Digital Transformation in Energy and

Natural Resources

HOW DISRUPTION IS CREATING OPPORTUNITY

Foreword We are delighted to launch the latest piece of insight from DLA Piper’s Energy and Natural Resources (ENR) sector – this time focused on how digital technologies are impacting the sector. We worked with inspiratia and our ENR sector around the world to pull together what’s happening in the market and how it could drive future change.

Not surprisingly, our initial finding was that as the global demand for power rises, the requirement for increased productivity, greater efficiencies in distribution and flexibility for consumers (both corporate and residential) is also growing. The exciting news is that due to the dynamic nature of the market, coupled with advances in new and emerging technologies, there is a wealth of opportunities for both established players and new entrants to the sector.

As a global law firm, we are well-established in advising on the impact of technology generally, and specifically within individual sectors, and ENR is no different. What is interesting is how different trends evolve at different speeds in different countries, and this is where our country sector experts come into their own. We can watch trends develop across the world and are there to advise clients on what’s to come and how we see it evolving.

Our team is familiar with the detailed, multi-layered and often complex, regulatory frameworks that apply to these technologies and their role in the wider ENR sector – especially around the areas of decentralisation, decarbonisation and digitalisation.

We’re delighted to pull together the collective expertise from DLA Piper and inspiratia to look at how key technologies are impacting the ENR sector, as well as highlighting the major transactions that are currently taking place within the market, and identifying opportunities for sponsors, investors and funders in this rapidly evolving landscape.

We very much enjoyed drafting this report, however we’re also aware that videos can be an easier way for many people to digest complex information. This is why we have also produced short films, with some of our key clients such as GE and HSBC, to accompany this report. They can be found on our website and social media pages.

Contents 1.Decentralisation

2.Decarbonisation

3.Digitalisation

4.Conclusion

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The information, data and analysis contained in this document (the “Content”) does not constitute advice and is by its nature selective and indicative, and may be subject to change. STMCB Ltd. (t/a inspiratia) (the “Company”) has made reasonable endeavours to ensure the accuracy of the Content, however, it makes no warranty or guarantee of any kind, express or implied, as to its completeness, accuracy or suitability. Recipients are encouraged to undertake their own due diligence or seek professional advice. The recipient acknowledges that the Content may contain inaccuracies or errors and the Company expressly excludes liability for any such inaccuracies or errors to the fullest extent permitted by law. The use of the Content by the recipient is entirely at his/her own risk, for which the Company shall not be liable for any loss or damage including without limitation, indirect or consequential damages, or any loss or damage whatsoever arising from the loss of data or profits arising out of, or in connection with the Content. It is the recipient’s responsibility to ensure that the Content meets his/her own specific requirements.

Natasha Luther-Jones Global Co-Chair, Energy and Natural Resources Sector natasha.luther-jones@dlapiper.com T: +44 (0)333 207 7218

Alex Jones Global Co-Chair, Energy and Natural Resources Sector alex.jones@dlapiper.com T: +61 8 6467 6204

Our ENR LinkedIn page can be found here

Or visit our website to learn more about our sector activity

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1.DecentralisationThe nature of energy production and distribution is rapidly changing, with new technologies enabling a move from large-scale centralised electricity generation to a flexible, smarter network which responds dynamically to the needs of consumers and provides greater scope for localised energy generation.

1.1 Distributed energy resources The 20th century model of energy distribution relied on large power plants specified to meet peak demand requirements and a centralised grid designed for unidirectional delivery. With greater access to electricity generating technologies, this model is now being challenged.

With more than 385GW of global installed solar PV capacity and more than 494GW of onshore wind, distributed renewable energy technologies are now considered an indisputable part of the world’s energy mix.

The introduction of support schemes such as feed-in tariffs (FiTs) and net metering ignited the micro-generation sector, which has been principally driven by rooftop PVs for households. On-site generation for large energy consumers is increasingly cost-effective, given increased energy prices and drop in PV costs.

However, the intermittent nature of these technologies and their intrinsic decentralised structure presents challenges and opportunities for the models by which utilities plan, invest, operate and maintain their distribution grids.

1.2 Grid balancing/ Energy storage In addressing these challenges, the ability to regulate supply and demand through technologies that enable grid-balancing is paramount.

In this context, the higher efficiency and lower cost of electrochemical storage solutions allow the smooth integration of decentralised renewable energy with the grid, whilst avoiding the pitfalls of peak-demand brownouts.

The global energy market is already alive to the benefits of battery storage. As of 2017, at least 1.9GW of large-scale battery storage had been installed worldwide, a trend which is set to continue as a result of falling battery prices. More than 700MW of capacity has been deployed in the US and at least 500MW in the UK.

Simultaneously, the use of smart-metering enables consumers to optimise their drawdown from central sources. Alongside rooftop PV and home battery packs, the use of smart meters opens up the potential for the public to sell excess energy back to the grid, creating a shift in focus from consumers to ‘prosumers’ of electricity.

“[Smart meters] would certainly facilitate either control of existing equipment or accessing equipment designed to explicitly exploit the potential for trading,” says Michael Pollitt, Assistant Director of the Energy Policy Research Group (EPRG).

“They clearly enable the possibility of time-of-use and real-time pricing so you can change price signals, and they also potentially facilitate different contracts based on the ability to take control of equipment within the home,” adds Pollitt.

