Faced with a wall of computer screens, Tara Desai has an eye on weather forecasts in Ireland, Britain and Japan as well as instant trades across Europe’s electricity markets. She knows that high wind will boost supply, and cold weather will increase demand. She has just given a client’s battery storage unit in Co Meath an instruction to charge off cheap renewable power, planning to release it to the grid at peak time later.
She’s also looking back on data from December, when a power plant tripped and prices spiked. Desai is ready to respond with client capacity if a similar event happens during her shift. She is one of the energy traders rotating on ElectroRoute’s 24/7 desk in Dublin city centre.
A software suite incorporating artificial-intelligence data analytics tools runs behind the walls of screens on the trading floor. Yet this system, dubbed ElectroRoute Core, is there only to assist traders in their decisions. When the time comes to make a trade at a given price and deliver the corresponding power, human brains are responsible.
Around Desai, colleagues on more regular office hours forecast market activity to trade energy for the day ahead and longer periods. In addition to weather patterns, the futures desk watches geopolitics and economic growth around the world, and their impact on the supply, transport and demand of energy.
Of ElectroRoute’s workforce of around 100, 65 are based in Dublin, where the business’s trading, finance and management functions are located. Another 15 are busy settling trades and billing clients in Letterkenny, Co Donegal, where the company is headquartered and its co-founder and chief executive Ronan Doherty lives. And 20 more are scattered across international locations including London and, more recently, Tokyo.
Most of the transactions on this floor take place on behalf of ElectroRoute’s clients, which include 1GW of capacity in Ireland – mostly wind farms, but also 270MW of batteries. One desk, however, is dedicated to buying and selling electricity and gas on the company’s own account: “We do also outright proprietary trading, where we trade in the markets and we sharpen our skills and try creating earnings that way as well,” says Doherty.
Turning to the 24/7 desk where the prices of electricity trades are displayed in real time, he adds: “Every time it flashes, there is a physical change to what is happening on the network” – whether that’s a gas-fired plant, a renewable generator or a battery switching on or off.
This ability of trading to help shape the way we produce and consume energy emerges as Doherty’s key motivation as we sit down for a detailed discussion of ElectroRoute’s business, which you can listen to on this week’s podcast above – his first in-depth interview since starting the business over a decade ago.
At its core, energy trading is deceptively simple – aiming to make it “flow from where it’s cheapest to where it’s most expensive,” Doherty summarises. Yet ElectroRoute has perfected it to a point that now values the company at over €100 million.
To understand where this value lies, I first ask him why producers and buyers of electricity choose to pay a middleman rather than trade directly between each other. “We look out for our clients’ assets, trade them into the wholesale market; we also, as a company, contract and procure renewable energy from projects,” he explains. “And that de-risks those renewable projects and allows them to get financed and built.”
While energy prices fluctuate all the time, Doherty says that the types of capital that go into the sector do so for 10 to 20 years at a time. “Those guys that are investing in renewables, for example, are looking for certainty over that horizon, and really our part in the value chain, the ecosystem and the industry is to handle some of those risks that are not suitable for capital-intensive projects to hold in the long term.”
By offering long-term contracts, ElectroRoute takes on some of those market risks and manages them through its trading activity and use of energy-backed derivatives.
So, when did Doherty come up with the idea of growing a business out of this need?
Ronan Doherty (RD): It’s really really part of a career-long ambition for me personally, in terms of the net-zero and decarbonisation journey. I was a fairly disinterested engineering student at a graduate level. And it’s really when I started my PhD on renewable energy and electricity markets that I realised the importance of the climate change challenge and, basically, the responsibility we have to decarbonise our energy system.
That really lit a fire in me at that stage during my research, and my publications at that stage in any policy work, and any roles or career work I’ve done have really been around that. You have to try to imagine ourselves in the future and our grandkids asking us why did we not do more on climate change when we still had a chance. Well, personally, I’d like to have the right answer to that, saying: “We did all we could, we develop all we could, we pushed on with solutions in that area as best we could.” That’s really a career-long motivating factor for me and understanding ElectroRoute within that, then, is really important.
Having done a PhD on renewable energy and electricity markets and the integration of renewables, I then went on to work in Airtricity, as it was a very rapidly growing and exciting Irish company. In Airtricity I got to work with absolutely stellar individuals like Martin McAdam; Paul Dowling, who was our chairman in ElectroRoute for a while; and Eddie O’Connor, who would be a very high-profile leader of Airtricity. In that environment, you could really see how to drive a business, how to build a culture, how to really approach the energy sector in a different way.
