In the Asia-Pacific, mid-market infrastructure space, battery energy storage is quickly becoming one of the key areas of interest, PATRIZIA says.
As the world transitions away from fossil fuel based energy, battery energy storage will play a critical role in balancing and stabilising the penetration of renewable energy into the grid.
Renewable energy, including wind and solar, can be intermittent and energy storage is needed to distribute power as needed and to balance the grid.
According to McKinsey the global battery energy storage systems (BESS) market will grow to US$120 – 150 billion by 2030, more than double its size today. This will partly be helped by the US Inflation Reduction Act, a 2022 law that allocates US$370 billion to clean-energy investments.
As many battery projects are still relatively modest in size compared to existing, brown field-type infrastructure assets, they form an enticing opportunity set for mid-market infrastructure investors, such as PATRIZIA.
“Batteries are a really interesting space,” Saji Anantakrishnan, Head of Infrastructure for Australia and Asia at PATRIZIA, says in an interview with [i3] Insights. “We started investing in batteries a few years ago as part of our small-scale, solar platforms. We started coupling them with Tesla megapacks, because we wanted to learn how they worked in practice in a system that was rapidly decarbonising, leading to instability and volatility, something which batteries could exploit.
“We started small, because we took a view that this would evolve into a utility scale investment opportunity and wanted to be an early mover in this space to understand both the risks and the opportunities. That’s certainly what’s happened,” he says.
Today in Australia batteries can be used for both ‘peak shaving (i.e. charging batteries when prices are low and discharging when prices are high) and provide system support services under the Frequency Control Ancillary Services (FCAS) markets, managed by the Australian Energy Market Operator.
It is at a point where you don't even need the battery to be coupled with solar photovoltaic. The battery can be a standalone investment on its own and effectively connect to the grid and provide services and revenue. And this will only grow
“Now, it is at a point where you don’t even need the battery to be coupled with solar photovoltaic (PV),” Anantakrishnan says. “The battery can be a standalone investment on its own and effectively connect to the grid and provide services and revenue. And this will only grow; everyone knows the system has to decarbonise further and additional battery capacity will be needed to balance the planned renewable power installations.”
Battery storage is not only used in energy generation and distribution, but also increasingly in transportation. Electric cars are an obvious example of this, but when looking at opportunities in the broader Asia-Pacific region the take up of electric cars has been somewhat slower than in the developed world due to the affordability of these vehicles and lack of government support.
Yet electrification is also taking place in this region, albeit in smaller modes of transport.
“In Asia you still get a lot of scooters, so EV scooters are a big opportunity,” Anantakrishnan says. “As an infrastructure investor, I’m always interested in the hard assets, the physical infrastructure.
“We’re exploring a deal in Asia at the moment and the business model we’re looking at is a swappable battery, where you can just take your battery out, put it into a rack and take a fresh battery out and put it back into your scooter. And off you go,” he says.
Swappable batteries help solve an important issue facing every investor that is looking to allocate money to EV charging assets: underutilisation. Although charging times continue to get shorter as battery and charging technology evolve, this doesn’t always translate into more charges a day since people are slow to change their habits.
“[Batteries are] really a commoditised product; there’s nothing special about your battery versus another battery. Obviously, the more times you cycle it up and down you do reduce the life duration of a battery, but if you’ve got the option of putting the battery back into another station and getting another one, then you are somewhat agnostic as a consumer,” he says.
Developed and Developing Opportunities
Energy forms a large part of the opportunity set in the Asia-Pacific, mid-market infrastructure universe. Anantakrishnan estimates that it will take up half of his portfolio, while the social and digital infrastructure assets will each take up 20 per cent, with the balance going to mobility-related assets.
Private capital will be an important driver of future infrastructure projects in the region since governments are fiscally constrained.
“If you look at what’s happening globally, no government is trying to decarbonise on their own. Everyone is saying: ‘Look, we’ll put the policy framework in place and we will look for private capital to build the next generation of energy generation technology’.
“Governments are not going to replace their fossil fuel based installed capacity on their own. Perhaps China aside, for most countries those types of nation-building programs are very challenging. So, we think decarbonisation of the energy sector will probably be half our deal flow,” Anantakrishnan says.
Southeast Asia forms an important part of the deal pipeline and PATRIZIA is looking at investments in Malaysia, Thailand, and the Philippines. It is also starting to investigate opportunities in Vietnam.
Asia is a region that is starved of private capital, especially in the infrastructure sector, where the funding deficit is close to the trillion dollar mark, so governments are conscious that supportive policy needs to be coupled with a relatively transparent development process, especially in the energy sector which is falling behind net zero obligations.
Governments are not going to replace their fossil fuel based installed capacity on their own... So, we think decarbonisation of the energy sector will probably be half our deal flow
PATRIZIA has been investing in emerging markets infrastructure since 2008 and believes it is essential to have a robust investment/ due diligence framework paired with trusted local partners to manage in-country risk.
“We have successfully acquired, operated and divested multiple assets in developing countries, but our approach has always been to partner with local teams and stakeholders to ensure risk is proactively managed,” Anantakrishnan says.
But it isn’t just the developing countries in the region that spark his interest. There are good opportunities in developed countries too, including Japan and locally, here in Australia.
One of the first deals for PATRIZIA’s mid-market infrastructure APAC portfolio was a solar photovoltaic and battery facility in Australia.
“One of our seed assets is solar PV coupled with batteries in Australia. It is a platform business where it is acquiring very small-scale sites that are 5 megawatts or 10 megawatts, and the strategy then is to roll it up into 200 or 300 megawatts [projects],” Anantakrishnan says.
PATRIZIA now eyes similar projects in Taiwan, Singapore and Japan.
To read more about investment opportunities in battery energy storage systems, please see PATRIZIA’s research report: ‘The Electron Conundrum: An Investment Primer on Battery Electric Storage Systems’.
This article is sponsored by PATRIZIA. As such, the sponsor may suggest topics for consideration, but the Investment Innovation Institute [i3] will have final control over the content.
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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.