Saturday 1 October 2016

Irish wind pioneers are Tesla's new partners

Brendan and Eamonn McGrath's Gaelectric is about to raise €450m - and they're coming fresh from doing a deal with Elon Musk

Published 12/07/2015 | 02:30

MEN OF ENERGY: At the launch of Gaelectric's Dunbeg wind farm in Co Derry last November, were, from left, Gaelectric corporate affairs manager Patrick McClughan; the then Northern Ireland finance minister Simon Hamilton; and Gaelectric CEO Brendan McGrath
MEN OF ENERGY: At the launch of Gaelectric's Dunbeg wind farm in Co Derry last November, were, from left, Gaelectric corporate affairs manager Patrick McClughan; the then Northern Ireland finance minister Simon Hamilton; and Gaelectric CEO Brendan McGrath
Elon Musk

Two of Elon Musk's newest partners are a pair of brothers from Artane, on Dublin's northside. Brendan and Eamonn McGrath, co-founders and respectively the chief executive and north America president of Gaelectric, have teamed up with Tesla for a project involving perhaps the hottest commodity in the renewable energy sector - storage.

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Storage is important because it reduces the need for fossil fuels to back up wind power when the wind doesn't blow.

Brendan's company, which was set up primarily as a wind-energy developer in 2004, started investing in storage in 2006. It's working on a massive compressed air project in Larne, which involves storing air from the atmosphere underground, compressing it and then pumping it through a turbine to generate electricity.

It'll be monetised through payments from the Eirgrid group's DS3 project, which aims to help Ireland meet its EU target of 16pc of total energy consumption coming from renewables by 2020.

The company is able to "lift and shift" the technology into different markets, and now has potential energy-storage projects in Holland, Denmark, Germany and the UK.

The Tesla project is different. That involves storing surplus energy in a battery that is plugged into the grid. They're aiming to deploy the initial one-megawatt demonstration project in 2016. Together, the companies want to explore innovative new ways for homes, business, and utilities to store energy from renewables.

"We went to the market with a clear request for proposals. We said: 'The Irish market needs this specification of battery, can you deliver?'" McGrath told the Sunday Independent.

"We went to about 20-odd different battery companies around the world, and out of that we ended up making a decision for around four. Tesla are the people we've gone and done an agreement with.

"We are delighted to be associated with Tesla. Tesla told us when we signed the deal with them that they have 100 companies a day pitching to them in terms of doing business, so out of that, why did they pick us? To me that's an endorsement of where we're at."

McGrath started his career as a management trainee in the company now known as Smurfit Kappa - it was 1967 and the company was beginning to go places. But McGrath didn't stay long.

"I left after a couple of years because I used to have to get the bus from Artane to Walkinstown every day, which was a long haul! I ended up in Nokia in Finglas, because Nokia were primarily a paper industry. Paper and rubber, that was their base industry before they got into phones.

"I ended up as marketing development director, having worked my way up from sort of going in as a boy. They decided back in 1986, 1987, 1988, that they were going to put all their money on the black, which was the phone. They sold all their paper, sold all their rubber, and bet on the phone.

"When that happened we were bought by an American company. At that stage, I'd always had an inkling to go out on my own. After a year or two under the new ownership I left, and I had a successful inholding agency for Andrex toilet tissue and all their other products at that time.

"Nokia had a factory in Dublin and a factory in Waterford, and they were closing the factory in Waterford and I initially tried to buy that, but they wouldn't sell it. They eventually closed that and I eventually re-opened it along with a number of other guys and ran that for about 17 or 18 years.

"And then the whole grocery market changed. Where there used to be a lot of Irish brands, they were all out the door. That whole market was changing. I was manufacturing under licence at that time for a company called SCA, who had the Kleenex brand, so we sold the business to them and it was time for something else."

That something became Gaelectric, which recently moved into biomass through the purchase of UK-based Imperative Energy, and is also involved in solar projects in the UK.

A €450m funding round is about to be completed, and by 2017 McGrath hopes to have yearly revenues of €70m-€100m.