At a global level, policy is a crucial factor for both the battery storage and the smart meter markets.

Incentives for utilities and investors to scale the deployment of these technologies are constantly growing.

For example, some countries, such as the UK and the US, are revamping their wholesale electricity market structures to allow the participation of batteries in the provision of capacity and ancillary services, such as frequency regulation and voltage control.

DLA Piper has been highly active in these key markets, with Natasha Luther-Jones and Alex Jones, Global Co-Chairs, Energy and Natural Resources, witnessing an overlap in their respective fields due to technology advancements.

Notably, the combination of on-site generation with behind-the-meter storage facilities and smart energy management software is a compelling example of how prosumers are taking control of both their energy generation and consumption.

Source: IRENA, inspiratia, 2018

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“Behind the meter battery storage, facilities are trying to get more value out of existing projects. So if you have a solar facility, a battery would be placed behind the meter at the generation side rather than the grid side, releasing energy at night, achieving – among other benefits – further independence from the grid,” says DLA Piper’s Luther-Jones.

CALIFORNIA: A BATTERY STORAGE SUPERSTAR

In the US, business models tend to be wedded to large-scale procurement processes from utilities, Independent System Operators (ISOs) and Regional Transmission Operators (RTOs) driven by state-led or federal mandates. California has mandated its three investor-owned utilities to procure 1,325MW of battery storage across their transmission, distribution and customer divisions by 2020.

In 2018, DLA Piper closed a deal on the largest project financed stand-alone battery storage in the Golden State. Owned by Texas-based energy company, Vistra Energy, the 300MW project is part of a 576MW portfolio comprising four projects initiated by Pacific Gas and Electric Company (PG&E). The projects received

approval from the California Public Utilities Commission (CPUC) in late 2018, and the 300MW is expected to come online in 2019 – subject to the outcome of PG&E’s recent bankruptcy filing – utilising lithium-ion technology with four-hour discharge duration.

1.3 Market risksAlthough deal flow is currently promising, there are still several challenges the sector will have to overcome before it reaches full maturity.

Globally, there is a lack of standardisation in the market, which can restrict its growth potential. Disparity in application processes and policies, as well as different technology requirements, add

complexity and additional costs to deployment, leaving developers to assess conditions on a plant-by-plant basis.

Potential investment decisions are still vulnerable to a perception of high installation and acquisition costs compared to other established technologies such as gas-fired generation. However, consistent drops in lithium-ion battery prices and increased demand offer more confidence that the technology will soon reach market competitiveness.

Although smart meters enable greater efficiency of both energy consumption and pricing, they are not without technical and bureaucratic constraints. An investigation by the UK’s National Audit Office (NAO) in November 2018 found that 70% of first-generation smart meters – smart metering equipment specification SMETS1 – deployed in the UK lose smart functionality when customers switch suppliers. The EPRG’s Michael Pollitt believes this is a symptom of the government taking too long to agree on their desired technical specifications only to find that the technology they forced onto the market is already obsolete.

A second generation of meters – SMETS2 – was introduced in 2017, but only 109,000 have been deployed as of November 2018, due to delays in resolving defects and complex technical specification requirements. The NAO is now urging the UK government to reconsider its 2020 target for deploying 50 million smart meters.

Battery technology also bears the risk of becoming obsolete, increasing attention on decommissioning liabilities, making lifecycle costs a critical consideration in deal structures. In this scenario, batteries can either exhaust their

charging cycles due to high use or become less competitive as new technology emerges.

“The EU is much more restrictive in relation to the decommissioning of batteries than in any other jurisdiction, particularly when held alongside the US and Australia,” says Luther-Jones.

Typically, battery manufacturers bear the costs and liability for battery disposals, but many stakeholders still have concerns over decommissioning due to increasing environmental regulations in this area. However, the launch in 2017 of the EU’s European Battery Alliance (EBA) may result in a homogenised and supportive approach to the sector across the bloc. For example, since its genesis in 2017 the EBA has established a strategic action plan for batteries and is also undertaking research into the ‘next generation’ of batteries.

1.4 Future trendsThe outlook for grid-balancing technologies is promising. According to the UK-focused trade body Renewable Energy Association (REA), policy reforms could result in the UK’s battery storage sector alone increasing installed capacity from 0.6 GW in 2016 to 12 GW by 2021.

“For standalone grid balancing projects, in countries that are quite heavily reliant on renewables, there is an absolute need for utility-scale battery storage, and that is clearly a big area of work for equity and debt,” says Luther-Jones.

The advent of smart grids and microgrid systems are opening new opportunities for battery storage globally, with the Middle East and Africa emerging as viable markets for investment in demand response, micro-grid and remote power opportunities.

Anthony Day, Partner at DLA Piper adds, “You can have microgrids in villages for businesses to access, building the community around it. Batteries have a big part to play in facilitating that, and people are investing in those smaller scale investments.”

New developments in EV technology point to a bright future for both battery storage solutions and smart-metering technology. Various stakeholders, governmental and commercial entities, are exploring ways to integrate the flexible storage capacity of EVs to help balance the grid. This will ultimately result in increased battery storage capacity as EV technology reaches economies of scale and smart charging and vehicle-to-grid (V2G) solutions are deployed.

