How to finance batteries: Debt financing vs Joint Ventures with Conrad Purcell (Haynes Boone)

Welcome to Transmission, the podcast that uncovers the business of clean energy. I'm Ed Porter, VP of insights at Moto Energy. My job is to help organizations understand how electrification assets and particularly battery storage systems work on a balance sheet. And right now, batteries are having a moment. Big projects, big headlines, big numbers. But underneath all that hype is a complicated question. How does any of this actually get paid for? Because batteries don't make money the same way wind farms do. They don't have one long governmentbacked contract. They earn their living from a stack of jobs, a bit like a freelancer. They trade power by the hour. They balance the grid by the second. And they get paid when prices spike or the system strains. And that's a great upside, but it's difficult for lenders who value certainty. So, in this episode, we look at two popular funding routes. One is bank project finance. Cheap debt, strict rules. Banks want predictable cash flows, tight risk controls, and a clear path to repayment. The other is joint ventures with institutional investors, pensions, insurers, infrastructure funds, more expensive money, but more patient, more willing to fund early, and more willing to share development risk. And all of this leads to a bigger familiar arc. Early markets are scrappy. Returns can be high. Lots of developers take a swing. But when the market matures, risk falls. Returns become more stable and the ownership consolidates into the biggest players with the cheapest capital. A cost of capital shootout. Just like what happened with solar and wind. Our guest today sits right at that legal intersection of technology and money. Conrad is an infrastructure and energy projects partner at Haynes Boon. He helps developers, banks, and institutional investors turn volatile battery revenues into deals that can actually close and portfolios that can actually scale. So on this episode, we get into the plumbing of the battery boom, how projects get financed, what on earth is a mini perm, and what happens to the industry once batteries stop being new and start to act like predictable infrastructure. Welcome back to Transmission. Hello Conrad and welcome to Transmission. >> Hello Ed, lovely to be here. >> Our pleasure to have you here and uh please could you start off by introducing yourself and your company? >> My name is Conrad Pcell. I'm a partner in the London office of Haynes Boon. Uh we're an international law firm headquartered in the US with around 700 lawyers and 19 offices and we have around 60 lawyers in London. I have been a project and project finance lawyer for just over 20 years. Uh I started my career in Middle Eastern infrastructure projects. So uh Del and um UAE palm island and that sort of similar >> del desalination >> desalination projects. Yes indeed. Um and around a year or so I think after qualification I moved in-house to a company called REZ renewable energy systems and um spent the next four years working more or less as a wind farm lawyer uh which is very exciting and covered projects across the UK so uh including Scotland uh Republic of Ireland uh and also up into the Nordics in particular in Sweden. Had a number of projects in Sweden that we worked on. And after 4 years at REZ, I moved back to private practice and there expanded beyond um wind into a broader range of infrastructure finance >> and still focusing really geographically on what people refer to as EMIA. So Europe, Middle East and Africa. And that covered everything from um Nordic uh onshore wind with incredible you know uh wind farms with uh hub heights of over 100 meters constructed within forests with aviation warning lights all the way through to uh hydropower projects uh in subsahara and Africa North African uh CSP projects uh but also over the years that's diversified into um a range of different technologies. So uh African rural communication satellites um and increasingly now digital infrastructure. So um data centers and uh the like uh again both in the Middle East, North Africa and subsahara and Africa as well as I guess to bring us full circle now in the UK predominantly to be bz. >> Okay. And uh you can you can feel like you've been in the legal docks, right, when you start talking about the sort of warning lights that sit on the like you just know that was in a document [laughter] somewhere. So it's stuck with you all these years. Okay. And what what I'm really excited about today, so we've got >> probably around over 50 billion e more than 50 billion euros going into battery storage across Europe. And one of the obviously there's some some classic moto um or transmission questions that we would ask about this which is like how do they work and what's the commercial sort of um process for this all all sort of existing and the thing that I'm excited about today is is that we're trying to finance this right so we're we're trying to understand how does the system behind it get 50 billion of cash into the hands of the people who want to build these things because it's not all the same and I think that's really where we want to try and get this conversation to where we're looking at a few of the options and then some people listening are able to say well actually I hadn't thought about that for project finance and we'll come on to what that is or I hadn't thought about that for a joint venture to what that is as well um but essentially