246. Can merchant batteries make solar PPAs work again? Insights from Alight

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Speaker A: Europe, North America, East Asia and beyond. Uh, hello, you are listening to Talking New Energy. My name is Tom Smout, I'm the head of storage here at LCP Delta. And today I am lucky enough to be joined by Johan Helmstrong, the head of revenue at Ally. Johan, would you like to introduce yourself?

Speaker B: Definitely. And first of all, thank you for having me. I've listened to your podcast, I've learned a lot, so hopefully you can share something that your listeners are interested in. So, really looking forward to our conversation. Yeah. My name is Johan Hastrom. I'm head of revenue at a company called Light. We are a PV and Bess IPP meaning independent power producer. And that essentially means we develop for finance, construct, own, operate solar and Bess assets across a number of European markets. And we are headquartered in Stockholm, Sweden. We're backed by CVC diff private equity fund. We have something like 500 megawatts of operating, uh, assets, a pipeline of 3 gigawatts. We have the largest solar part in Sweden. We have, I think the first and the largest PPA backed part in Finland and we have actually our biggest assets in Denmark which is a 200 megawatt plus solar park. Before going into the details as to what we do, I think what struck me when I joined and I feel it's very much core to us, is that we're truly a purpose driven company. So we all do what we do because we genuinely believe that the world would need a massive amount of clean power. I mean you and I talked about the heat waves in Europe before you press record. The world is deglobalizing. We're seeing regional conflicts that ah, we did not see before the conflicts in the Middle east, exposing how vulnerable fossil fuel dependency is. And on top of that you have AI which is driving an explosive uh, growth demand. So from climate cost and resilience I genuinely believe and light the end and believe that the answer has to be renewable and that solar and Bess are critical pieces to that puzzle. And so we got solar to work in Sweden without subsidies, which is if you can make it work here, you can make that work anywhere. And I've been with the Light for six years roughly. I'm an engineer by training. I have a background in consulting. I spent a fairly big chunk of my career working in telecom in Africa, Central America in the Middle east, but also tech implementations for big Swedish industrial firms and European consumer goods companies. The red thread of my career has been, let's say the intersection of technology infra and business. And I think I benefit from all of that in this role and the role I have at the Light head of revenue spans, sort of PPA origination. All our assets are backed by ppa so power purchase agreement and then best commercialization which I'm sure we'll get into more and portfolio management and trading. So again, yeah, super happy to be here.

Speaker A: We're very happy to have you on. I do want to talk a little bit about maybe just to set the stage a little bit, what um, makes a light distinctive as a company and how you're approaching the market. I've already touched on, I think a very heavy focus on PPAs for the solo existing assets that you've been building out, but also on originating and developing PEZ assets. So I wondered if you could talk a little bit about how you're approaching those two, how that behaves differently.

Speaker B: Yeah, definitely. We started out 13 years ago. Lite was founded in 2013 which probably according to our founders was five years too early, especially in dark Sweden. But we built the platform of the idea of subsidy free, let's say customer first and um, solar. So CNI focused. Started out as a pure developer. So develop, build, secure, off, take operate. We some of the first rooftop PPA in Europe. And then because we did not grow up under let's say feed in tariffs or subsidy schemes, we were forced to learn a few things. One is to structure bankable CNI PPAs in a Nordic context, then build a customer first organization. I think those sort of underpins our business today, the direction we are now taking as an IPP because as solar matured we moved into offsite PPAs. In 2020 we built was the first in Sweden, PPA backed Solar park with a sweatbank, uh, retail bank in the Nordics. And that's really where the grid connected part of our business began. And then from 2022 onwards CBC Ah Diff came on board. We shifted from being a developer to a fully fledged IPP which essentially means we build and own these assets on our own balance sheets for the long term. So the time span for our ownership is 40 years. And then since then we've moved beyond Sweden. So in the grid connected business we operate in Sweden, Finland and then Denmark. And I think maybe just worth mentioning we have two business areas. One is grid connected, the other one behind the military is where you build the asset adjacent to our customers on premise, a warehouse, a factory, ground mount, rooftop or carport. Are you connected behind the assets? And here we are present in a number of European markets, UK being the core. And then grid connected is where we construct assets on land that we connected to the grid. Sweden, Denmark, Finland and that's the business that I represent. And then we anchor all of these projects in sort of long term PPAs. We have PPAs with H& M, Autoliv, Akonobel, Swedbank as I mentioned and to this day I'd say most if almost all of the products are backed by Pay as produced PPAs which is uh, that model has served us well and I guess the deployment of renewables really well. We have two best assets in our portfolio, they are both backed by tolling agreements. But going forward the strategy that we have is to be merchant on Bess very happy to go into details as to why and how he thinks this combination with PPA backed solar combined with merchant Bess makes sense.

