One of the simplest ways to make money is to buy something cheap and sell it when it is worth more. This concept is so straightforward it barely seems worth mentioning. Yet it is at the heart of the biggest growth opportunity that Pacific Green faces today.
Our energy storage business, which started off with a focus on developing battery projects for third parties, is now growing to encompass electricity trading: buying cheap and selling at a profit.
In September, we announced that we had been offered £23 million (US$31.6 million) in debt finance to fund the construction of a 99.8 MW battery plant at Richborough Energy Park in Kent, England.
The project is expected to reach financial close before the end of this year, in time for us to build the energy storage plant in 2022. Shortly after the Richborough announcement, we went public with the acquisition of a second project, Sheaf Energy, from UK-based Tupa Energy.
Sheaf Energy will add 249 MW of battery storage capacity to Pacific Green’s portfolio. And we are just getting started.
The two deals this year stem from a framework agreement under which Tupa Energy and Pacific Green will collaborate on the development of up to 1.1 GW of energy storage capacity in the UK. It will represent one of the largest energy storage portfolios in the country.
Under the agreement, Tupa Energy will take care of identifying development opportunities and create early-stage battery storage project companies, with planning consent, a grid connection and a long-term lease agreement with a landowner.
We will then work with investors to buy these companies from Tupa, and develop and operate energy storage plants within them.
These developments leverage our ability to procure high-quality energy storage systems via a strategic framework agreement with Shanghai Electric Gotion New Energy Technology Co.
Shanghai Electric Gotion New Energy Technology Co is a joint venture between Shanghai Electric and Guoxuan High-Tech Co, China’s third-largest battery supplier, with more than 13% of the Chinese market.
The agreement with Shanghai Electric Gotion allows us to acquire battery systems at highly competitive rates, improving the return on investment for our energy storage projects.
Plus, the battery systems we buy are based on lithium-iron-phosphate chemistry, which is not subject to the kinds of supply chain shortages that might affect batteries using cobalt.
As we are developing the projects, we will also be arranging offtake agreements with traditional energy trading companies such as Centrica, Shell and Statkraft.
These companies enter into long-term agreements under which we supply electricity whenever it is needed on the grid.
The revenues from energy sales, which are typically guaranteed for anything from seven to 12 years, allow us to borrow funds for further energy storage developments.
This model, developed by the experts in our Pacific Green Energy Storage Technologies subsidiary, is a long way from our original build-and-sell project development approach. But it has significant advantages.
The biggest one is that it allows us to benefit from long-term revenue streams, something that has not traditionally been the case within our business. These revenue streams are also highly robust.
As the UK moves to decarbonize its energy system, it is removing firm generation—predominantly from coal plants—and replacing it with intermittent renewables such as wind and solar.
These technologies exacerbate the differences between supply and demand and create an increasing need for energy storage.
Plus, they offer major opportunities for energy arbitrage: a surfeit of renewable energy can cause electricity spot market prices to fall to practically zero, whereas periods of dull, calm weather, referred to as dunkelflaute, can lead to major pricing spikes.
Pacific Green’s battery projects are not only able to make money from these extremes in pricing, but also from the provision of ancillary services such as frequency response.
In fact, in the UK there are currently at least six markets that batteries can operate in, covering wholesale, balancing, ancillary services, time of use, stabilization and infrastructure. And this situation is not unique to the UK.
Although regulations vary from market to market, the ability to stack revenues from different types of application is common to just about any grid-connected battery system in the world.
For now, our immediate focus is on the UK market because it is highly mature from an energy storage perspective.
We are targeting around 2 GW of energy storage opportunities in the UK, based on the assumption that maybe just over half of that capacity will make it through to commissioning and operation.
That will still give us a portfolio of more than a gigawatt of UK energy storage assets over the next four to five years, as well as helping us build a robust development platform that can be replicated elsewhere.
The ability to tap into such a significant store of energy from a single supplier is already attracting the attention of a range of potential UK off-takers.
Similarly, we are courting a range of banks and other debt providers interested in lending against what is clearly a secure, profitable and growing revenue stream.
From an investor’s perspective, battery systems are an attractive asset class not only because of their revenue potential but also because they meet growing requirements for compliance with environmental, social and corporate governance benchmarks.
Beyond the UK, there are several markets that could be of interest. In Europe, Germany and Italy both have large and growing battery storage sectors.
And further afield, Australia and the US are both of interest since they are among the leading markets in the world for energy storage.
The outlook for this technology is improving all the time, with recent electricity price increases in many parts of the world acting as a timely reminder of the hazards of relying too much on fossil fuels.
And at Pacific Green we are keen to engage with investors and stakeholders right across the energy storage value chain. If this sounds like an opportunity that your organization would like to be involved in, then get in touch and let’s see what’s in store together.