they can get a bit more of a steer in terms of how some of this works maybe I can come to you and say well for the for the assets in the market today that you see what's that balance like between the finance options that exist >> um certainly in terms of what we see I would say um there's almost equal popularity between developers who prefer for various reasons to enter into joint venture structures with institutional investors and that's effectively people accessing money from say life insurance and pension fund pots. >> Okay? >> And on the other hand developers with a slightly different profile who instead prefer to access money from commercial banks. Certainly if we're talking about UK bez now in my case um depending on the year uh we might have a few more of one or the other but in terms of the overall split across Europe I'd be interested to know the answer but I'm afraid my hunch is that there is more institutional debt going into bez than into traditional renewables. I think um if we look at on and offshore wind for example probably there is more of a tendency to use bank bank finance for the bulk of the capital expenditure on those projects but that again is largely based I guess on the anecdotal spread of clients that I work with. >> Okay. Okay. Really interesting. So we're seeing a bit of a balance between getting uh debt from a bank or getting uh funded by an institutional institutional fund. >> Um and let's go right back. So, let's imagine that um if you were having to explain loan financing to a 5-year-old, what would you say? >> I would say that um the starting point is that you have a lender and a borrower. Instinctively, we all know maybe not by the age of five, but hopefully by not long after that, that there is an inherent fairness associated with that relationship whereby if I lend you something, I do so on the understanding that I will get it or something of equivalent value back. >> Mhm. >> And uh the same applies uh in the in the world of bank debt. Now the way that manifests itself within the world of corporate finance is most commonly if we think of the example of a corporate entity who needs to borrow money for a particular business need may approach a bank or a number of banks and say they wish to borrow some money for a given purpose. From the bank's perspective, in order to address that primary concern of how do I know I'll be repaid, it can uh approach that potential borrower in a number of ways. The most obvious example would be to carry out an analysis of that borrower's business, to look at their balance sheet, to look at their P&L, uh the assets that that business has, and to form a view as to its strength as a counterparty. Sometimes it's referred to as its covenanting strength. So what does it have available to it by way of collateral? >> Okay. It's like a health check. >> Exactly. And there's also a very once you get up into bigger sized companies, there's a neat uh kind of proxy measure that can be used for that which is a credit rating. Um and so whatever rating is assigned if it's got a what they call an investment grade rating that can help a lender to make it >> cheaper to loan to it and if it's less healthy then it'll be more expensive. >> Indeed. Indeed. and and for some lenders with some products, it would either exclude them from that category uh or you're right, it would impact pricing. Beyond that, then the most simple form of loan that that that we might picture in a in a corporate context, there are more specialized products that banks have available um given the complexity and range of things that people want to borrow money for. And if we sort of take the most um the most relevant examples for somebody who's thinking in terms of how might something big and expensive be funded. >> The classic example which applies to a lot of uh funding of big expensive items can be seen in the world of shipping or aircraft financing where for various reasons uh including the ability uh to be able to dispose of or transfer an aircraft or a ship in future. you end up with a borrower saying, "I'd like to buy a ship or an aircraft, but in order to do so, I'm first going to establish a new company, what we call an SPV, a special purpose vehicle is all it stands for. So, it's a new a new co which will operate as the borrower, >> and it will own, let's say, the aircraft." Now, from the bank's perspective, they will say, "Well, um, this is a new company. It's got no track record. It's got no balance sheet of of as such uh that we can take a view on its creditworthiness in relation to, but we know it owns an aircraft or it will do as part of this loan process. Therefore, in order to determine the amount I'm going to lend to it, what matters fundamentally is the value of the collateral, which of course will be the aircraft in the same way that if you or I were to buy a property, we might want to buy a house for 100 somethings. Um, and the bank will say, "Okay, I want a mortgage on the house." In the same way the bank would say to the SPV, I want a mortgage over the aircraft and I will lend you an amount based on a third party objective valuation of that house in our case or aircraft in the case of and that's called generally in the case of aircraft and ships it would be referred to as asset finance. So it's finance determined by the value of the asset. Now what we're potentially more interested in uh is something called project finance. And the distinguishing factor there is that you have a broadly similar structure to begin