Speaker A: An interesting dynamic there. It basically feels like for the solar assets you're basically doing pay as produced PBAs so taking out the price risk as much as you can. There are a lot of different angles there but maybe let's start with the solar because that's the historical starting point. How much can you really DE risk through PPAs? Is the market liquid enough to support that volume? Is there enough off taker appetite? Does a pay as produced PPA really insulate you or are you still exposed to negative prices? To what extent is it really a full DE risk and to what extent are you still carrying some kind of risk on those projects, do you think?

Speaker B: So first of all the market for pays produced PPAs probably has an expiration date. It is not as strong a hedge as it used to and I think the proposition of standalone generation solar or wind is not as strong as it used to be either. We're experiencing a number of, let's call Them market forces that are challenging the investment case for standalone solar. That's where we start. We're seeing capture rates eroding across renewables and yes a pace produced PPA could shield us against that. But we also have a merchant tail beyond the ppa. Negative prices are up and here again depends on the type of ppa. We have imbalance costs that have gone up significantly. We have grid tariffs increasing and not by a little. And then you see an increase of uh, spot market volatility. And then for us that presented or presents two main challenges. One off takers are more hesitant toward pace produced PPAs and second project economics for standalone solar and is under pressure because of higher OPEX and balancing cost and grid tariffs. So the market is and have been, let's say punishing inflexible renewables. And this is happening then at a time where best OPEX is falling dramatically. So for us adding best to this mix makes a lot of sense and not only as a revenue generating asset let's say, because that of course is also important, but it's also a way to enable further deployment of solar because we are still very bullish on solar and there is a number of reasons as to why this is colocation proposition makes a lot of sense. And to start with, you have a lot of cost synergies. You already have the land, you share the grid connection permitting partly overlaps delivery station, transformer and other type of hardware can be shared. And then the second one is that what PVDN and BEST allows for is a PPA product that is different to pay as produced. Something that is more attractive to our customers. If you compare it to pays produced and attractive can mean a few different things. It doesn't necessarily have to mean a full baseload, but it could be stronger protection against negative prices. It can be a profile that is more aligned to their consumption, a profile with higher capture value or a profile that gets you at least closer to some sort of baseload and especially if you bring wind into the mix. And then the third reason to add Bess is because you can improve product economics. You can increase total revenue for the, for the asset you combine PV and best to reshape while you're participating in AU markets and day ahead and intraday trading and you can lower operating costs. So Bess makes a lot of sense. But then for us to tap into all those, let's say value levers, we want to be merchant on the Bess, that's when we think it makes sense. Paired with a uh, contracted pv. But I mean we're not dogmatic in that what we want is we want control over how the battery can be used. And there are on the market some structures that probably could work in terms of contracting. We've seen some virtual tolls, there are uh, local flex market, so probably there is a combination whereby we could contract part of the bezel, uh, still retain the flexibility we need to pair it with pv. But we strongly feel that we need that flexibility. And then I think the question becomes often in these conversations so what about project financing? And first of all yes we are seeking product financing and yes product financing for merchant standalone Bess is tricky. I think it's possible in some markets but you would get lower gearing. But as long as you have it best co located with PV and the PV Is backed by PPAs and lenders have access to all cash flows, we have found that it works well. So then the PPA is not only de risking solar, it also unlocks the merchant strategy that we believe so much in because that's when we really get the benefit of the flexibility and can hedge against some of the risks that the PPA cannot or the types of risk that the off taker is not willing to take.

Speaker A: I guess one obvious question to me is so I work a lot in batteries and a consistent theme that we've been hearing from a lot of our clients is right now there's a big push towards contracted revenues. Uh, a lot of lenders are looking for storage assets to demonstrate contacted revenues. Do you feel like because you're co locating with PPA backed assets you have an element of contracted revenues? Are you just pursuing like uh, a lower debt, higher equity investment strategy or are you managing that in some other way? Or have you just got lenders comfortable with the merchant exposure? Because it feels like you're basically pursuing two very different levels of hedging for these two asset classes.