What is imperative now is facilitating more vehicles to accommodate bi-directional power flow at affordable levels. By bringing together the energy and automotive industry – two typically segregated sectors – to understand the mutual benefits of V2G, lower total costs of vehicle ownership are achievable.

“V2G works today, but it’s going to work even better in the future when you have greater variety of V2G capable vehicles, more cost-effective hardware and you have more open energy markets,” says Paige Mullen, Project Manager at V2G specialist Nuvve. “Most energy markets in Europe are liberalising and making it easier to participate with distributed assets, therefore a greater ability to stack revenue streams.”

DEAL FLOW & FINANCING

• May 2018: Asset management company Calvin Capital signed a new contract with EDF Energy upscaling the latter’s smart meter roll-out efforts across the UK. The deal will see Calvin Capital procuring 1.6 million smart meters for EDF, with funding support from BNP Paribas, HSBC, RBS and Santander. In December 2018, Calvin Capital also agreed to support independent energy supplier Bulb to accelerate its smart metering programme.

• June 2018: ecobbee – a Canadian smart meter developer – raised £27.4 million (Can$47m, €31.2m, US$36.4m) to expand its business. The deal saw support from Canadian pension fund CDPQ, Australian utility AGL and the Business Development Bank of Canada. In total, the company has raised series C funding worth £73.9 million (Can$127m, €84.2m, US$89.4m).

• June 2018: The government of Puerto Rico issued a request for qualifications to procure storage solutions for grid balancing services. In October 2018, the government shortlisted Tesla, PowerSecure, AES/

Fluence and Invenergy with details of the projects’ development expected soon. The contracts will have a term of between 10 and 30 years.

• November 2018: Pivot Power started developing a £25 million (€28m, US$32m), 50MW storage facility in Carlisle, as part of a £1.6 billion (€1.8bn, US$2bn) battery storage and electric vehicle (EV) charge network. Each device will be connected to the UK transmission system, providing back up to National Grid, and powering as many as 100 rapid 150kW charge points. Two additional sites have been given planning permission – in Southampton and Norwich – with Pivot aiming to have 10 sites up and running in 2019 and Q1 2020.

• February 2019: UK battery storage operator Zenobe Energy secured a £25 million (€29m, US$32m) investment from a pair of Japanese investors, namely JERA and Tokyo Electric Power Company (Tepco). The equity deal, which constitutes one of the largest investments in the UK energy storage sector, will go towards the company’s flexible power solutions for charging in depots offerings, as well as its behind-the-meter propositions.

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Progress in establishing battery storage technology is also leading to significant activity in the battery commodities space. Other than lithium, minerals like graphite, nickel, copper and cobalt will also likely see a boom in mining production.

DLA Piper’s Alex Jones observes that these areas have increasingly driven mining activities over the past 24 months, a trend that has accelerated since the start of the year.

He says, “This momentum in mineral exploration interest has been consistent, to the point where we have worked over the last twelve months in just Western Australia on three new lithium projects which have come into operation.”

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2.DecarbonisationThe increasing drive to tackle climate change across the public and private spheres has resulted in two strategic priorities emerging in the energy sector: decarbonisation of electricity supply and increases in energy efficiency measures to mitigate consumption.

2.1 The continuing rise of renewablesGlobally, renewable energy has emerged as the fastest growing energy source, which now supplies over a quarter of electricity worldwide. Dramatically decreasing costs and colossal technological

advancements have also moved investment dynamics. Projects are no longer exclusively reliant on publicly funded support schemes, with subsidy-free operations becoming commercially viable.

“The uptake of subsidy-free is a different question country-by-country,” says Matt Brown, Energy Market Analysis and Design Practice Head at Pöyry Management Consulting.

“Due to the local dynamics of electricity markets, subsidy-free projects will need to strike the

optimal balance between cost of production, wholesale electricity prices and demonstrating the competitive advantage they can offer,” adds Brown.

These developments have been mirrored in the private sector, with large corporations looking to meet their sustainability and environment, social and governance (ESG) objectives through the use of corporate power purchase agreements (PPAs), alongside increased energy efficiency schemes.

Corporate PPAs have stimulated significant interest from businesses worldwide, with some 13GW of contracts signed in 2018 alone. Through sophisticated structures tailored to meet different needs, corporate PPAs offer a valuable de-risking tool for energy generators. Specifically, project developers achieve a minimum level of price certainty and revenue streams to achieve financing, while the offtaker is protected from price volatility and – depending on the PPA structure – can also generate additional revenue.

Corporate PPAs with a strong counterparty are seen by many developers, equity investors and lenders as an opportunity to produce renewable energy projects than can be financed in much the same way as those developed during the era of subsidies.

“A trend we are seeing is that with the global approach to the renewable energy procurement of many corporates, we see a diversity in the PPA structures that are being agreed and innovative pricing structures that maximize the benefits for both the seller and the buyer, rather than a simplistic fixed-price approach,” says Zosia Riesner, Head of Corporate PPAs at Lightsource BP.

RENEWABLE ENERGY IN AFRICA

With approximately 60% of the continent’s one billion-plus population without access to electricity, Africa presents huge opportunities for investors, developers and operators across the renewable energy sector.