with. In both cases, there's a new company that's established to own the thing. In one case, it's an aircraft. In the other case, in this case, let's say it's a BEZ installation. And that new company, in the case of the Bez, a grid connection, various contractual rights, and a bunch of shipping containers full of battery storage equipment. However, for project financing, its proposition to the lender is not I own valuable things with a value of X. Therefore, I'd like to borrow some money up to a percentage of that. What they will instead say is that I'd like to borrow on a project finance basis. the fundamental element of which is that you size the loan that can be made available to that project company not by reference to the value of its assets but by reference to its contracted revenues into the future. >> Yeah. >> And and that that basis of distinguishing not between the asset value but between the the future revenue stream. So it's that stream of payments over a given period of time that determines how much you can borrow to build your infrastructure project. >> So I'll borrow your currency for a moment and say that that project is going to earn 100 somethings >> and you're essentially saying okay I could get in um 60somes worth of debted um to support that project and because I'm pretty confident I'm going to have this 100 then I can I can bring that debt in. >> That's right. And the question ultimately then for the lender will be how certain am I that you're going to earn that 100? What are all the different things that could happen that might jeopardize your receipt of the 100? >> Okay. And there's a few ways in which that could be slightly more secure, right? So what are some of the ways that some people have secured that future receipt? >> So the revenue stream is primarily secured in a project finance model by determining number one in relation to the third party who is going to pay the revenue. So the person buying your electricity or the person who's buying whatever product the project is producing. Number one, what's their creditworthiness? >> So what's their status? Now if it's um a an investment grade rated utility that's likely to exist for a long time, then that's a big tick in the box. Fantastic. Someone is going to be buying this product and we know they're, you know, A+ rated or whatever. So you've just got this this this vehicle this new company you've created that has batteries in it and they say I'm going to go to this large utilitydeed which has been around for 50 years and I say would you give me a fixed return and they say yep I can give you a fixed return and the bank instead of looking at the SPV which has existed for all of 5 minutes instead go I'm going to look at this utility over here which has been around since you know donkey's years and therefore I can get much more confidence around >> I think they would say as well as rather than instead of >> as well as okay okay well I have to be very careful of I forget your profession so I have be very careful of the words I use. >> No, not at all. But yes, it would be as so they would certainly be comforted by that because what what they want to see is you've got a contract with this offtaker. Not only are they highly creditw worthy, they also really know what they're doing. Okay? >> So they know all about buying power and that reduces the likelihood that they're somehow later going to want to get out of that contract. They don't understand the market they're in, etc. >> And this feels okay. this this feels like a nice sort of exciting way of bringing a lot of that cash that we need into these projects from from day one. >> What are some of the issues? So where so where does the project finance structure go wrong? Um I guess rather than go wrong, I would describe it as being um set up to focus on certain factors that other funding sources would not be concerned with in the same way. So, let's start with the concerns a project finance bank might have about bez projects. Um, and we've only had about five years of these really being project finance in the UK would until quite recently have been uh is it a proven technology? So, number one, do we know this stuff works? How long does it last? So you know my technical advisor which is somebody the bank will have advising them on the appropriateness of that technology uh as the basis for lending >> is able to tell me yes lithium ion for example uh is a chemistry that we have lots of experience of over a long period of time but we also know that it suffers from degradation rates. Um now increasingly as the markets evolved uh developers will say well we have a strategy to be able to address that through augmentation for example. So by continually adding batteries to this we can maintain uh a certain level of output and that that should give you comfort lenders. But lenders might well say well we're still going to factor that into the question of how long we're going to lend you money for. >> Okay. And in addition to that, as a battery storage developer, you're not in quite the same position as somebody who's generating power and selling it on a long-term basis to a third party >> because what you're really doing is taking power from the grid and then releasing it back to the grid at an optimal time depending on whether you're providing grid services. So that might be what you consider on a given day to be the best way to generate money >> or whether or not you're seeking to exploit an arbitrage opportunity because batteries are able