“Trading is a really important part of the value chain in energy. It’s where everything gets monetised, where everyone gets paid.”
Working through the sector like that, we could see that there was an opportunity for trading companies to be a bit more proactive, a bit greener and a bit more progressive in their outlook. Trading is a really important part of the value chain in energy. It’s where everything gets monetised, where everyone gets paid, and everyone has to pay at the end of the day. But we felt that a lot of the trading functionality in the industry was inside big utilities and, as such, were prone to being a bit lethargic a bit behind the curve, and maybe not progressive enough in their practices to onboard more renewables in the future.
So, around 2010, I did a little bit of desktop research on the opportunity for there to be a better, more progressive energy trading company, particularly around the import and export of excess renewable energy and indeed how renewable projects sell their output onto the grid to begin with. I thought I’d stumbled on a couple of good ideas but I knew there was no point in setting up a company on your own. Unless you convinced a couple of other good individuals to go on the journey with you, there was no point.
So, almost as a way of ruling out setting up a company, I thought: Okay, I’ll ring around a couple of the best guys I know and see if they’d be interested in setting up a company – expecting a no, to be honest. But when I pitched the idea to my co-founders, Alex Bryson, Alan Mullane, Eamonn O’Donoghue and Bernie Fitzpatrick, they were like: “Yeah, this sounds really good, I’ve been thinking about something like this myself.” And over a series of beers and burgers around Dublin, the idea came together for ElectroRoute. We took the plunge in 2011 and started from there.
Thomas Hubert (TH): You say the idea was to create a greener trading company and especially to help renewable producers to get market access. What were the ways you had in your head between you and your co-founders that could deliver that?
RD: Very early on, we had a couple of ideas, as I mentioned, around importing and exporting power, and how we sell power onto the grid. If you look at our very first investment prospectus from back then, those ideas are mentioned. Today, they’re actually some of our best lines of business still, even over a decade later.
Some of the practices we would have pioneered in ElectroRoute in the early days were exporting excess wind power to Britain when there’s too much wind power in Ireland. It seems so obvious now but back then, our interconnectors were used – they almost flowed power in one direction for a month at a time, but the wind changes every half hour. That demand is sometimes exported and sometimes it’s imported. It’s hard to believe today but in the past, a lot of that wind power was just simply dumped instead of being exported. So one of the practices we pioneered was exporting that wind power to Britain, rather than dumping it here in Ireland.
A second innovation we brought to the market was something called “supplier lite” where we noticed that, increasingly, wind farms were not owned by utilities, they were owned by independent infrastructure funds or renewable funds who didn’t necessarily have customers or utility capability themselves. But these new entrants into the market were still selling their power to a utility. And ultimately, they were rivals in some respects and we find they were unusual bedfellows. Often, the utility practices at the time didn’t necessarily give these renewable projects the best terms or the most flexibility, or maybe weren’t empathetic enough to how they were financed.
One of the other pioneering ideas we had with this supplier lite product was to bypass the utility entirely. We set up structures that allowed wind farms to sell their power directly into the electricity market, under our supervision and with our help and our forecasting and trading, and we would de-risk elements of that for the project. In that way, independent wind farms could sell their power independently, receive their subsidies, access the market without necessarily being tangled up with a utility.
They’re some of the early practices that got the business off the ground and we managed to grow from there.
TH: Did you and your co-founders have some funding of your own? Did you need to go to investors straight away?
RD: Energy trading is not for small companies. It’s not like having a little tech company in the garage. Very quickly, you need balance sheet and working capital and collateral for trading. Ultimately, energy trading is a big boys’ and big girls’ game.
We tapped up the usual VC funds and so on around Dublin, but we just didn’t really fit the formula that they were looking for. So we went back to some of our industry colleagues from Airtricity: Paul Dowling, ex-Airtricity [chief executive], was one of our early-stage investors, and another very experienced individual from the industry, [Tynagh Energy founder] Bran Keogh, also came on at a very early stage and backed the company. We closed our first kind of €1 million funding round with those guys and a little bit of help from Enterprise Ireland, and that got us going.
That allowed us to trade some products in some fashions and from there, we were able to prove the model in reality, start making a little bit of profit, and then expand upwards from there. We did a second €1 million funding round. On that growth journey as well, Ulster Bank was actually a very good partner. We had a great individual, Karen Doyle, who used to work in Ulster Bank, and they were very supportive and helped us understand how we could apply a little bit of debt into that environment as well as we grew.
