Q&A - Voltalis: Raising project finance for demand side response

Europe's push to rapidly electrify its energy mix is essential for getting us closer to net zero. However, it also strains the electricity grid. While battery storage is a popular solution to balancing grid constraints, demand side response (DSR) has been proposed as a viable alternative to help prevent power outages caused by grid capacity stress.

DSR is a mechanism grid operators use to help balance electricity supply and demand. Businesses that can flex their energy use can join DSR programmes, which incentivise them to reduce electricity demand during periods of grid stress.

inspiratia sat down with Mathieu Bineau, the chief executive officer at Voltalis, a company looking to roll out DSR across Europe.

The company made headlines earlier this month [July 2024] when it reached financial close on its 1.4GW DSR rollout in France. Notably, the Meridiam-backed developer raised project finance debt for this rollout, with revenues underpinned by long-term contracts with RTE, the French grid operator.

Bineau considers DSR similar to an infrastructure asset, highlighting the advantages of rolling out DSR across Europe.

How does Voltalis' technology work?

There are essentially two ways companies can develop DSR. The first instance is working with large industrial sites. Here, you have customers adjusting their consumption or buying equipment they need to provide flexibility to the grid and add value. However, these contracts are done on an annual basis and are not as readily available for the grid.

We are looking at a totally different segment at Voltalis, as we wanted to address the very large volume of small-scale customers. That is where you have 80% of the DSR potential in any European country, not just France. That segment is also where you have little competition because you need a different kind of technology to do that.

We have more than 1.5 million appliances connected to our in-house proprietary platform. With this platform, we can play with these appliances on a daily basis and adjust their consumption according to the needs of the grid. At the same time, we provide energy savings to the consumers.

For residential homes, we have to install a smart thermostat to provide these features. In the thermostat sector, we have over 50% of the market share in France, so we are spreading very broadly and very fast. We have a huge number of devices that provide smart thermostat features, and we aggregate that in a software platform to provide demand response capacity.

Voltalis has recently been successful in several French tenders. How important are the auctions to your growth strategy?

France is really ahead of the market at the European level. Over the past few years, RTE has decided to make DSR a key element of its energy strategy and energy mix with the launch of these tenders, under which operators secure DSR capacities in the long term.

These 10-year contracts are needed for companies to invest in DSR capacity.

It's a win-win situation where we have the visibility to invest, and RTE has confidence in the fact that DSR will be available long-term in the energy mix.

In France, RTE has separated two groups of customers: the big industrial customers with a consumption of over 1MW, and the small-cap consumers below 1MW. These include residential customers, but also small commercial or small buildings like offices and shops, supermarkets, or even universities. For small-scale customers, we have a unique position and a huge market share because we have developed a platform that is designed to handle a huge number of appliances.

Since the launch of those tenders, we have had huge growth. For the first tender, we won about 94% of the market share. This is because, today, we are still the only DSR operator operating at scale commercially in small and medium buildings.

What drove the decision to go the project financing route for this project?

At Voltalis, we needed to find a way to fund a large volume of assets. The kind of smaller-scale DSR that we do needs a lot of investment. This kind of technology has a high CapEx as we need to put a device in the customers' buildings to make its consumption metered and remotely controllable – making it 'smart' in a word.

To achieve that, you need to convince customers of this project, send in engineers to install the devices, and also operate them. We pay for maintenance; we pay for everything. So, this requires high initial CapEx.

Until last year, we funded the growth of the company through equity. But thanks to the nearly 20 years of experience that we have, we are comfortable enough with our outputs and our potential revenue to fund the growth through project finance.

The RTE tender gives us ten years of visibility on the revenue from the capacity market, which is similar to what you have in the UK, but maybe with better revenues. Thanks to that ten-year visibility, we were able to secure project finance funding through non-recourse loans, as you would find in any renewable project. As a result, we are importing renewable funding strategies to demand response investments.

For us, the key was to find a way to fund the growth of CapEx in the new technology and do it in a way that would be replicable in a large number of countries.

It sounds like DSR has a lot of infrastructure characteristics.

Yes exactly. That is why our main shareholder is Meridiam. They helped us build a business case, and find lenders, and explain the technology with an infrastructure mindset, which helped the lenders feel more comfortable. Thanks to Meridiam and the first tranche of lenders we worked with, we were able to be regarded as an infrastructure asset and were financed as such.

Investors wanted the same kind of visibility on revenues as they would have for battery storage – for 10-20 years. So, it was really key to have long-term contracts from RTE and to be a part of the energy mix.

What kind of growth expectations are you seeing for DSR in Europe?

When you look at the figures from the International Energy Agency (IEA), they consider that DSR will be the first source of flexibility in developed countries, even before battery storage. They expect about 500GW of DSR globally by 2030. In advanced economies, IEA expects 25% of the flexibility to come from DSR, 25% from BESS, a small amount from hydropower, and the rest from gas, biogas, or hydrogen, depending on what scenario of the energy transition you consider.

In all future scenarios, DSR is expected to be the first source of flexibility in any country. For the simple reason that it is the fastest to roll out and is the cheapest. The experts we have been speaking to say that before a major rollout of BESS in 2030, they expect a huge capacity DSR to grow as it is more cost competitive. We target a buildout of at least 10GW of capacity by 2030, and of course, the market is much bigger than that in each country.

Are you targeting any other countries for deployment?

The next step on our roadmap is the UK. There are two main factors for this.

The first is the high potential for DSR in the UK. You have households and office buildings that use electrical heating and boilers that use electricity. You also have a strong heat pump growth, so the use of electricity heating is growing fast. This means there is a potential for 10s of gigawatts of DSR, and demand is rapidly growing.

At the same time, the UK regulator Ofgem has opened the wholesale markets, so there is huge potential to make revenue.

With these factors, it is really tempting to enter the market. The UK is the second country in Europe to open the wholesale market to demand response. We will be using that market offering to introduce our solution to the UK, which will involve hundreds of millions of euros of investment.

You have a lot of countries that open small ancillary services markets for battery storage. A lot of developers go to those small markets at once, and as a result, the prices collapse, or the projects fail. Those markets are not our target. Our goal is to develop gigawatts of DSR, and for that, you need access to large wholesale markets, not ancillary services. France did that first in 2015, and the UK has followed suit this year. The next two countries that have voted on laws on that are Finland and Sweden, but they have not published any details on that yet.