to be filled with power when there is a low price in the market and then return it to the grid when the price is higher. In which case we have to take account of your ability to execute a trading strategy in circumstances when we don't necessarily know you well enough as a trading entity to form a final view on that. So it becomes a more complicated revenue stack. Sorry. >> And and what does that and what does that mean for the for the financing term? So like with a very straightforward solar solar project that is just essentially quite a simple um it's not simple but um quite a refined technology at this point where very little goes wrong and the project the the revenues look pretty stable um you would kind of maybe put that into like a 15 year or 20 year project for batteries what would that sort of standard term look like? >> The standard term would be shorter in terms of what we're seeing. So going back about five years ago or maybe a bit more just before COVID the first of these projects that I worked on we were seeing around fiveyear terms. So you know the bank would say we'll lend you the money uh that will allow you to build the thing but then within 5 years we expect to be paid back. um that's extended now to in some cases seven and even 10year loans, but fundamentally those are still shorter time periods than you would traditionally expect in a project financing where the whole of the cost of constructing the project would be spread out over the term of the loan. And the types of shorter loans um that we're talking about for bez projects are commonly referred to as mini perms. So what that mini perm product uh doesn't offer you is that same life cycle cost management that a traditional PF loan would give you. >> Okay. So we say we take the sort of traditional 15 years we sort of chop it in half to seven years because that it better reflects the technology we first put in. Yes. And and that sort of first first part of that loan we're calling that's the mini perm >> indeed. And it's that's right. Exactly. So the the mini perm is the loan itself. It describes the loan product. uh and I can go go on to explain a little bit more about how that works. In essence, over a 15-year loan, if we take the solar example, and we'll we'll leave aside any um peculiarities relating to um subsidy periods and loan tales, etc. That 15-year loan period on a solar project should allow you to construct the solar installation, operate it for a large part of its life cycle, repay your loan in full, and then have a little bit of life left at the end of the solar park, it'll continue debtree. >> Yeah. And so the way we would commonly describe that is we'd say the loan is amotized which just means divided up uh and spread out over a period across the tenor. That's the t the term or the length of the loan. >> So >> and this is similar to like how someone might pay back their borrow. Absolutely right. Exactly. A mini perm differs in that quick twist. There's we have two types of mini perm. Hard and soft mini perms. So um all all that that means is that um when the date for repayment of the loan comes a hard or a soft mini perm will have slightly different treatment. Uh effectively one allows you to take a little bit longer to finance and the other one could result in a default at that point. And the fundamental difference though taking a step back and thinking about dividing that loan over 15 years >> that's the amortization period. >> Okay. In a mini perm, your seven-year loan repayment period is commonly going to still be set up across or amatized across the say 14-ear period or 15-ear period. So you'd have a loan that's amotized over 15 years to be repaid in 7 years. And what that means, of course, is at year 7, you've still got a load of debt that's outstanding. So that at that point, a balloon payment becomes due. >> Quick break. If you listen to this show, then you probably work in energy. 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And what we're trying to get to with all of this is that the in this type of structure because of the nature of a battery asset where you're going to go on site at year 7 or year 10 to go and replace some of the technology. >> Yes. that brings in this need to have things like mini perms and then like to consider the second half of the financing and I think really what we're trying to sort of highlight here to people is that because they degrade in a certain way there's augmentation there's this this this mini perm structure there's more complexity in in in that approach and so alongside the sort of project finance you're also saying there's another way of doing this right which is a which is a joint venture and so maybe just describe how a joint venture works and then we can kind of compare the Uh yeah no I' I'd be delighted to so um at a high level the way it works is that the alternatives available for a developer who's looking to fund the construction of a project is either to say to a bank I'd like to borrow the money to do so or they could say to an institutional investor so it could be like someone like an asset manager >> um or even a private equity fund quite commonly there's a blur distinction between that group of investors they're all effectively institutions looking to invest money often they do it across Ross a range of things. So they'll have a desk that's investing in um what they call fixed income bonds or they'll have a desk that's investing in stocks and shares or they'll be you know hedging Apple and Nvidia