Burgeoning belief in batteries

Where PATRIZIA does think it has a role to play is in supporting the transition by investing in batteries to help balance out the energy supply. “There is a clear need for firming capacity,” Shawn says. “And, at scale, batteries are the most suitable way of doing that. For us, that's an area where we see a real opportunity for investors.”

It’s a simple enough concept, but it was only relatively recently that battery technology was good enough to really play an active role in grid stabilisation and arbitrage. “You take excess power during the day that isn't being consumed and discharge it at night,” Shawn explains.

“Batteries can now provide critical system support services. You can place them across the grid where you have system weaknesses and they can provide what we call frequency control and ancillary services to balance the instability caused by intermittent generation coming online.”

That is particularly important in an Australian context. On the one hand, the country’s geographical profile is replete with opportunities for green energy generation - two things Australia has in abundance are land and sunshine, after all – but it’s also a very large country and that also comes with challenges. “As you can imagine, most of the projects are, given their size, usually located in remote regions, where land access is cheaper, far from demand centres which is typically concentrated in metropolitan cities along the coast,” says Shawn.

“Unlike more advanced regions like the UK, Australia does not have any offshore wind. There's lots of talk about it, but we aren’t there yet, so everything is very rural, very remote and, by virtue of that, the grids that connect to [solar and wind farms] are very thin. So, when these things turn off, you have a problem.

“Having batteries spread out across congested areas of the grid helps balance frequency, and it will become more mission-critical as coal retires. It is also, from our perspective, easy to deploy, fast and easy to monetise. The markets are just getting deeper and deeper and more complex. That's where we see a lot of value for firms like us who were early entrants into the sector and are already across the steepness of the learning curve.”

There are, however, some issues that need to be overcome. For instance, the minerals required to build batteries are finite and are often found in troubled regions. “Batteries need minerals that are often considered to be dirty, especially if they come from regions where there are unsafe practices,” says Shawn. “For instance, batteries now no longer use cobalt because cobalt is a dirty word in factories due to the fact that, more often than not, it comes from distressed regions.”

As a result, the cost of batteries is unlikely to fall as rapidly as we have seen with solar panels or wind turbines. “The technology is good and it's going to just keep getting better, but I think the pace of change will be incremental,” says Shawn. “There will definitely be savings and I think everyone counts on cost savings, just as you've seen with production costs with solar and wind, but it will be slower.”

Then there is the fact that the demand for batteries is set to increase dramatically. After all, it isn’t just buildings that need to decarbonise. Transport is on the same trajectory, with most developed economies now having put in place cut-off dates for the sale of vehicles powered by combustion engines. Manufacturing, again, is on a similar path, albeit with a less well-defined roadmap. In short, electrification powered by green energy is the order of the day.

At the moment, the expectation is, as Shawn points out, that costs will continue to decrease over time. But, as demand intensifies, there is a real danger that supply will fail to keep pace, which could potentially drive up costs once again, particularly when huge markets such as China and India start to retire coal more quickly than is currently the case. From an investment perspective, that means that the earlier you enter the market the better.

“This is really important,” Shawn says. “Something we stress is that there is a real early mover advantage when it comes to batteries. If you step back and think about it, the more that batteries enter the grid, the more that means that they will erode each other's potential profits. On the other hand, the more batteries there are and the more renewable energy available should ultimately lead to less volatility in the cost of energy for all concerned.”

For now, however, the business case is compelling. “The market is just catching up to the need for batteries and there is real value to be had for investors prepared to invest in learning about the risk and rewards of this sector,” says Shawn. “People are only just beginning to see the need for batteries to come online, but the situation is changing and that will allow battery providers to participate in new markets. It’s evolving and very interesting from an investment perspective.”