Speaker B: The way we argue against lenders because uh, we have the same lender for the PV and Bess is that for them Bess is actually a risk mitigant. So long as they have access to both cash flows, that's a proposition that they buy into. But yes, there have been conversations to make everyone comfortable with that setup and we think it's a very strong one and it's one where you really get the benefit from the flexibility. And as you know the um, solar and Bess have negative correlation. So solar's worst hours are battery's best. You have low capture of negative prices which is good for Bess and Not as good for pv. High imbalance cost would hurt PV but it drives MFR or AFR prices for Bess. So they work very well together and as a lender that's a good thing. And then if we contrast that to a tolling agreement we would essentially lose out on a lot of the negative correlation that you see between PV and bess. Yes, you have a fixed revenue but you don't get the same risk adjusted proposition. What I'll add to that is if we use BESS to reshape the PV profile and sell that as a shave PPA towards an off taker, then indirectly we have contracted part of the BESS not to a uh, toller but a PPA offtaker. Maybe the last thing I'll say, I don't want to complicate it too much, but we are not dogmatic. So we do see that tolling could make sense and some post COD contracting and bilaterally could make sense. Local flex market is one that we believe in and that can be combined with being merchant certain hours than having to tap into the local flex market at certain hours. But we want to retain that optionality and we want to use BESS fully to risk mitigate and enhance pv.

Speaker A: I guess if I was going to be contrarian I would say is there a risk here that we're really just throwing good money off the bad? We've built a bunch of solar assets. The solar environment has deteriorated for a number of different reasons. There's been a lot of build out, there's been a lot of behind the meter solar. There's been unexpectedly high levels of negative pricing, unexpectedly low capture rates. Even in markets without a lot of negative pricing and those things that you would lose. Higher OPEX grid fees coming up faster than I think a lot of people expected, increasing competition for EPC and other kind of services. If we're just putting batteries behind those assets. I've always wondered, is there this challenge that how much do you get from having a colocated battery that you don't get from just also building a battery and just also having a battery asset in your portfolio, especially as an IPP kind of owning the assets yourself? You could get a lot of that price shaping and hedging power just by having a standalone battery asset somewhere else. And that would have all the benefits that standalone brings relative to colocated. So why specifically co locate and what are the benefits and the challenges from that approach?

Speaker B: Maybe there's a number of parts to it. I mean first on the colocation proposition we're probably saving 10% capex by sharing grid connection, transformers, delivery station and land lease, etc.

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Speaker B: on the say, let's say commercial side is what we found. If we find the right ratio between PVN bess, they're not actually eating into each other's revenue streams that much. But by having them behind the same meter you can also optimize for imbalances and grid tariffs. So the modeling we are doing shows that it's commercially a stronger combined case and you save on copper. So we don't see it as a bet, we see it as a hedge. And what I think I uh, would be more worried about would be standalone solar and standalone bess because then you could end up in a situation where grid tariffs are increased which you are not really in control of and cylinder markets saturate and you don't have that many, let's say, avenues to recoup that. Whereas in this collocated proposition, especially with the generation source, then you can use the battery in so many more ways and you can create a better product, uh, towards the PPA offtaker. That's the strategy that we believe in. And we've seen some European peers looking more at standalone bez, we've seen tolling setups, et cetera. That could also very well work and it is working well. But we think this is the right approach for pv. This is the right approach, especially given how quickly the market changes and how new revenue streams pop up, how new local market pops up, how off takers think differently. It's part about moving from becoming a uh, electricity producer to a trader or if you will, that's the direction we are heading in and that's one we believe a lot in. And for that for us to fully give ourselves the full flexibility to maximize value and reduce risk. We believe in Bess, we believe we want to control Bess, which often times means uncontracted and we think the collocation is a strong proposition for the reasons I mentioned we're not against standalone solar. A standalone Bess in a portfolio that could have strong, let's say, risk mitigatory properties to help the different assets and maybe as part of a trade code in the portfolio. So we're not discarding that, but we think it's having co located merchant Bez paired with PBS is a very strong proposition.