A decision on whether to float will probably occur around then - with the company sitting on a diverse portfolio of assets. Our conversation takes place in the company's beautiful office near Dublin Port. It also has offices Belfast, London, Manchester, Chicago, and Great Falls, Montana, where the company has over 30,000 acres under an option-to-lease agreement for up to 90 years for a massive wind project.

Eamonn McGrath is the president of the North American operations - and he's a key man in the company's story, along with the third founder, Barry Gavin, who's now the company's chief financial officer.

"My brother had a thriving business at the time in terms of pension investments. He was a pensioner trustee, and he had invested a lot in property. But back in 2004, 2005 he was starting to look for another asset class, because even back then he was saying this thing isn't going to keep on going the way it is.

"He asked me to come in and help in terms of putting some structure around it and looking at some other opportunities, so I came up with this opportunity in relation to wind.

"Himself and Barry Gavin had already looked at it previously back in 2002, 2003, where somebody had come to them and said, 'Can you get pension money into this. We want to build a windfarm.'

"So they had an opportunity to go through all the financials and said that potentially this was a good place to be. The idea was that you got a 15-year power-purchase agreement which was government-backed, so you had a secure level of income coming through, and it was of a size that potentially pension funds would be interested in.

"As an idea it was absolutely sound, the reality was the pension industry wasn't ready for it. It's only now that they're beginning to enter that space, at the time they thought it was too newtech.

"So that's what got us involved in the business. We initially did a joint venture with a small developer/consultants who had a number of sites, and they wanted a funding arm so we ran it like that for a period of time. And then after that we basically decided that this needed to be brought to a different level. So I moved in, took it over, and sort of developed it on from there."

Rate revaluation a dark cloud on wind farms

Private equity firm HG Capital has joined the list of investors raising concerns about a trebling of commercial rates for windfarms in Limerick.

The steep hike from around €7000 per megawatt to around €21,000 per megawatt is a result of the rate revaluation process which is due to roll out in other counties over the coming years.

Emma Tinker, a partner at HG, which has invested in onshore wind energy provider Invis Energy, said: “It’s a not a little whinge, it’s very serious.”

“Clearly in any market, in any country, you expect modest changes over time, but this is an extreme change. It’s very disproportionate.

“It’s serious enough to cause a major, major setback and possibly go as far as completely halting investment.” The Department of Energy, Communications and Natural Resources has engaged with the Valuation Office to “ensure the broader national and European energy policy context is understood by them”, but the huge hike has raised the prospect of a funding drought just as Ireland is poised to miss its renewable energy targets by a large distance.

Irish Wind Energy Association’s CEO Kenneth Matthews told the Sunday Independent that the process is a “horror show that’s coming soon to a county near you”.

“We must continue to ensure that Ireland continues to be seen as a renewable energy leader, and a consistent, fair and equitable rates regime must be part of that.

“This is about ensuring an appropriate environment for small, medium and larger businesses to flourish across Ireland,” Matthews said.

Teresa O’Flynn, a director at the world’s largest asset manager BlackRock, said recently that there was “no uplift in return that will ever compensate you for that type of change”.

“Return levels and targets are irrelevant if you’ve got a fundamental concern over regulatory stability,” she said.

“Up to now, Ireland was absolutely knocking it out of the ball park. Because of that we’ve [BlackRock] faced increased competition in Ireland over the last number of years, because you’ve had institutional investors from Germany pour into Ireland because they were going for ‘strong fundamentals, strongest wind resource in Europe’. As a result, returns have been falling — good for developers and utilities,” O’Flynn said.

“If you’re investing in a project and you expected a particular profile for 25 years, you expect that there’s going to be some ups and downs, we’re equity, we take risk. I hate to scaremonger, but it’s really, really serious.”

Gaelectric chief executive Brendan McGrath told the Sunday Independent: “There’s been discussion in the industry in relation to ‘how did this happen?’.

“I think there’s recognition that it doesn’t make sense, this is equivalent to retrospective legislation. Rates can always change and people factor that in, but you don’t factor a 250pc increase in one year into any calculation. That’s not seen as being reasonable. It’s blatantly wrong,” he added.

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