with a view to selling their shares short at some point. So they they're doing all kinds of financial um activities to make money. And one of those might include working with developers to realize the development, construction, and operation of certain types of infrastructure assets where there is a an appropriately high margin. >> Okay. >> So with battery storage, we're at the start of that cycle. So onshore wind began like this with very high rates of return. Then it plateaued and now it's moved into what people often refer to as um utility rates of return. Mostly the market saturated. There aren't huge numbers of new wind farms being built and to a large extent you've seen a degree of consolidation where that mature market has resulted in long-term owners of those projects who aren't looking for huge returns but do like the low risk profile. Same in solar. We're at the early part of that for BZ battery storage and that means those high returns are attractive to that kind of asset manager. Now what they will say is okay developer I will work with you. So we'll again set up the special purpose vehicle and the developer who's done they'll have to have done some work. There has to be a project that they can point to but maybe it's at that early stage you know they've got a a grid offer maybe planning and an option for lease over some land. and the uh institutional investor will then say right we'll work with you and often it's the case that although these are financial institutions they can be very experienced within the fields they work in so they may well know lots about UK power plays in which case you're you're working with an institutional investor who's not just providing money they're also providing often expertise and um contacts you know to the extent that they already own 50 wind farms and 20 solar parks they already know a lot of people in the market and so they can help you with your project >> and through that structure then they'll effectively say we will share the cost of funding with you. I say share I mean often that can be 100% from them and then really what they call sweat equity the effort of doing the work from the developer all the way through to whatever mix you want along those lines and then at each stage so commonly it's divided into sort of that stage one conceptual yes we'll agree to fund you through to stage two which is the ready to build stage at which point if we agree then we'll pay for the cost of uh construction to get it to an operational phase. is sort of the commercial operation date it's often referred to at which point the revenues from that project will be shared between us on a pre-agreed basis. >> Okay. >> So from the developers perspective this is rather good because you've got someone who may even be committed to say well I know you've got four or five other projects in mind. Bring them to us as and when they're ready and you can formalize and document that >> and we've already got this set process right. So when you bring the project to us we know what we're doing. We know Yes. Okay. Whereas you're saying with the debt process, every time you go to a bank for a fresh project, it goes through the same investment committee. You look at the same sort of debt financing. We've got mini perms coming coming left, right, and center. >> That's right. And I mean um I certainly wouldn't want to do down banks from the bank financing perspective, but it is the case and this may not be banks who are to blame for this, but if I certainly think in other types of technology, I've worked on a good number of portfolio financings. So that's where you say exactly the same. I've got four or five projects. >> Yeah. >> As and when they come through, I'd like to add them into this loan facility arrangement that I've got with you bank. >> Can we pre-aggree that my next whatever it is wind farm be project can be added in and the next one and the next one? And the banks quite often say, "Yeah, of course. We're delighted to. >> We'll set out some broad parameters or even detailed parameters, but when the time comes, you'll need to bring it to us and there'll still be a due diligence process and then we can work it in." I've worked on a number of portfolio financings that consist of a portfolio of one and have not had any more projects added to them. Okay. >> And that's quite often it's because the developer, you know, a year and a half later when the next project's ready, they've gone, actually, I can find a cheaper bank over here. >> Yeah. And so you're really thinking about this in terms of like the efficiency of doing multiple projects and the efficiency of sort of dealing with some of the road bumps that come up when you're when you're in those projects, right? So you're saying okay you could go down the banking route or it could be this JV route and because the JV route has the sort of experienced counterparty on the other end that's maybe looking at many more projects. You think for some developers, >> yes, >> they might go, okay, actually, you know what, I know a lot of people are doing project financing, but I can see this JV route working out for me. >> Absolutely right. And at the risk of sort of oversimplifying this, it's worth, I think, you know, if we put ourselves in the shoes of this hypothetical developer who's looking at options very quickly, sort of reminding ourselves of what a bank's function is in the world. What is a bank really? So the way I think of it, a bank effectively provides the plumbing for the the