The introduction of auction programmes in several African countries have been relatively successfully in improving the bankability of utility-scale projects and are signposts for the future potential of private investments. South Africa’s Renewable Energy Independent Power Producer Procurement (REIPPP) has to-date procured 6.4GW of its 2030 18.8GW target, according to inspiratia. In April 2018, 27 PPAs were signed for 2.3GW of capacity worth ZAR56 billion (£3.3bn, €3.7bn, US$4.5bn). The International Finance Corporation’s (IFC) Scaling Solar Programme has been implemented in Zambia, Senegal, Madagascar and Ethiopia. After two successful Scaling Solar tenders, Ethiopia launched an 800MW tender in January 2019.

Off-grid solutions will also play a part in increasing renewable energy capacity, as more capital is channelled into the continent. For

instance, CrossBoundary Energy Access (CBEA) – Africa’s first facility for mini-grid project financing – received its first facility of US$16 million (£12.2m, €14.2m) from the Rockefeller Foundation and family-office Ceniarth in February 2019 to deploy mini-grids across Nigeria, Tanzania and Zambia.

Off-grid projects open opportunities for private wire PPAs. This unique structure provides smaller African companies a chance to form a consortium that strengthens their economic viability when negotiating an agreement. The local corporates and growing rate of start-ups in Africa will benefit from this solution to source cheaper clean energy, whilst simultaneously lowering the credit risk of the generator.

DLA Piper’s guide to Renewable Energy in Africa provides a comprehensive assessment of the key aspects of the legal framework and commercial activity occurring across these and other countries in the region – click here to learn more.

PREDOMINANT CORPORATE PPA STRUCTURES

Private wire PPA: Renewable energy is generated on the site where the electricity is being used, or at least adjacent to it. Such on-site installations usually include rooftop or ground-mounted PV. For example, US retail giant Target has installed more than 204MW of capacity through rooftop PV plants, and targets installations on 500 of its buildings by 2020.

Virtual/Synthetic PPA: In this type of contract, there is no physical delivery from a renewable energy project in proximity to where the energy is consumed. Virtual PPAs are a financial agreement, where the producer and the

consumer agree on a strike price. The generator sells the electricity to the wholesale market, and then the electricity supplier will ‘virtually’ sell it to the consumer. Depending on price fluctuations, if the energy gets sold to the wholesale market for a higher price than the one agreed between the producer and the consumers, the latter is entitled to additional payments.

Sleeved PPA: Under this structure, the corporate buyer enters into two PPA agreements: one with the generator and one with a supplier that will manage the off-take of the power from the site. This structure is the one most commonly used in the UK.

Figure 3: Top offtakers by deal count and by capacity (in GW)

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2.2 The drive for increased efficienciesFinancial savings, policy directives and corporate ESG agendas are some of the drivers behind the boost of energy efficiency investments.

Improvements in renewable generation, battery storage and other enabling technologies such as demand-side response (DSR) software and artificial intelligence (AI) offer an attractive investment proposition for large energy consumers to take control of their consumption and improve their environmental performance and reputation.

Energy efficiency schemes utilising LED lighting have now become established as an investment asset class. With some 80% less electricity consumption than traditional bulbs, LED lighting can deliver drastic carbon emission reductions. LED retrofitting projects have been pushed globally by initiatives such as the Global Lighting Challenge, which aims to deploy 10 billion high-efficiency lighting fixtures and bulbs by 2020.

The use of AI, particularly in the renewables space, also enables greater efficiencies. Google recently applied its DeepMind machine-learning software to wind power, which can predict wind power output in advance of its generation, thereby enabling it to recommend how to schedule set deliveries of energy output. There is significant value in this predictability, and Google claims it will make the energy produced by its wind farms up to 20% more viable. We have also seen AI leading to increased efficiencies in solar

power, through efficient storage of solar power energy (which is then tapped when energy prices spike), AI-designed solar farms as well as AI diagnostics and optimisation solutions, which can suggest real-time action plans for improving solar plants. These developments are attracting new players to the market, with venture capital becoming increasingly active within this sector. Figure 5 shows that venture capital financing accounts for 10% of energy efficiency deals tracked by inspiratia between 2015 and Q1 2019. This trend is expected to continue, as the pace of technological development gives rise to opportunities which at the moment are perceived to carry higher investment risk, outside the parameters upon which more long-term investors ordinarily operate.

Stadiums and sporting venues around the world have joined the sustainability race in an effort to reduce their carbon intensity, boost their green legacy, and to lead innovation.

EMIRATES STADIUM, LONDON:

• In August 2015, Musco Lighting installed state-of-the-art LED floodlights which reduce energy consumption by 30% compared to the previous 2000-watt metal halide lights.

• In 2016, Arsenal was the first Premier League club to switch to 100% renewable energy after it signed an agreement with renewable electricity supplier Octopus Energy.

• In November 2018, Arsenal became the first UK football club to install a large-scale battery storage system. EV charging and battery storage developer Pivot Power will operate the system

under a 15-year agreement, generating additional income from ancillary services to the National Grid. The 3MW device has already secured a 6-month Firm Frequency Response (FFR) contract. It will also participate in wholesale energy trading, storing cheap renewable electricity and selling it at peak times, in a scheme operated by Open Energi.

