Q&A - Zenobe: Two-hour BESS is here to stay

Zenobe is an EV fleet and grid-scale battery energy storage systems (BESS) specialist, headquartered in the UK.

Founded in 2017, Zenobe entered the market when BESS and EV technologies were in their relative infancy. It now has 730MW of battery storage in operation or under construction with another 900MW of projects in advanced development in the UK.

The company made waves in September 2023, when it onboarded private equity juggernaut KKR as a co-majority owner as part of an £870 million (€1.02bn $1.11bn) equity fund raise. The business is now set to expand into new markets, focusing on EV and battery storage assets.

inspiratia speaks to Semih Oztreves, global director of network infrastructure at Zenobe, about the growth of the battery storage sector, the challenges it faces, and how the company seeks to harness the equity financing from KKR and Infracapital.

Zenobe recently raised around £870 million in equity financing led by KKR and Infracapital, does this investment accelerate any specific strategies for the company?

The £870 million is a significant amount for a relatively new sector and will really expedite our growth. We use project finance – meaning we use a mix of debt and equity. This means that we'll be able to leverage this investment to deploy more than £2 billion of capital into projects over the next three years across the EV Fleet and Network Infrastructure parts of the Zenobe business. 

Off the back of the capital fundraising, we have been hiring across the UK, North America, Australia, New Zealand and the rest of Europe. Our target is to build a team in North America by the end of this year [2024], which is effectively the key first step to accelerating our presence there. 

What does investing in "network infrastructure" mean for Zenobe?

Network Infrastructure represents the standalone grid-scale battery storage business. We named it this way because, at Zenobe, we focus on key issues on the network which support the increasing uptake of renewables by the network. While battery storage can traditionally offer several services like energy arbitrage, ancillary services, and frequency response services, there is so much it can offer. We aim to unlock that. 

One of the key challenges we are seeing emerging in increasingly renewable networks is stability and constraint issues. Stability, mainly in terms of the inertia of the network, is the amount of synchronous generation coming offline and renewable generation coming online. The National Grid is already seeing huge amounts of stability issues and inertia levels dropping with the increased integration of renewables (or non-synchronous generation). Equally, the short circuit level, which is a measure of when there is a fault on the network, is also dropping. This is because there is not enough synchronous generation on the network. Batteries with grid-forming inverters can address both problems. 

Reactive power is also a very critical service we provide for the network, along with constraint management services, which uses large-scale battery storage projects to reduce curtailment when renewable generation is high, particularly from on-shore and off-shore windfarms in Scotland. 

We provide infrastructure solutions to network issues and are very much focused on this. This is unique to Zenobe because, right now, the rest of the market really doesn't have any contracts to provide these services. We are the first player in the market to have won stability contracts with National Grid ESO across three major sites in Scotland – namely, Blackhillock, Kilmarnock South and Eccles – for a total of 1GW of battery storage.

We are also the first to win a constraint management contract on our recently commissioned Wishaw 50MW asset. We are also the first company to have won a reactive power contract from National Grid on our Capenhurst 100MW project. 

The reason we won these contracts, is because we design and engineer solutions to fix these network problems and help more renewable energy to flow onto the network. 

The conversation in the market has shifted to focusing on longer-duration BESS projects, how does Zenobe view that space?

We remain confident with two-hour duration batteries for the time being, even though there is a potential trend towards slightly longer duration. We believe that, fundamentally, the value is in trading and cycling the battery. 

In the UK there are two peaks, one in the morning and the other in the evening. Because of the UK's solar penetration and wind profile, the price during the day is usually pretty low, which means that you can sell during the morning, charge during the day, sell in the evening, and charge at night. This is effectively a perfect setup for a two-cycle scenario. 

But when you increase the duration of the system, you are not able to achieve the same number of cycles during the day because you do not have a four-hour duration window in the morning or the evening to capture the high prices. 

California is a great example where four-hour duration is pretty much the norm, because it is a very solid market where the peak is longer and during the evening because of the weather and the demand profile. This means that in order to take advantage of the full arbitrage opportunity and peaking capacity, you are actually better off building four-hour projects. 

I don't necessarily think that a four-hour duration is optimal for the UK, but we do need a lot longer duration projects to address the constraints on the network during high wind periods, which can last for 10-18 hours. 

Are 10 hours plus batteries on the horizon for Zenobe?

We are actively speaking to policymakers and National Grid ESO about this. We are well positioned because we analyse the constraints, the network fundamentals and market forecast every day. However, there is no commercial technology available today to deploy at scale, except pumped hydro, which takes a much longer time to develop. And that is not Zenobe's focus. We are waiting for a new long-duration technology, whether it's battery storage or some other technology, to achieve the scale necessary for our lenders and our investors to get comfortable with. So, we are considering it during our development strategy, but not actively working on building out long duration storage projects at this point. 

What is the current market outlook on financing BESS projects?

There is liquidity available from lenders. There are a lot of battery storage investment opportunities, so liquidity is not an issue, but there are challenges. The revenue curves have not been consistent, which makes it more challenging for developers to raise debt for projects and to manage the risk which comes with that financing. 

The market has been volatile because of Covid-19 and the Ukraine war. Gas prices spiked, which, in turn, resulted in higher electricity prices and high spreads for batteries. This set expectations at a level which is not reasonable and rational for battery storage. 

Unfortunately, revenue curves have been developed using a top-down approach based on those projections and numbers for the next couple of years. As a result, lenders banked on higher revenue projections based on them. 2023 was a fairly mild year, given the significant saturation of ancillary markets, which meant the revenues were nowhere close to the projections. 

These inaccurate revenue curves mean that we need to do more work to convince lenders that, going forward, the revenue projections are bankable and stabilised, even though they were off last year. That has been the key challenge we are going through, demonstrating that the future business case and the project revenues are bankable.  

How do you strike the balance between equity and debt on BESS?

It's important to strike the right balance because you can always try to squeeze as much debt as possible into the project and leverage your returns – although this does not have the same impact anymore because of the high interest rates. Our approach is to run multiple sensitivity analyses with downside cases, and stress test the revenues against the debt requirements and the interest rates. We effectively size the debt based on a pretty conservative outlook, and then apply further discounts to the debt in order to build a bit of protection for the equity. 

We try to size our debt in a way where we still receive the leverage and benefit from debt. Once you have below 50% leverage, the kick you are getting from debt is almost negligible, so it does not really make a difference in today's interest environment. But if you push your leverage too high, like 80%, that introduces significant risk to the project. So, we are trying to keep that balance. 

One thing that informs this ratio is the amount of contracted revenues. A majority of our projects have offtake agreements with the likes of EDF and Centrica, whereby they are underwriting the revenue stream for us with a minimum floor, which is guaranteed payment to Zenobe for the trading rights of the asset. 

We also have a revenue share mechanism above that guaranteed amount, which incentivises optimal performance from trading the asset. This way, we are able to at least protect our downside with the minimum revenues coming through to the project every year, and then pay our debt liabilities as well.