global finance system. >> So what what does that mean? A bank funds itself really from three principal sources. So deposits from its customers, your and my savings, etc. Debt or money it raises in the wholesale markets, so issuing bonds or borrowing money from other banks. Uh and then also equity, it sells shares and that you can use the proceeds of that sh those those share sales. uh and that gives it a pot of cash. So it and all of the other banks like it then face the market of potential borrowers with their pot of cash or access to money to fill that pot with cash. And as their customers come along and choose which bank to go to, we've evolved a highly efficient system to provide the customers of banks with pretty cheap, pretty accessible debt, which operates on the basis of a loan agreement that says, "We'll lend you money on the basis of a benchmark rate, and that's a proxy for what it costs the bank to get that money." >> So, it's a really low rate. There's nothing really built into that. However, you then apply a margin to that. So you have a base rate plus a margin gives you the overall cost of debt. And that margin that the bank applies is applied in competition with all the other banks that its customers could go to. >> Now what that means is that from a borrower's perspective, you've got a highly efficient system where they can compare each bank's margin to determine where do I want to go and borrow money. Now the reason that's important is that from the bank's perspective, this system only really works on the basis that they have a relatively high level of certainty based on a few parameters that are reflected in the margin that they'll be repaid. What they're not taking is general commercial risk. Okay? you know, they're not taking a chance that there's going to be um, you know, a change of law in relation to the way that banks balance sheets are treated or that there's going to be new tax requirements or whatever because to factor that into the margin would make it so unbelievably complex to ever negotiate a loan that it would be close to basically an equity product. It would be like buying shares in the developer. >> So that means bank debt is generally a pretty cheap way, >> yeah, >> to borrow the money to build your project. So if I'm the developer and I want to maximize the returns that come to me and I'm considering on the one hand going to a bank and on the other hand going to an institutional investor, the institutional investor's money is going to be a lot more expensive probably in most cases than the bank's money because the bank is able to lend on the basis that all of that risk associated with the project has to be mitigated, backed off, covered in a contracts, covered with guarantees or insurance, whatever it might be. And that gives me access to cheap debt. M >> so I bear all risk as the developer. On the other hand, the institutional investor is basically a partner with me. They're not quite buying shares in me, >> but we're close to that kind of relationship. >> Slightly more risk, but for a slightly higher rate. >> Indeed. >> But that can grease the wheels to mean that you could move potentially much faster. >> Not only can you move faster in many cases, but also what it means is you don't need to. So the key thing with the bank is if the project costs 100 to build, you're probably going to need at least 40 of your own money and maybe 60 of the bank's money. Could be 60 of your money and 40 of the bank's money in a bez project >> depending on the risk that they consider with all of the >> and the amount of revenue it's projected to raise because remember project finance we're sizing debt on revenue and that determines your debt to equity ratio. >> With the institutional investor, I might have spent very little indeed. I might have spent two out of the hundred just to secure my you my site, my grid and not even have planning. I could have a report that says I'll get planning. Now at that point as a developer I'm saying if I bring in the institution investor I've spent the other 98 is going to come from them. >> So actually I'm spending very little of my own money. Now the flip side of that of course is the future revenue that's generated much more of that will be required by the institutional investor than would by a bank because the institutional investor he's your partner he's working with you in this he's taking a lot more risk and risk comes with a cost. >> Interesting. Maybe sort of to fast forward this like where where does this all end up? Right. So in a world in 15 years time, do we have 100 developers or 200 developers all going down their own route for individual special purpose vehicles, these SPVS? >> Yes. >> Or does some sort of mammoth in infrastructure fund just say, "Look, you know what? I like the battery space. Here's 50 billion. I've got 50 billion because, you know, I'm a very large infrastructure fund and you just go and get it done and let me know when it's done and I'll I'll I'll have, you know, 98% of the revenue when it happens." Well, I think the answer is it will is I mean my guess is I should say not I think the answer is so my hunch is in the same way that we look at for example technology pricing or technology cost wind turbine costs we track them over a period of time from when they first started to be deployed costs go d all the way down >> same for solar we're already seeing it's the same for bays >> yes >> now let's assume that we can map some kind of equivalent curve onto the the market