to learn more about topics such as grid connection, building permits, technical planning, trading, financing, and regulatory developments. The one-day event will cover industry topics focusing on Germany and Italy as well as other European countries. Visitors can meet project developers and investors at a networking reception on the evening of July 15.

For more information, and to register for the event, click here.

From pv magazine Deutschland.