JOHAN CRUYFF ARENA, AMSTERDAM:

• In 2015, 4,200 solar PV panels were installed by renewable energy company Nuon, a subsidiary of Sweden-based power company Vattenfall. With solar arrays across more than 7,000 square meters, it is still considered one of the largest rooftop solar PV installations in the Netherlands. The panels are able to cover 10% of the stadium’s energy needs, with Nuon also supplying the stadium with district heating and wind-generated electricity.

• In the summer of 2018, the home of the Ajax Football Club installed the 4MW xStorage Buildings system, comprising 280 Nissan LEAF repurposed batteries from 148 previously used EVs. Commissioned by the international power management company, Eaton, the innovative storage installation will provide both back up energy for the stadium as well as local grid management by flattening energy peak usage during events.

Figure 4: Energy efficiency deal flow (2015 - Q1 2019)

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desire to enter into PPAs has spread. Large banks, retailers, restaurant chains and IT and telco companies have all secured their own PPAs, driven by momentum around corporate carbon-reduction targets.

In December 2018, Germany saw the signing of its first corporate PPA, between Mercedes-Benz and the Norwegian utility Statkraft. The automaker will buy the electricity produced by a 46MW portfolio of six wind farms in Lower Saxony and Bremen. The wind projects will exit the FiTs regime in 2021, therefore the newly signed PPA will secure future revenues.

“It’s a new type of PPA, where corporates can extend the life of existing projects. Preventing renewable power going offline is as justifiable as bringing new power online,” says Phil Dominy, Director – Corporate Finance, Energy & Infrastructure at EY.

Similarly, policy changes are creating a positive environment for the energy efficiency market, as businesses increasingly place energy efficiency high up their corporate agenda.

DLA Piper’s Day asserts that the retail sector, particularly companies that wish to be perceived as socially responsible, is an interesting space for energy efficiency projects to be deployed.

“I think that the market will continue to target applications such as smart buildings and energy efficiency management solutions, because they are easy to control through technology and direct benefits can be drawn from such projects,” says Day.

2.3 Market risksDespite the decline of subsidies for renewable energy projects, many potential schemes and the technologies needed for their success remain reliant on governmental support for their development and implementation.

Depending on geography, technology and site-specific parameters, countries which hold competitive tenders may offer a more lucrative alternative for developers – subject to the strike price attained by bidders – challenging the attractiveness of corporate PPAs.

Uncertainty as to the regulatory landscape in which such projects operate presents a risk to the identification and development of renewable energy sources and the long-term viability of projects as an investment suitable asset class. Care must be taken when considering

any potential scheme to fully assess the existing regulatory position, and the risk of future changes which may occur.

Predicting energy efficiency gains can also be difficult, due to the number of variables that are dependent on uncontrollable external factors.

“There needs to be a sensible assessment of what the normalisation factors are when looking at energy efficiency projects. It can be difficult to track because external factors pose the risk of skewed results,” says Anthony Day.

“But certainly, with better analytics, predictive analytics and more data being collected, it’s becoming easier to make those kinds of assessments and work out what those external factors are that will influence or explain why certain energy savings have not been met,” adds Day.

Presently, the regulatory landscape is unclear, with different governments pursuing their own respective

agendas. This makes successfully navigating the legal landscape essential in order to identify the geographies and technologies where sensible investments can be made, or easy expansion by existing players into new markets may occur.

2.4 Future trendsCorporate PPAs have long been a feature of the US energy market. However, they are also becoming increasingly prevalent in Central Europe and in the Nordics.

This trend is anticipated to continue across the Asia Pacific and Africa regions, with large and well-known corporates increasingly looking to enter into PPAs to take advantage of both the economic and environmental benefits they provide.

Although the original instigators of corporate PPAs were typically high energy consuming companies, the

DEAL FLOW & FINANCING

• October 2018: Swiss investment manager SUSI Partners launched SUSI Energy Efficiency II fund, targeting €400 million (£343m, US$451m). A final close is expected to be announced soon.

• December 2018: European infrastructure investor, Infracapital, launched an 80-20 joint venture with Enel X to develop a platform dedicated to energy efficiency projects for commercial and industrial companies in Italy. Enel X is also set to provide a series of integrated services to end customers, ranging from assessment of energy needs to implementation and management of high-efficiency technical solutions to optimise energy consumption.

• January 2019: Gap, Bloomberg and Salesforce teamed up to sign a virtual PPA and buy 42MW of the electricity to be produced by a 100MW solar farm in North Carolina which is being developed by

Germany’s BayWa. The three companies joined the Corporate Renewable Energy Aggregation Group consortium, also comprising media business Cox Enterprises and financial manager Workday.

• January 2019: SUSI Partners teamed up with Free Energia to finance up to €10 million (£8.6m, US$11.3m) of energy efficiency projects in Italy. The venture has already closed a portfolio comprising three on-site generation schemes for corporates and two street lighting projects with municipalities.

• February 2019: Nike signed its first European PPA with Spanish electricity utility Iberdrola. The company will provide the global sportswear brand with 40MW of the energy derived from its planned 11MW Cavar wind farm in Navarre in northern Spain. In 2018, through its US subsidiary, Iberdrola signed another milestone PPA with Nike, after agreeing to provide the sports conglomerate with 86MW of the electricity to be produced by the 286MW Karankawa wind farm in Texas.