saturation profile for these different technologies. So onshore wind, you start with very few in the most windy spots. You then go gang busters and then before long every good site's got a wind farm on it. >> Bears will probably be the same. You've got a certain capacity within the market and it'll get filled up by and then ultimately owned by I suspect different people. Mhm. >> So where we are now, there are still lots and lots of developers out there quickly trying to get stuff into the ground and they'll do that either using a JV structure or um using bank finance, combination of both in some cases, but they're probably in some cases at least they're not anticipating what they call a hold play. They're not looking to be in this for 25 years. Their business is creating a project which once it's operational has a completely [snorts] different risk profile. You've removed all construction risk. it now has much more value because it's reached that oper that that operational stage. But once the market no longer has construction projects as a large part or a large proportion of it and you're largely into operational projects, I would have thought you'll see something similar to what we saw in the solar market which is where lots of solar got deployed and then quickly it consolidated as the types of players who wanted to acquire those projects thought this provides me with a long-term stable revenue stream. Yes, >> that's worth X to me and I don't have those same expectations of return as say a certain asset managers or a private equity fund might have. So a private equity fund might have a hurdle rate which is the level at which they'll decide to invest in something. It could be say 12 or 14% IRRa. So if they're not getting that return, they can't justify investing their um clients money in those projects. Um, however, if I've got some a fund who's looking for a much something that's um going to be used to service future pension payments, they might be looking at something which is far far lower risk but also with a far lower return. So, it's got this kind of utility rates of return 5 6% whatever it might be. Now for that kind of entity you end up with once the market consolidates what certainly in relation to solar was often referred to as a cost of capital shootout which is a question of how much can you justify to pay for this asset as as you inversely increase the value and your returns drop >> um in order to secure it and the person who can ultimately bear the lowest level of return can spend the most on those assets. Yes. Now if we look forward to a point at which the bez market is largely reaching not saturation but it's it's a large fleet of operating assets rather than >> maybe very low risk is probably the a nice way >> it yes indeed. So all the construction risk has been removed and it's a proven site with a long track record exactly as you describe. Uh so it's got, you know, relatively low risk hopefully going forwards potentially with long-term augmentation um kind of contractual uh provisions from a creditworthy battery supplier. >> Mhm. >> Now in those circumstances you're probably close to the kind of profile that you'd have for a solar project in which case it'll come down to how many you know pension fundbacked asset managers out begins. >> Indeed. Indeed. Yes. >> Okay. And so and so you're you sort of see this world where as that risk comes down each of these sort of large groups of capital cash start to say okay as that risk comes down I can I can bring that into my portfolio I want to bring it in. So you can see some of these really big groups taking on quite large portions of the market. That's I think >> it's not yeah it's not hard to imagine. Um and uh now within that sort of basic overview there are of course a hundred various different ways of structuring that and you end up with um you can imagine and we have this now in even in the UK today where having seen this cycle play out a number of times various of the kinds of asset managers who would like to own these projects in future might decide they want to acquire a development business and vertically integrate. We'll do the development and then our other subsidiary will do the operation. You might then also acquire a contractor to build it for you and then they can flip it into the fund that wants the long-term returns. At each point, you take the appropriate return. I think people are starting to get an idea of just how complicated um hopefully we're adding some simplicity to it, but there are there are a lot of sort of complicated parts of this, but they're starting to get sort of an idea of how complicated it is to to bring the cash into these projects, how things like interest rates really matterdeed, how the sort of risk of these projects really matter for sort of who owns it and and and where's it actually going to end up on, you know, whose balance sheets going to end up going forward. Maybe um one final question before I move on to the the final two. So we've talked a lot about Europe and and sort of GB within this. But you also mentioned you've worked in the Middle East and also Africa. So are these sort of the are these the same financing approaches that are taken in Africa or do people generally tend to see sort of different approaches in those regions? >> Uh pretty similar is a short answer. Um now in terms of technologies that does differ a bit and I think you know even if we took sort of the Middle East and Africa as two separate regions North Africa a little