Speaker A: What do you think about the Buoyant plus Bez item as well? Because there's an obvious solar Bez synergy where they share a lot of components. I think the classic argument is always that the two assets want the connection at different times. The solar wants to export when the battery wants to import and vice versa. So that's helpful. Is the same thing true with wind? Is it as effective of a hedge for wind or do you think it's more challenging?

Speaker B: What we've looked at is solar, wind and Bess. I've not looked at wind and Bess. I couldn't really comment. We see solar, wind and Bess as a very strong proposition both on system level and potentially on colocation level. It's a bit more tricky development wise, but on a system level it's a beautiful setup. The green baseload that in the Nordics where you have a lot of hydro, you have a base of nuclear, could very well be the type of generation we need to meet the explosion in demand growth. I could not comment on wind bass specifically. I'm not sure.

Speaker A: I guess one other additional challenge then. It feels like a big driver with colocation is actually just the cost savings. Why pay three different grid fees? Why pay three different opexes? Do you ever think about putting a firm generation like a gas peak or something behind the same grid connection, Maybe get some good capacity payments as well, keep the running hours really low. It feels like a potential kind of augmentation of the business case.

Speaker B: The quick answer is no, we haven't thought about it. We don't have that much natural gas in the Nordics. There's some biogas and obviously the hydrogen project, but we don't have that much gas as in some other markets in Europe or the us. But if you look at the data center boom here is where co locating more than just solar based and potentially wind behind the same grid node as the data centers could be quite interesting. Exactly what that technology is, I'm um, not sure given that we don't have natural gas. But we're seeing an explosion in data center demand growth. Sort of. The Nordics has become the new hub for a lot of the Hyperscalers, you've seen what they call the flap D, Frankfurt, London, Amsterdam, Dublin, Paris, they're full or at least heavily constrained. So a lot of data centers are looking north. As you know, their bottleneck is not generation, it's accelerating grid access. And here I think co locating several different generation sources with different storage assets could make a lot of sense. And if we had natural gas, I would really like to have some gas beakers or fuels as part of the bridge solution at least to get them connected faster. But no, we haven't looked into it for our own projects.

Speaker A: Maybe picking up on a theme there. To what extent do you think, because you are active in Nordic markets, right? Finland, Sweden, Denmark, what do you think are the characteristics that make those markets distinctive, that have shaped the way that you're approaching your business case? And what do you think might be different for other people pursuing kind of similar approaches in other markets?

Speaker B: The first thing I'd say, and I touched upon it before, is the electricity mix we have in the Nordics is one that can take on quite a lot of renewables. In Sweden you have something like 30% hydro. In Norway the majority of production is hydro. You still have something, I don't want to say percentages here, but some nuclear, that gives you the baseload. In Finland there is more wind, in Denmark, more renewables than in Sweden and Norway and that's a very good foundation for additional uh, generation. And then on top of that you have stable political climate, good infrastructure, cold weather. So from a data center perspective, again, it's a very attractive market. The other thing before I move to the structural point is we have a very strong industrial base in the Nordics and a lot of these companies are electrifying. So the total demand or consumption in the Nordics is something like 400 terawatt hours at the moment when the industry are doing their sort of bottom up estimates on future demand, they're looking at 600 plus terawatt hours. And uh, by 2035 that's only 10 years away. And structurally we've had a price discount to the continent. But what we saw earlier this year is when we've had a dry year, low hydro, very cold climate, that price discount towards Europe was completely erased and we had prices that were significantly higher than they usually are. It's a renewable heavy system with a lot of flexible assets, Hydro being the big one. But it's also sensitive to an increase in demand and that will have an impact on prices. So I think maybe that's one of the Differences from continental Europe.

Speaker A: Do you think having so much hydro on the system is like a benefit or is it extra competition isn't so exposed to kind of gas or carbon prices?

Speaker B: I think it's a good thing. There is lots of flexibility, at least in some of the hydro. We can't add that much capacity. You can change out some of the turbines, the generators, but there's not that many rivers. So it's not a competition in that sense in meeting the demand growth that is coming. I think on the contrary, it's enabler. There is an inherent flexibility and I think that's a very good thing for the Nordic system and it's good for the system.

Speaker A: But is it necessarily good for your assets as a source of competition?

