Power flexibility 'in the money' but recession drags on transition: investment fund

Investments in power system flexibility, stretching from industrial demand response to battery storage systems, were "massively in the money" due to current wholesale prices, Pieter-Jan Mermans of Junction Growth Investors told S&P Global Commodity Insights Oct. 5.

Avoiding peak price periods has become a hot topic in Europe after EU energy ministers Sept. 30 agreed a mandatory 5% cut in power demand during peak periods this winter.

"Aggregators working on industrial flexibility and battery storage are having a good time, all these investments are massively in the money," Mermans said.

In late August, evening peak block 5 power prices in the UK exceeded GBP660/MWh ($753/MWh) and have averaged GBP351.43/MWh since end-June, up 80% year on year, according to assessments by Platts, part of S&P Global Commodity Insights.

In France, the situation was much more extreme due to poor nuclear availability, with December peak power settling at Eur2,384.76/MWh on Oct. 4 on the EEX exchange.

Mermans, a founder of Belgium's REstore demand response company bought by Centrica in 2017, helped launch a variety of demand side management products at the company before moving on to set up private equity fund Junction Growth Investors, focused on European scaleups in the energy transition sector.

The fund has raised Eur75 million to date and aims for Eur100 million, with further closings by end of this year and by July 2023.

While bullish on flexibility investments, Mermans said he had changed his opinion on the macro impacts of the current energy crisis on the transition.

"My initial position in Q2 2022 was this was going to accelerate the energy transition. My current thoughts are that it is probably going to temporarily hold it back. If recessions develop, businesses as well as households will freeze investment budgets, and that will have a downward impact on energy transition spend," he said.

A wide-spread recession could have an impact on the type of company the fund invested in, Mermans said.

"Valuations have gone down quite a bit on the stock market as well as the private equity and venture capital space, so from that angle this is a good time for us."

On the flip side, current demand for solar PV systems was huge and components were scarce, so installation costs had increased over the past six months.

"These [solar PV/battery installer] players earn a higher margin so they would be more expensive for us to invest in," he said. "We are a bit cautious on that side."

Digital distribution

Other ET target investment areas were less exposed to short term impacts from the crisis, such as products and services for grid operators, energy efficiency in buildings and climate compliance.

"We strongly believe in digitization of distribution grids," Mermans said.

While the last 20 years had seen large transmission-level digitization programs, "now distribution grids are at the start of that journey. They really need to look at congestion management. There is a lot to do there," he said.

The same could be said of heating, ventilation and air conditioning optimization, being driven by the integration of buildings in the EU Emissions Trading System from 2024 and as part of the EU's Fit for 55 program.

Then there was the growing demand for carbon accounting systems, being driven by mandatory carbon disclosure imposed by the EU's Corporate Sustainability Reporting Directive, and similar obligations issued by the Bank of England and Bank of Japan, as well as the US' Securities and Exchange Commission, Mermans said.

Back to the future

On 2015's "Internet of Things" vision of an interconnected universe of domestic devices sending and receiving data, Mermans quoted an old telecoms saying: "It takes 10 years to make an overnight success."

"It is 2022 and there are about 3,000 home batteries in the imbalance market in Belgium, selling ancillary services to the transmission system operator," he noted.

That was, in aggregate, around 5 MW of capacity, a tiny volume, Mermans said. But "if you manage 3,000, you can manage 20,000."

As such, Mermans remained enthusiastic about flexibility opportunities in the consumer market, which was likely to take off around electric vehicles and home batteries in the first instance.

That was because both were already connected to IT computing clouds and were fit for aggregation, unlike heat pumps, Mermans said.