Deals interview: Storage and battery technology will become big markets

Jack Unwin 20 November 2019 (Last Updated November 20th, 2019 09:59)

An interview with Francis Wright of Turquoise Capital on the power market and the increasing importance of battery and storage technology.

Deals interview: Storage and battery technology will become big markets
Battery and Storage Technology to become big markets in the future Credit: Energy Absolute.

The power industry is now an integral part of M&A activity, and the addition of renewables has bolstered the market even further. But how has the introduction of battery and storage technology affected the industry?

Power-technology spoke to Turquoise managing director Francis Wright about power industry M&A trends in 2019 and the importance of these new technologies on the sector, and how renewables compare to oil and gas in value.

Turquoise is a financial adviser which focuses on energy, the environment and industrial technology. The group invests in low-carbon, cleantech companies at an early stage through its funds and was founded in 2002.

Jack Unwin (JU): What have been some of the biggest trends in the energy sector in terms of M&A’s?

Francis Wright (FW): In terms of renewables there was a very large expansion in the market whilst renewable obligations were available to developers, so a lot of projects were bought and sold in previous years but a lot less has been done now because there are no tariffs for developers.

There are companies such as Tesco putting solar panels on their roofs and stores so they can use the power themselves and the power never has to go to the grid. The returns are quite low in solar, but we do expect that to change in the coming years as the price and cost of solar continues to fall.

Looking to 2019 it’s fair to say the discount rates that investors are required to invest in wind and solar are continuing to fall quite slowly now. There is a lot of demand and they have become an established asset class that people understand. Pension funds have invested and are comfortable now.

JU: How important is private equity in the sector?

FW: From early on there have been specialist investors in renewables. They’ve now been in the renewables sector for a long time, they’re specialists, know what they’re doing and are very happy to make investments.

More broadly, energy companies and pension funds were slower to market but they are there now. You’ve seen people like BP and Shell investing in renewables and pension funds are allocating money for renewables because they have low costs of capital.

You don’t really see private equity as much because they’re investing in operating companies and are looking for higher rates of returns.

JU: How does investing in renewables compare to more established assets like oil and gas?

FW: It’s difficult to compare. If you’re looking at upstream oil and gas that is a bit of a gamble, you can drill five wells and they can all be a dud, so you can spend £100m and have nothing to show for it or you can drill one well which turns into a big oil field. So you can make huge returns on oil and gas but also make a big loss.

To compare it to downstream oil and gas, I would say that in good years returns are going to be better but in bad years they will be worse because you’re exposed to price fluctuations, whereas typically renewables projects are locked into long term fixed prices for electricity so the returns are quite low but they are less risky.

But if you look at junior oil companies in the last five years most of them have had a terrible time whereas renewable companies have done very well.

JU: One trend in 2019 seems to be the importance of battery and storage technology. How important has that been?

FW: That’s an area we are very active and we have a number of clients in that sector. I think it’s fair to say that it is in its infancy at the moment, the storage that exists at the moment is mainly for grid power and the number of megawatts installed isn’t massive.

There are various reasons for that, one is because batteries are still expensive, although they are getting cheaper all the time.

One of our clients is using second-life car batteries for example. So when an EV car battery has lost 30% of its capacity the driver may think it is time to put a new battery in the car, at this point you can either scrap it or use it in a storage project because its still good despite losing capacity. It’s a way of reducing the cost of batteries and getting a second life for batteries rather than just scrapping them.

In our view storage will become a really big market, domestic storage will come as the costs fall but also distributed storage could strengthen weak areas of the grid. Storage is not a big market yet, but it’s growing every year and people are growing in confidence that the technology works.

JU: What are the future trends in M&A’s?

FW: One quite important thing is that big projects are driven by government policy. If you think about the recent policy around net-zero by 2050, if the [UK] government is going to achieve this is will have to incentivise a big increase in renewables, and this includes renewable heat.

But at the moment we are very reliant on gas which would also have to be replaced by something. The government is trying to support district heating networks but at the moment there are noticeably few of those, so to achieve net-zero by 2050 there needs to be a big push to incentivise. The government is obviously quite pre-occupied with other things right now, but something big needs to happen.

Also there are a few things for clean-tech businesses. One is that you need to have money to deploy renewable technology but you also need to have the clean technology itself.

A lot of early-stage companies developing new products struggle to get funding because most funding in the UK goes to software rather than hardware. So intelligent homes and making things more efficient and other technologies, there are lots of opportunities to make this better, it would help to have more venture capital and growth capital in those sectors which we currently don’t have because of the focus on software.

It’s going to be an interesting time to be in the energy and efficiency business because of the change and the growth.