Speaker B: I think so. If you look at capture rates, capture rates in the Nordics for solar is maybe around 70, 80%. It's a bit higher in Finland. The flexibility we have on the generation side, mostly hydro and also more and more on the demand side. In Finland you have a lot of electrical boiler is one that keeps capture prices from not falling to similar levels as we've seen in other parts of Europe. I do genuinely think it's an enabler and without hydro you could not build out wind or solar to the same degree as I think you can given that the electricity mix we have today. So I think that is a good thing for the energy transition. It's a good thing for our build out in the Nordics. Given the mix we have, I think solar could make up, let's say 15 or 20% of the total, uh, mix, especially if you pair it with Bess.

Speaker A: I would like to switch a little bit, just talk about what comes next. I uh, like to gone through the transition from your developer now to ipp, so developing, you know, your own assets for your own portfolio. What do you think is the future of this business model? Basically, it feels like for reasons that we've talked about a lot already, the market is increasingly challenging for developing new projects. Returns are compressed, capital is expensive right now. What are your immediate next priorities? And then taking a slightly longer term view, what do you think are the challenges for the next generation of assets that you're trying to bring to market?

Speaker B: There are a number of challenges as we talked about. We have captured for PV that it's falling. We want to argue that it seemed to have the data to support that it is a transitionary problem given the build out of storage and the bond side flexibility. And then for best you can look at the UK or other more mature markets, the ancillary markets will saturate. So you will have to depend on other revenue uh sources. And as we said pace produced PPA does not provide the same hedge as it used to. So there needs to be something else. But for us to fully, let's say tap into all of that we need to evolve from uh, we've already taken the step from developer to ipp but then we need to go into something that is different. If it's being a power trader or utility light, you probably follow Pixapark. They talk about this next generation IPP where we are no longer competing with other renewable energy players or developers but more sort of the entire power market doing that switch from producing kilowatt hours to a more firm supply that is optimized. That is the journey that we are on. And that is first of all it's hybridization with Bess, potentially with other technology. And then it's about having the trading capabilities, the modeling capabilities to make sure you can tap into that and to shape the type of product that our customers want. We started on that journey a few years back. We already have in house. Portfolio modeling can make promises but I think we will sign our first shape TPAs this year. And so I think that's the clear direction we're heading in is becoming much more of an active manager of uh, the generation. We produce and offer more tailored and shaped products to off takers and then what we believe in is at uh least that power demand will increase significantly. So I think there are good reasons to believe so and a lot of data is supporting it. I mentioned before the Nordics going From let's say 400 to 600 TWH in 10 years and when that happens the impact on power prices, the willingness from companies to hedge their electricity cost will be enormous and the demand for clean energy will be huge. And exactly how that will play out and, and what different types of markets will open up. The opportunity for Bess to participate in other new markets is difficult to say. And again that's one of the reasons we want to retain the optionality with Bess. And so as long as that electrification materializes I don't really see challenges. I see a huge market opening up but exactly how we tap into that I don't know. But I know we need the capabilities in trading, portfolio management, modeling and we want the flexibility on the storage side so we can tap into all of that.

Speaker A: What are your high level predictions then for the next five to 10 years? The Nordic kind of energy markets, do you think we're going to see a lot of investment into solar or bez. I guess one of the capacities that we've seen recently has been that the wind market has had some challenges. The development for wind assets has flagged where the BEZ solar development has really taken off. Do you think that's going to continue? Do you think there's going to be a bit of a rebalancing and are you worried at all about crowding out in the solar space or the best space with so much interest in those markets, relatively quite a low barrier to entry for competitors.

Speaker B: First of all, I do believe in the demand growth. There are many, let's say macro trends and we touched upon them previously as well as the CAPEX level for BEST and other renewable generation that points towards the direction of a lot of renewables will be built globally and especially in the Nordics. Short term we've seen a collapse of wind buildout. I think that's sad. I think wind and solar together is a very strong proposition. But if you look at wind turbine orders, it's completely collapsed in the Nordics by almost 100%. So the new production additions short term and let's say five years, it has to come from repowering or solar paired with bess. And then in the medium term I'm also very bullish on wind both onshore and offshore. I see more and more distributed type of generation, more behind the meter type of generation. And maybe especially given the growth in data centers, I think vehicle to grid has an enormous potential. If you look at Sweden, if you have a million electric vehicles in Sweden, the total capacity for that is three times the max capacity on a given day in Sweden. So it is probably the uh, biggest paradigm shift of our generation moving from stable demand. It's been stable for 50 years, centralized, inflexible generation to an explosion, um, in demand. A ah, distributed intelligent system backed by storage and demand side flexibility. I think that's a very exciting space. I think solar, especially paired with storage and with the ability to shape and to optimize has the potential to grow to again something like probably 15 to 20% of the energy mix in the Nordics.