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3.DigitalisationThe collection and analysis of large volumes of data, coupled with the development of deep learning algorithms and artificial intelligence (AI) is set to pave the way to an integration of blockchain and digital asset management systems that will transform the energy industry as we know it.

3.1 ConnectivityA growing symptom of technological advancement is the heightened level of connectivity in our everyday life. The growth in the number of data centres (in particular cloud data centres) together with an explosion of new technologies which rely on the cloud, such as the Internet of Things (IoT), are indicative of this trend.

Figure 6 shows that the total number of data centres worldwide will reach over 19,000 by 2021, and that the majority of these will be cloud data centres. Unlike traditional data centres, where server hardware is stored on premises, the ability to now instead store data ‘in the cloud’ and access it remotely, together with the scalability and potentially unlimited capacity of this offering, has led to an unprecedented growth in connectivity. We have, in turn, seen a number of organisations in the energy sector utilise data lakes,

where organisational data is pooled into a central, cloud-hosted data lake, and various data analytics tools and AI are implemented to drive better and more enhanced business insights and strategic decisions with the data sets obtained. Cloud technology also serves as an effective collaboration platform in a distributed (and often remote) work environment, while ensuring that data can be integrated and shared securely, whether in a public, private or hybrid cloud format.

IoT is a network of interconnected appliances and its global market is expected to include over 50 billion devices by 2021, compared to 12.5 billion reported for 2010. The proliferation of IoT devices and sensors in the last decade alone has accumulated mass pools of data that give invaluable behavioural insights into both energy production and consumption, that once analysed can drastically redefine energy trading and operations.

“There has been a significant spike in the number of businesses maximising their leverage from big data analytics. The response to DLA Piper’s European Tech Index shows that optimisation of business processes, customer services and supply chain management along with the ability to more accurately forecast customer behaviours and macro-economic trends are the key drivers for this process,” explains Kit Burden, Global Co-Chair, Technology Sector at DLA Piper.

3.2 Digital asset managementBig data is being analysed on virtual platforms, giving rise to the concept of digital asset management, where developers and operators alike have remote access and control over their energy generating assets.

‘Digital twins’ replicate physical assets in digital forms, refining the use of energy generation plants and distribution networks to optimise operations and efficiency gains. Coupled with predictive analytics, operators are equipped with real-time data on the operational condition

of an asset, a significant cost saving tool due to the forecasting of potential costly downtimes. With optimised efficiency, the lifespan of the generation asset is extended, prolonging its revenue generating timeline.

A digital twin can be created prior to construction as well as for operational assets, holding significant advantages for distributed generation such as wind farms. With this option, developers can virtually test critical variables until the desired performance standards are achieved, so that approval for construction can be granted. inspiratia believes that this may reduce not only the initial capex, but could also be an invaluable tool in decreasing the cost of debt from lenders if the limitation of risk can be proven.

Virtual power plants (VPPs) are a dynamic aggregator technology enabling multiple distributed energy resources to be managed remotely in real-time, optimising demand response times. Pooling multiple distributed energy resources – from varying locations, climates and technologies – on a single platform can make revenue streams from ancillary services and demand response more reliable. Advanced forecasting algorithms are set to overcome the variability factor of renewables, bringing the possibility of a 100% renewable energy grid closer to reality.

The mutually beneficial relationship between battery storage and VPPs is slowly being recognised. Battery storage is an easily integrable technology for back up reserves, while VPPs further strengthen the position of battery storage in the balancing mechanism market. Battery storage is essentially the ‘glue stick’ that makes it easier to blend assets in a portfolio for longer periods of time.

“If you’re running a VPP on the basis of aggregating assets by volume only and calling it a VPP it undermines the notion of a true VPP, really you have just made a large version of a single asset class.” explains Joe McDonald, Vice President of Sales at energy-tech start-up Limejump. “The real value of a VPP is achieved when delivering a unique aggregated profile from a range of distributed assets, simulating what a traditional power plant can do.

“No one should look at a single technology type now and say that’s where all my investment will go because actually blending these assets together is fundamental. Not only in the ownership of a portfolio but also for someone like Limejump, for example we couldn’t do what we do without batteries but equally without CHPs,” adds McDonald.

Australia is a testament to this dynamic. Its strong battery storage market gave rise to South Australia’s VPP pilot developed in partnership with Tesla. The VPP will operate 250MW of power sourced from 50,000 Powerwall battery systems and home solar PV.

3.3 BlockchainThe energy sector is undergoing a change in the dynamics of services and of supplier-customer relationships as blockchain permeates every aspect of the supply chain.

“The energy industry is definitely one of the industries impacted, simply as a result of the fact that there are a lot of trading activities within the market,” says Martin Bartlam, International Group Head, Finance, Projects and Restructuring at DLA Piper.

Figure 6: Number of data centres and IoT connected devices worldwide (2010-2021)

No.

of d

ata

cent

res

No.

of I

oT c

onne

cted

dev

ices

(bill

ion

units

)

20,00050

15,00040

5,000

30

10,00020

0 0

10

Cloud data centre Traditional data centre IoT connected devices

25,000 60

Source: Cisco, Cisco Global Cloud Index, inspiratia, 2018

2010 2015 2016 2017 2018 2019 2020 2021

1817

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Blockchain technology will lay the groundwork for automated software in the form of distributed ledgers, peer-to-peer (P2P) transactions and smart contracts that will disrupt the monopoly that most utilities have in delivering electricity to end-users. Such systems allow market participants to securely verify assets and sell and buy power to and from the grid in response to real-time signals. Blockchain also has the potential to improve logistics for energy companies that are vulnerable to inefficiencies in power distribution.