In five years, ElectroRoute evolved into what Doherty describes as “a strong small business”. “We had a choice to make as founders: Do we plateau there and say, ‘We have a nice lifestyle business now that’s quite profitable at this level,’ or are we going to do more? Unanimously, we decided we’re not really fulfilling our mission to make net-zero a reality if we stop here.”
Having a bigger impact meant scaling up, and therefore finding a new backer.
“At that stage in 2015, along with KPMG, we ran a process to find a capital partner with a bigger balance sheet and more international reach that could take us on the journey to the next level,” says Doherty. He recalls other international energy companies were interested, as well as trading houses and investment funds already present in renewables in the UK and Ireland. Mitsubishi, however, took the lead very quickly following an initial meeting in Madrid.
Doherty says the Japanese bidder’s strong points were its long-term outlook and its experience as a global investor, offering “a nice balance between oversight and governance; but also the autonomy to allow the success that we had built so far to continue under the management we had”.
“They knew the core of the expertise in ElectroRoute was in the team, they didn’t invest in us to tell us how to do it differently,” Doherty added. “They were interested in learning more about trading and deregulated energy markets. They provided the capital and financial support for us to grow and increase our trading size and multiply the styles of trading that we had at that stage.”
In 2016, Mitsubishi purchased 60 per cent of ElectroRoute, with a plan to acquire the full business later. This was completed last June. Buying out existing shareholders, however, represents only a fraction of what the Japanese group has invested in the company so far. In its annual accounts to the end of March 2022, ElectroRoute Energy Trading Ltd reported: “Mitsubishi Corporation provided substantial liquidity support to the group through €300 million of additional facilities given the unprecedented volatility in energy markets.”
“When the war in Ukraine kicked off and the Russian gas pipeline flow stopped coming to Europe, the wholesale energy markets went into complete turmoil. And when markets get really volatile, they put a huge strain on balance sheets in terms of the collateral that you must keep, the margin calls and so on,” Doherty says. ”The additional funding sources that Mitsubishi made available to us allowed ElectroRoute to ride through that volatility, to weather that particular storm as we restructured a few of our contracts, and wound down certain positions that were particularly inefficient in terms of capital usage.”
With hindsight, becoming part of the Mitsubishi group had been an even better idea than ElectroRoute’s founders had initially thought.
Mitsubishi deal delivers 15x average return to ElectroRoute’s early investors
When Mitsubishi completed the acquisition of ElectroRoute last summer, no financial details were given about the deal. Company information released since then, however, has disclosed that the Japanese group paid €35.3 million for the 35.83 per cent shareholding it did not yet own at that point. An internal group transfer in July then showed that Mitsubishi valued ElectroRoute as a whole at €101 million.
The figures reveal the growth in value achieved by the Irish company since October 2016, when Mitsubishi had first paid €18.7 million for 60 per cent of ElectroRoute. In the intervening six years, the share price more than doubled.
Public filings now made by both parties show how much ElectroRoute has returned to its early investors. In aggregate, the company’s founders, staff and backers multiplied their investment by 15 over the past decade. This included an opportunity offered to founding managers and longer-serving staff to acquire residual shares from capital schemes pre-dating Mitsubishi’s involvement at a discount just before last year’s final sale.
Doherty says ElectroRoute is on the front foot and growing again after six months spent dealing with market turmoil last year. Yet he thinks the energy market will never be the same again. “We've seen now what can happen in the sector and we need to factor that into the future plans," he says. "And we also have a continent in Europe now that will be without Russian gas, where it had it in the past. That's going to change policy, business approach and business models radically into the future.”
Doherty’s view is that the old approach to energy and climate policy, based on the three pillars of cost, security of supply and environmental footprint, has been reframed. While the central questions used to revolve around how much renewable supply to include, how fast and at what cost, he says this has been resolved.
“Now renewables is by far the cheapest source of energy that we can get, well below any fossil fuel source of power,” he says. “It's green, it also has security of supply in that a Russian government can't turn off the wind while it might be able to turn off the tap. So the answer is renewables in terms of the future – and commercial solutions: How to get them built, how to de-risk them, how to manage markets and systems with them on there. There's a couple of decades of really, really hard work for the likes of ElectroRoute ahead to continue to solve those problems.”
Pulling up a slide showing analysis of company figures, Doherty points out that this can be good business for the Exchequer, too: From €1.3 million in state investment across Enterprise Ireland capital, tax reliefs and credits and other supports, he reckons ElectroRoute has returned €53 million in corporation tax, income tax and PRSI, capital gains tax and Enterprise Ireland returns.
