Renewable Energy Creates A Growing New Real Estate Asset Class: Battery Storage
Rapid changes in society are creating new real estate asset classes almost every week, from last-mile logistics and film studios to mini data centres and dark kitchens. The need to cut carbon emissions is adding a new sector to that list: battery storage.
London-based fund manager Catalyst Capital is planning to invest at least £300M in sites to house batteries that store the electricity created from renewable energy sources, and it has bought its first site to build such a facility, in Leeds in the north east of England. Its battery storage platform will target the UK first, then potentially expand into continental Europe.
The battery storage sector is niche right now, but it has the potential to grow rapidly, with two complementary factors pushing in its favour. First, as countries push to hit decarbonisation targets, renewable energy will become a larger part of global electricity grids, increasing the need for battery storage systems.
Second, institutional investors are implementing their own ESG and net-zero carbon targets, with investment in sectors that contribute to decarbonisation set to increase. Battery storage fits that bill.
“We spent three years researching the energy storage market as part of our clean energy strategy,” Catalyst Investment Director John Parsons said. “We’ve got an open-ended fund, and are looking to future-proof that with strategies that have strong ESG credentials alongside good returns, and this provides that.
“It’s all well and good having a shiny pitch book for a strategy saying you will retrofit offices, but this is actually helping to decarbonise the grid.”
So what are battery storage systems, how do they work, why are they set to grow, and what’s the real estate play?
It helps to start by thinking about renewable energy sources and how they work. Many sources of renewable energy are intermittent, like wind power or solar power; they produce energy at different times of the day, rather than being constant.
They may not, however, produce energy at the times the grid needs it most. Parsons said around a quarter of renewable energy is currently "wasted" because it is produced at the wrong time of day, so it helps to be able to store it. Enter the battery and the battery storage site.
The kind of batteries that store electricity from a renewable power source are about 3 meters high and 10 meters long, and they are housed in what is essentially a shipping container. These can be stacked on top of one another. To get the kind of scale needed to hit make a business plan work, at least 30 or 40 such batteries are required, necessitating a site of about 1.5 acres.
How does the business plan work? Parsons compares it to the data centre sector, except in this instance energy is being housed rather than data. Catalyst will lease a connection to the battery storage site to an energy company — the kind of company that supplies household power, taking a flat fee and also a share of any upside that energy company creates. Such energy companies use their knowledge of the energy market to buy electricity at times of day when it is cheap, for instance at night, and sell it when it is more expensive.
Catalyst’s role is buying sites, getting planning permission to build the battery storage facilities, undertaking the development, and then leasing the connection to an energy company. Parsons was not willing to give away all his trade secrets as far as site selection is concerned, but clearly proximity to a renewable energy generation facility is key.
Catalyst’s first deal is for a site adjacent to a 19.5-acre waste-to-energy facility at the former Skelton Grange power station, which is currently under construction. Planning permission was granted last year for a 100-megawatt battery storage facility.
The lease to the energy company provides the income component of the strategy, but Parsons said Catalyst is also anticipating growth. The need for such sites will increase as renewable energy generation becomes more widespread, with Parsons saying the current 1.2 gigawatts of production could rise by as many as eight times over the next four years.
As the number of such sites rises, investors will become more comfortable owning them, they will be seen as less risky and the value investors are willing to pay will increase.
Catalyst is funding the first site from the capital in its open-ended fund. It has the ability to fund further sites, but it is looking to bring in a partner for deals that will take it to and beyond the £300M barrier.
While it has many of the characteristics of real estate, it is not exactly the same. Like so many of the new sectors springing up, it comes with a higher operational component than has previously been the case in property.
Catalyst spent three years researching the sector, including buying a minority stake in energy market data and analysis firm Modo. Now it is putting that research into practice.