The nascent market is dominated by venture capital players who are willing to grapple with the risk profile of blockchain start-ups. Outside the ENR sector, venture capital investment into software developers is an especially active corner of the US industrial landscape. In terms of applicable solutions in the ENR sector, blockchain remains in its pilot phase for utilities and other groups.

GENERAL ELECTRIC (GE) DIGITAL WIND FARM

• GE’s digital wind farm involves a 2MW platform that creates a cloud-based model of up to 20 turbine configurations. The platform is powered by GE’s Predix software.

• The digital model allows developers to test and adjust turbine configurations best suited for each pad location on their wind farm. When results are deemed optimal, construction commences and on completion each virtual turbine is fed data from its physical version. Engineers are thus able to remotely adjust parameters according to the data fed back to the virtual asset.

• GE’s digital wind farm proclaims that 20% efficiency gains are achievable. A collaboration with Invenergy – a US-based power provider – reportedly saved US$96,000 per year in

cumulative value, with 62% savings on overtime and 13% lower morning downtimes.

• Previous experience on factories, aircrafts and power plants built on GE’s Predix software and AI expertise reportedly saved GE US$1 billion (£761m, €888m) in efficiency gains in 2017.

3.4 Market risksPolicymakers are yet to understand the intersection of blockchain and data privacy. This presents a problem that could stifle blockchain’s potential. The General Data Privacy Regulation (GDPR), which came into force in May 2018 and standardised data privacy laws across all 28 EU countries, presents a conundrum. In some cases, GDPR requires personal data to be anonymised or erased, but it is still unclear whether blockchain has the capability to do this.

Limitations in data privacy also extend to big data. In the EU, the definition of personal data is still blurred, and the limitations created by GDPR may block useful information that could further optimise operations and service offerings.

UK gas and electricity regulator, Ofgem, views big datasets as an enabler of target offerings for specific customers, opening new possible markets. However, there are still concerns over their impact on price variations and competition with a select few existing firms having the upper hand through their knowledge of customer characteristics. In the US, the limitations of collecting big data are due to the fragmented nature of the country’s energy market and the disparity in available data. For instance, some larger utilities can gain access to data reporting at regular 15-minute intervals, whereas other smaller providers are confined to a smaller set of aggregated monthly totals.

The legal frameworks surrounding emerging technologies and data privileges are still being developed, but some jurisdictions are still taking the initiative in improving their understanding around safeguarding private data. In the case of blockchain, the US state of Illinois has established a Legislative Blockchain and Distributed Ledger Task Force.

“Whilst data security remains a concern, overall, it would seem that the key challenges to implementing big data analytics programs are starting to decline as companies gain experience in the collection and mining of data,” explains DLA Piper’s Day.

Transitioning towards an AI-enabled digital ecosystem entails the creation of multiple new points of entry, making traditionally segregated or closed networks that aggregate large volumes of personal data vulnerable to cyber attacks. This could mean cyber-to-

physical implications for connected assets such as digital twins or aggregated technologies in VPPs. Cyber security is now a top priority as the power and utilities sector grows its understanding on how to safeguard from mounting threats.

3.5 Future trendsThe potential of blockchain in the ENR Sector is huge, and new models and revenue opportunities are emerging. Indeed, a diverse range of applications already exist. However, Figure 7 shows that the electricity trading market currently dominates the blockchain landscape when it comes to energy, with P2P and grid transactions accounting for 36% and 24%, respectively. This is followed by energy financing, accounting for 12%. Advancing the communication and responsive capabilities of the grid is increasingly

DEAL FLOW & FINANCING

• April 2018: Leading developer of blockchain solutions for the energy sector, Electron, received an undisclosed investment from SYSTEMIQ, following an early-stage bridging round investment from Japanese utility TEPCO in January 2018. Electron has also been the beneficiary of several grants totalling £1 million (€1.2m, US$1.3m) from the UK’s Department for Business, Energy & Industrial Strategy (BEIS) and Innovate UK.

• July 2018: Eelpower acquired a VPP connected, 20MW battery storage facility in Shropshire, UK, from Anesco for a total of £20 million (€22.6m, US$26.5m), funded by a debt facility. The VPP is operated by Limejump who partnered with Anesco to operate a portfolio of distributed assets as an aggregator.

• January 2019: Spanish utility Iberdrola and local Basque lender Kutxabank partnered for a blockchain pilot that monitors the delivery of energy in real-

time from two wind farms and one hydro plant to Kutxabank’s banks. The partnership stems from an earlier 10-year corporate PPA deal to power Kuxtabank operations from Iberdrola’s 319MW Nunez de Balboa PV plant in Usagre, Spain, that reached financial close in August 2018.

• February 2019: Oil giant Shell is in the process of acquiring UK-based start-up and VPP operator Limejump through its subsidiary Shell New Energies.