Blending into Japan
As part of its acquisition by Mitsubishi, ElectroRoute has been growing its business in Japan. Its subsidiary there operates according to a “blended approach”, Doherty says, with staff seconded from both the Irish company and its Japanese parent. “We'd like in the future to really mirror what we've built in Europe, ultimately to have a company of the same scale and capability built in Japan. That, again, speaks to our long-term mission to really make a contribution to the green transition.”
The opportunity there lies in ElectroRoute’s experience growing through the liberalisation of energy markets in Europe. “Japan is, broadly speaking, five to 10 years behind Europe in its deregulation journey. We have some insight as to what's going to happen in Japan in the future and how these market forces and regulated markets change and evolve over time,” says Doherty.
While he thinks the company is well equipped to navigate this transition, he is also aware that ways of working are very different between the two countries. “The classic European growth-stage company business culture approach won't necessarily be the right formula for building a company in Japan,” he warns. For example, he adds that Irish and Japanese colleagues are currently working on ways to attract the right people into the company, which they know won’t be the same as those applicable when recruiting in Dublin.
From an Irish perspective, Doherty expects this island to continue benefiting from its good standing as an international investment destination and its membership of an increasingly integrated EU. “After the common market, the next biggest economic benefit we've yielded from the European Union is the Energy Union. It's really been massive,” he says, with EU policy to structure the market still in the process of being implemented here.
He mentions the added challenge of balancing intermittent wind generation with demand but sees progress in this area. I ask him about the perceived burden placed on the national grid by rapidly expanding data centres and mention that I first heard of ElectroRoute when it set up a direct supply contract between a wind farm in Co Kerry and Microsoft a few years ago.
RD: Some of our clients are these large tech firms, as you point out, which contract directly with renewables. I find, particularly, that the large branded US tech companies are very progressive in their approach to renewables. Depending on which company, they have particular policies and targets to procure renewable energy for their electricity consumption in the data centres.
Some of them seek to take the burden away from the electricity consumer here by making sure that none of the projects are subsidised in another way and they are exclusively supporting that and making those projects happen. That's a concept called additionality that some people use. And as they build out their data centres, quite a few of them have full back-up generation and so on as well, trying to ensure that they don't place any additional stress on the grid at times of peak demand, for example.
TH: In terms of the additionality, actually, do you see it happening? You said there are definitely branded US tech companies interested in it. Is the overall data centre industry, in your view, providing additionality? Or is it taking away from the existing grid and from other users?
RD: I feel it's a positive impact on the grid. I was a little surprised at the nature of the coverage that it's got so far. I mean, each country powers its own industries. And the tech industry is massive in Ireland, we have a lot of people employed, we have a lot of tangible operations here and good Exchequer returns as well from that sector. It's perfectly normal for a country to power the industries that are core to its economy.
Data centre demand is probably around 14 per cent, maybe, in Ireland. It's really just a small subset of the electricity story that we have to tell. So I feel maybe a bit too much attention has been deflected onto the data centre sector and away from what we should be doing in the rest of the industry. The net-zero journey for me means: Electrify everything with renewables. That means heat, transport, everything. We have the renewable resources here in Ireland and our challenge is, we have to almost double the size of our electricity system and get everything electrified so we can get to net zero.
“The data centres are an interesting, maybe sub-story in our industry, but certainly not the main event.”
It's really a journey of development rather than shutting things down. It's really a journey of doing things rather than not doing things. So the questions are really: Are we building enough network? Are we building enough substations? Are we building enough peaking plant? Are we building enough renewables? Are we upgrading our metering practices to enable this future to happen? They are the key. I think that's a real story. The data centres are an interesting, maybe sub-story in our industry, but certainly not the main event.
TH: In the wider EU context you mentioned a minute ago, Ireland is getting more and more integrated into this, whether that's through policy or physical infrastructure. I'll start there – these two interconnectors being built now in addition to the ones we already had with Britain. Is that a big business opportunity for you? Do you think it's going to make a difference both to the flexibility of Ireland’s supply and to your own business with more imports and exports as you pioneered here?
RD: Yeah, I think they're very compatible topics. Good trading, if it's beneficial for Ireland and the countries around it, then it'll also be good commercial activity and vice versa. I'd be a big, big supporter of interconnectors, there's nothing better than sharing our resources with our neighbouring countries.
