Energy SpA – Capture the battery storage opportunity
- JUN 17, 2024
As the most viable way of smoothing supply of renewable energy, battery energy storage systems (BESS) appear set to proliferate. Energy SpA (ENY) is a strong player in the important Italian market, and has all the necessary elements to take that strength beyond its national borders.
There seems to be little doubt that investment in BESS worldwide will continue to escalate in the next few years, and that Italy will be one of the major growth areas.
There is a significant body of work (see image) that points to a requirement for pharaonic investments in BESS worldwide. From batteries the size of a flat-screen TV in household utility rooms to serried ranks of container-size units ensuring the smooth operation of renewable-heavy grids, lithium ion cells are set to become a part of our lives.
Some form of subsidy is still required for residential solar + BESS to make economic sense, but the political will to facilitate deployment is entrenched in many countries, and unlikely to be de-railed by recent right-wing gains. Taking Italy as an example, although the Meloni Government is not unconditionally supportive and the highly generous post-covid subsidies (more on this below) are rolling off, the structural 50% tax-deductibility of residential investments in force in some regions of Italy gives rise to a sensible pay-back period, according to a recent BNEF study, of 6-7 years.
Energy S.p.A. management tell us that, given suitable design conditions pay-back periods for businesses in Italy can be as low as 5-6 year range; given that the average battery life is 10 years, this should provide a decent rationale for investment. In addition, across Europe, sustainability disclosure requirements will start to bite, albeit quite gradually, pushing businesses more and more towards renewable solutions. Moreover, grid operators are starting to remunerate storage services handsomely, thus reducing pay-back times further. Belgium, where ENY has secured some decent sales, is very advanced on this front, and Italy is due to follow suit in 2025 with the advent of the MACSE storage market mechanism.
Which brings us on to the fact that Italy is something of a sweet-spot for BESS, as much of its famously copious EU post-Covid recovery grant is being channelled into renewables. €6.3bn has been set aside to incentivise energy efficiency and energy autonomy for businesses, and €5.7bn for energy communities (in both cases, grants apply to storage as well as production). On top of which, national grid operator Terna will be auctioning off permits for 71GWh of BESS systems by 2030; a €17.7bn plan for which Italy has received EU approval.
All-in-all, the direction of travel is becoming clear. We seem to be heading for a significant ramp-up in demand for BESS systems worldwide, and Italy looks set to be implementing more than its fair share.
DEMAND SET TO RAMP AGAIN
(Click on logos to link to articles/reports)
“Out to 2030, the global energy storage market is bolstered by an annual growth rate of 21%”
“The estimated market size of the BESS systems worldwide… was forecast to increase to $150bn by 2030”
“Europe is on the brink of a significant surge in grid-scale BESS… projections indicating a sevenfold increase in capacity by 2030”
“We expect the global BESS market to reach between $120 billion and $150 billion by 2030”
“The battery energy storage system (BESS) is a super-high growth market”
ZERO CO2 PRODUCT RANGE
(From utility room to utility-scale)
Energy S.p.A. is already a significant player in the Italian BESS market, and the gigafactory it is building will further enhance its position, as well as giving further impetus to a growing presence outside Italy.
Energy has built up its capabilities as a full system integrator to encompass manufacturing and in-cloud management systems, and looks set to build on its 7% share of the Italian BESS market. Having started off in 2013 as an integrator for Pylontech, a leading global battery brand, it is now building its own 8GWh battery gigafactory near Padua.
To put the production capacity of the plant into context, in 21-23, which includes the residential subsidies period, Energy sold around 500MWh of capacity (1/16th of 8GWH), and turned over a cumulative €241m, for an EBITDA of €52.5m. Of course, one can’t fully extrapolate the profitability an extraordinary period, but it’s important to note, at this juncture, that the current enterprise value is around €90m.
It is also important to point out that the Italian BESS market is currently going through something of a hiatus. Residential is suffering from the customary slump after a handout-fuelled bringing forward of demand, businesses are waiting for the subsidies aimed at them to become effective before investing, and storage developers are waiting for grid operator Terna to get going with its MACSE auctions. So things in Padua feel somewhat anticlimactic at present, but the next wave of demand – from commercial customers – is on its way, and the picture on exports, which grew from 7% to 15% (there was a sizeable denominator effect, but still..), has developed further. Energy secured a €26m order for the Austrian motorway EV-charging and PV infrastructure network, as well as acquiring Enermore, a complementary EPC in German-speaking South-Tyrol that is active in the DACH countries.
Talking of European demand, it is also worth bearing in mind that the EU has set itself a target of producing 40% of its renewable energy equipment locally. Given that the starting point is a de minimis percentage, and that China – in a free-trade situation – holds all the cards in the industry, this will require significant intervention. No surprise then, that the recently-agreed EU Net Zero Industry Act contains significant “encouragement” for projects to “buy European”.
So not a bad time to be building a factory in Europe, not to mention one whose security of supply is guaranteed by a JV with Pylontech, which is based where 60% of the World’s Lithium is processed. That is, of course, China, which some may think takes the shine off the Energy story, but dig into the supply chain of any battery manufacturer, and you will find plenty of Middle Kingdom entities, so the “buy European” campaign will have to grant manufacturers some sourcing latitude.
On the sourcing front, the current overcapacity in China is helping European margins by keeping costs low, but is also pushing down the prices of finished imports. This is being countered in multiple ways; by the EU, with its “buy European” campaign, by manufacturers such as ENY itself, with value-added management services and, latterly, by the Chinese Government, with moves to curtail breakneck capacity expansion.
The Shares have been hit hard since July ’23, when analysts began to realise they were extrapolating an unsustainable wave of demand, giving rise to an interesting opportunity
The Italian “Superbonus” Covid recovery package was giving households that invested in (among other things) Solar + BESS a transferrable tax credit of 110% of their expenditure. As a result, Energy S.p.A.’s top-line went from €20.3m in 2019 to €126.5m in 2022, before falling back to €63m in 2023, after the newly-elected Meloni Government took an axe to the tax credit transfer mechanism.
Not surprising then that the shares were hit hard, falling back from a high of €3.97 in Feb 2023 to €1.13 in November. Although they have recovered a little since then, they have remained volatile as earnings forecasts have continued to come down, with estimating where demand might finally settle proving quite difficult.
How this year will pan out in terms of numbers remains uncertain. As mentioned above, businesses are waiting to be told exactly how subsidies will be granted and paid, which is holding back investment in renewables equipment. That said, there seems to be little doubt that very significant sums of money are going to be thrown at building BESS capacity in the next few years, and Energy seems very well positioned to be a meaningful beneficiary.
The Company will need to spend €43m to build its gigafactory, but the Italian Government is putting up a grant of €7.15m, and the balance sheet carries no debt. So near term-funding should not be a problem and, further out, the resumption of the investment cycle should improve the cash-flow picture.
In that context, it is important to note that Energy was able to fulfil rocketing demand in 2022 while still operating principally as an assembler, and generated an EBITDA margin of 25%, so cash-flow is not at all reliant on the new production capacity kicking in.
With all of the above in mind, the 2023 EV/EBITDA multiple of 8x does not seem onerous, particularly when one considers that the sector heavyweight, Fluence Energy, has yet to turn a profit at any level of the P&L.
A DIFFICULT START
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Max Casini – June 17th 2024
Research Coverage: GBC AG, Kepler, Stifel, Websim