bit more similar to the Middle East the focus in both of those sets of jurisdictions is quite different. So for example where you might have collocation with solar and bez here in the UK as a way to optimize a grid connection. >> Yeah. in many Middle Eastern um countries where there isn't always the most um well-developed grid infrastructure and a lot of um both CNI and domestic users will have backup power in the form of diesel gen sets >> the the the opportunity to improve the the financing costs associated with heating and powering their properties heating less so cooling and powering their properties effectively comes from colllocating solar with diesel. >> Okay. >> So then then it's not the same level because it's an individual who's making that choice often rather than it being you know a grid connected product then that's how that works. I'm not aware of any. So we're doing a few a few different things across Africa at the moment in various different countries on the continent and it's always hard to generalize. as I always say 54 countries in Africa and you know you can't really extrapolate across Africa any more than you could extrapolate from you know the UK to you know Croatia they have very different dynamics however of the types of projects we're working on including renewables projects I'm not working on any with a bez component however I am aware of one in Kenya which is going to be colllocated with bez um so it it is coming the same basic rules apply so if you if you're offtaker might slightly different structure in some African countries it's a stateowned utility often but if your offtaker can come up with a solution whereby they buy both your power and whatever you're providing in the way of services and you know return of power to the grid through your battery storage project under one banner effectively then that very much speaks to what the lenders to those kinds of projects would like to see the lenders are different that's another story that but DFI is fundamentally um develop sorry development finance institutions sorry are they're concerned with the same things. So it's not you know this isn't sort of concessional finance in the traditional sense of they're not giving money away. This still needs to be a commercially um viable project. What they're there to do is to overcome a lack of depth and liquidity in local banking markets not to give money away. So there's going to be a very sort of regional specific focus in each of the in each of the regions. >> I think that's right. Also driven by what the um what the utilities want there because as you know the developer is part of the story even the funders as well but also you're responding to what the demand is in the country. >> Mhm. Agreed. And it's a fascinating topic. I'm sure on transmission we will have something on um African storage coming soon. and and obviously because you're quite close to the equator in some in some cases then then there's a really nice case for 24/7 power. So we'd love to have that conversation for sure. Um so I've just moving us on to the final two questions. So is there anything you'd like to plug? >> Yes, we have very recently uh in the HP team in London produced um an animation uh which is intended to provide uh an overview to the project finance process. >> Okay. >> And uh I it's it's a shortish video. It's about five or six minutes long and it helps to explain how a project financing works in practice. So, we're not going into the detail of any legal concepts here. It's just big picture. How does this actually work? And um if anybody would like uh a copy of that video, >> we will we will put it in the show notes so delighted to add them to a distribution list and they're welcome to email me. >> Yeah. Yeah. They can click through and they can see it. So, uh yeah, very happy to to get that get that on there. >> Fantastic. Thank you. >> Final question. is a a contrarian view that you hold. >> Well, I guess contrarian might be an exaggeration, but uh the I suppose the context in which I would put my answer is that it's unlikely to be a consensual one across the piece, >> okay, >> in that it's sports related, >> okay, >> which is always going to generate a certain amount of controversy. And so my my view is that this season is finally the season for Arsenal to win both the Premier League and the Champions League. [laughter] >> Oh god, that's the worst that's the worst contrarian view we've ever had. >> And we'll have to we'll have to stop everything there. >> I have to Well, I'll come up with something about the NHS. [laughter] >> No. Very good. Very good. I think everyone's everyone's entitled to their own view. So, um I'm sure we can justify that. And there'll be some people in the office who will be delighted you've said it. >> Well, I hope so. But this is why I say it's contrarian. [laughter] >> Yeah. Yeah. Of course. I wasn't expecting that actually. Um, very good. Well, uh, comrade, thank you very much for coming on. I think people will really appreciate sort of the level the level of experience you've got and um, really just how like the sort of financing works behind the scenes because it's not easy to kind of get to grips with it. And so I think it will give people a huge amount of sort of um, confidence in trying to understand that space. And obviously there's way more detail that people can get into. But I think it's just like getting into that to begin with, they're off [music] and running. >> Oh, it's an absolute pleasure. Thank you.