It's very, very expensive for each country in isolation to provide for the worst-case peak demand or outage scenario. There are huge economies to be had by sharing your resources so we can all have a more secure system at a cheaper price, and interconnectors are core in that, be they gas or power. So I’d be very supportive of the new interconnectors to Britain and France from Ireland for sure.
Every day is different in its features. If it's very windy here and the French nuclear plants have an outage, prices will be high in France, we’ll export our wind generation and vice versa: If there are some outages and no wind here, France may well be in surplus with its generation position and can simply send some stuff to us. So when you see that changing picture day in and day out, you really understand the benefits of being connected with your neighbouring countries.
TH: And there's no additional risk out of that in terms of becoming more dependent on another country? I suppose the war in Russia and Ukraine has recently made people, maybe, more protectionist. Don’t we run the risk of having something blowing up on the ocean floor and cutting us off?
RD: No, I really don't feel so. I think Ireland will have the renewable resources to be energy independent at some stage in the future for sure. So it's not really about being completely dependent on another country for bulk continuous transfer of energy. It's about one day, I'll help you; tomorrow, you'll help me. So, no, I don't really feel we'll get into a kind of protectionist scenario, particularly within the European Union.
In the immediate future, the energy industry’s challenge is to rebalance markets in the post-Ukrainian invasion environment described by Doherty, which has led to state and EU interventions to compensate or cap price hikes, decouple electricity from gas prices and tax the sector’s excess profits. He has mixed views of heavy-handed government intervention in this market, which he says was highly regulated in the first place.
“The whole industry is very empathetic to the high wholesale costs, the burden that is on households and so on in terms of consumer bills. So, while you want to see markets that are not being tampered with and messed around with too frequently, the industry understands this was a very exceptional year and some sort of intervention to, maybe, cap prices or clawback supernormal profits probably needed to be done,” Doherty says. “Having said that, nobody has a theoretical model for how these markets can operate in the long term with constant interventions, caps or clawbacks and so on. It cuts right across the basket of concepts that have put the market together to begin with.”
For these political intrusions to go away, he acknowledges that energy prices need to come down to more normal levels. “Sometimes, market interventions can have a lot of unintended consequences and they can last for years and years after the intervention itself,” Doherty says. “Due to the warm weather in Europe over the last couple of months, there's been a huge fall-off in gas and power prices right across the continent – an almost halving of prices over the last three weeks [to January 10]. We're hoping that Europe will be in a good position to get through the rest of this winter, and have good gas supplies moving into next winter. If we get corresponding lower, stable prices for a while, hopefully then that will give license to maybe cool off on some of the market interventions that were necessary over the last year.”
I ask Doherty whether, having worked hard to restructure ElectroRoute’s balance sheet with Mitsubishi’s backing in an environment where gas prices were as high as €300/MWh, he feels this effort was for nothing now that the EU has capped this price to €180/MWh. “Certainly not,” he replies. “We would have restructured some of our more difficult contracts over the course of the year, so we're fairly neutral ourselves as a business to whether that cap came in or not.”
Still, he hopes the market will operate below this threshold and the EU cap won’t actually be applied. Stopping two counterparties from selling something to each other at an agreed price could have a lot of unintended consequences, he warns.
Looking further into the future, Doherty is resolutely optimistic about Ireland’s contribution to the challenge posed by the decarbonisation of energy. “I've heard people say that we're a small country, it doesn't matter, we don't produce that much emissions anyway, why try so hard,” he says. “But it's important to remember that per capita, we're among some of the highest emitters in the world. And we've been so privileged and advantaged in so many ways in terms of our setup, our educated workforce, that there's a kind of obligation on us to come up with solutions here that can be rolled out in a wider context around the world.”
From developing offshore wind energy in a small island to making the national grid operate flexibly with a huge amount of renewables, he says Ireland is well placed to deliver those solutions and meet not only its own 2030 and 2050 green energy targets, but also help others to do so.
“People underestimate how much can be done over the long term – and often overestimate what can be done in the short term,” Doherty says. Working on policy in 2004, he remembers being one of the first people to write down targets on a page, which resulted in Ireland adopting a 40 per cent renewable electricity obligation for 2020. “I remember back then they were laughably high numbers that nobody had any belief that we could reach – and we did basically reach them in 2020,” he says.
“So again, by 2050, the ambition to be energy-independent and net-zero is a very real and achievable target. We just need to apply ourselves, build the right systems, come up with the right solutions and there's no better place than where we are now to do that.”
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