Speaker A: Are you at all worried about flexibility from demand eating into the need for batteries or other technologies, smart charging, EVs or vehicle grid technologies, you know, demand side assets could compress price spreads, reduce that volatility.

Speaker B: Oh for sure. They are tapping into partly the same type of market, so let's say solving the same type of problem. So I mean it could very well be a situation where again we build standalone solar because capture rates are high enough to warrant a standalone uh, investment. But sure, the rapid build out of Bess will impact markets. It's quite difficult to oversee and when we look at forecasts they seem to change every quarter. And uh, it's really difficult to tell exactly how you would make money, let's say from a standalone asset in five years I think combined with solar and the risk is smaller but we have to be smart about where we're deploying flexibility and the ratio between PV and best. But you're right, it's definitely a risk from a system perspective. I like it. I think it's a very elegant solution, especially vehicle to grid. We already know there's a lot of buffering on the industrial side as well because of all the energy efficiency programs that have been taken on over the past year. So there is a lot of flexibility on that side as well. That is a very good thing. But it's something we need to take into consideration when planning for our build out because it is very much a multi dimensional type of transition where it is quite difficult to forecast exactly how this will play out. And again that's why we think being merchant makes sense and pairing it with generation. And then for us, let's say medium term, I think wind in some fashion makes sense because wind, solar, best and together gets you closer to baseload. Might not get you all the way, but it gets you closer. You also have a lot of freedom in how you engineer PD AC DC ratio. So you can over build trackers east west rather than south ratio between solar and pv. So even without wind in the mix, you can create a profile that is significantly more interesting than your typical solar southern phased PV installation. And then with wind on top of that, then you have something that is very interesting.

Speaker A: What do you think is the key? Because you don't see a lot of those projects at the moment on the market is quite a new kind of business case. What do you think is the key thing that has to happen to enable that wind solar bez colocation business model?

Speaker B: First of all, I think one reason we haven't seen is because it has not been demanded from the market and the best has been too expensive. And so now when you see sell prices falling at the speed it is, most of the best in the Northeast is one hours. Most of what's being invested in now is two hours. We'll soon see four hours and six hours. And that wasn't possible a year or two ago. And then the other one is around capture prices. They've been at high level and when capture prices fall, well then you need to be creative in how you create something that is more attractive. So it's a combination of things that have changed in the market. Prices on cost for Bess that had pushed us towards creating something new and being innovative around how we do it. There simply hasn't been a demand for that in the past and creating that type of product has not been possible. But nowadays we do see a lot of traction both on physical collocation, wind, solar, Bess and also virtualized type of structures. There's not that many examples yet in Europe, but we're seeing more and more and more innovation goes into this. And here again I'm sure AI and those types of digital tool can also help shape and understand the exposure if you were to do something that is not fully asset backed. So there's a number of, let's say convergent trends that pushes us towards being able to deliver this thank you very much.

Speaker A: I could talk to you for a long time and I already have, so we are slightly running out of time for this episode. Uh, I'll wrap up in just a second, but I just wanted to finish by asking what is next for Light? What do you think are your next steps?

Speaker B: Time flies. Thank you for having me. Very interesting to talk to someone that is curious and wants to understand more on these questions are not necessarily easy given the investment horizons and all the moving parts. But the next thing for Light is certainly moving into becoming much more of an active ipp. Let's call it Utility Light or Next Generation IPP where we hybridize our assets and we're much more active in how we optimize generation and storage holistically. And the other one is around the types of products that we offer our customers. We are in the process of creating new types of PPAs that are more attractive to and meet their needs much better short term. We are not expanding geographically, but we are expanding in new technologies and in capabilities that will uh, enable us to roll out more solar and meet m customer demands in a better way.

Speaker A: Thank you very much and thank you for listening.

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