• March 2019: UK mainstream energy supplier OVO invested in blockchain firm Electron, with a view to accelerating Electron’s deployment of distributed energy trading platforms that will enable the transition to intelligent grid infrastructure, and help work toward a distributed, carbon-neutral energy system.

• April 2019: VPPs are expected to enter the balancing mechanism market from April 2019, alongside battery storage, as part of the National Grid’s strategy to improve access to the flexibility market.

Figure 7: Blockchain initiatives in the power sector, by category of application

Electricity trading markets - 60%

Peer-to-Peer - 36%

Grid transactions - 24%Energy financing - 12%

Electric vehicles - 11%Sustainability attribution - 11%

Others - 6%

Source: Council on Foreign Relations, inspiratia, 2018

60%

36%

24%12%

11%

11%

6%

2019

WWW.DLAPIPER.COMTECHNOLOGY DISRUPTIONS IN ENERGY

on the agenda of governments worldwide. DLA Piper’s Martin Bartlam anticipates an increased use of blockchain in smart grids, where distributed ledger technology (DLT) can be utilised to enhance grid security through authentication, and off-grid trading platforms in the renewables space.

“If you want to see where a real trend will develop, it’s trying to link VPPs with electricity users through virtual peer-to-peer transactions. That is where the next real excitement will come from. Allowing your distributed assets in a VPP to connect and contract directly with end-users who need that electricity, bypasses the need to go through traditional intermediaries and could fundamentally revolutionise the energy industry,” says Limejump’s Joe McDonald.

“This concept, delivered by Limejump’s Virtual Grid, for example, is really where the future lies. And that is connecting our network of

distributed generation assets to thousands of decentralised end-users, all managed on a second-by-second basis via our technology platform and algorithms,” he adds.

In the future, as new software and enabling technologies emerge, the applications and revenue streams associated with blockchain, VPPs and digital twins within the energy sector will become more tangible. Figure 8 shows the growing number of patents for enabling technologies issued between 2010 and 2016 – a trend anticipated to continue as the development of these technologies gathers pace.

The next phase for digital asset management technologies will be driven by the broader objective of a digitalised ecosystem. Investors are, however, looking for where to position themselves now in order to get their journey towards full digitalisation started. This interest has prompted governments

worldwide to intensify their efforts to create frameworks that set clear principles to encourage investable opportunities.

For example, the Gemini Principle – the first deliverable of the UK’s Digital Framework Task Group (DFTG), the body responsible for setting the ground rules for data-sharing between institutions that create digital twins – not only has high level definitions and principles that are long lasting, but also includes a road map for the next three years towards a digitalised ecosystem. This will take into consideration approaches for standardisation that will form the basis of governance and management.

Figure 8: Cumulative patents for efficient end-user electric power management and consumption, by type of application

No.

of p

aten

ts

8000

4000

6000

2000

02010 2011 2012 2013 2014 2015 2016

Source: IRENA, inspiratia, 2018

Demand response systems, e.g. load shedding, peak shavingInvolving home automation communication networksGeneral Power Management SystemsSystems involving the remote operation of lamps or lighting equipmentSystems which monitor the performance of renewable electricity generating systems

2221

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4.ConclusionEmerging new technologies are disrupting the ENR sector at every stage of the traditional ENR journey: from energy generation and its transmission/distribution, to ultimately providing end users with energy, and we are now seeing a notable shift towards a more interconnected ‘energy cloud’.

The pace of change will continue to intensify as new technologies permeate the energy sector, and existing ones develop further, as many of the technologies referenced are still in their infancy. Governments, businesses and consumers alike must therefore adapt to an increasingly decentralised, decarbonised and digitised nature of future energy production and distribution, embracing the opportunities it brings forth.

Figures

Figure 1: Total installed capacity of intermittent renewable energy sources worldwide (2010-2017) Figure 2: Total smart meters to be deployed by 2020

Figure 3: Top offtakers by deal count and by capacity (in GW) Figure 4: Energy efficiency deal flow (2015 - Q1 2019) Figure 5: Proportion of financing sources and deal count for energy efficiency projects Figure 6: Number of data centres and IoT connected devices worldwide (2010-2021) Figure 7: Blockchain initiatives in the power sector, by category of application

Figure 8: Cumulative patents for efficient end-user electric power management and consumption, by type of application

3

4

9

11

12

15

18

19

Contacts

Natasha Luther-JonesGlobal Co-Chair, Energy and Natural Resourcesnatasha.luther-jones@dlapiper.com T: +44 (0)333 207 7218

Alex JonesGlobal Co-Chair, Energy and Natural Resources alex.jones@dlapiper.com T: +61 8 6467 6204

Jonathan McNairHead of Contentj.mcnair@inspiratia.comT: +44 (0)207 349 4173

DLA Piper is a global law firm operating through various separate and distinct legal entities. Further details of these entities can be found at www.dlapiper.com.This publication is intended as a general overview and discussion of the subjects dealt with, and does not create a lawyer-client relationship. It is not intended to be, and should not be used as, a substitute for taking legal advice in any specific situation. DLA Piper will accept no responsibility for any actions taken or not taken on the basis of this publication. This may qualify as “Lawyer Advertising” requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome.Copyright © 2019 DLA Piper. All rights reserved. | JUL19 | 2019209