Ten interesting things that we read this week

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At Ambit, we spend a lot of time reading articles that cover a wide gamut of topics, including investment analysis, psychology, science, technology, philosophy, etc. We have been sharing our favourite reads with clients under our weekly ‘Ten Interesting Things’ note.

Here are the ten most interesting pieces that we read this week, ended June 30, 2017.

1)        The value of crowd sourced earnings forecasts [Source: Valuewalk/SSRN ]
•    Crowdsourcing — when a task normally performed by employees is outsourced to a large network of people via an open call — is making inroads into the investment research industry. This academic paper sheds light on this new phenomenon by examining the value of crowdsourced earnings forecasts. The sample considered includes 51,012 forecasts provided by Estimize, an open platform that solicits and reports forecasts from over 3,000 contributors. The authors find that crowdsourced forecasts are incrementally useful in forecasting earnings and measuring the market’s expectations of earnings. The results are stronger when the number of Estimize contributors is larger, consistent with the benefits of crowdsourcing increasing with the size of the crowd. Finally, Estimize consensus revisions generate significant two-day size-adjusted returns. The combined evidence suggests that crowdsourced forecasts are a useful, supplementary source of information in capital markets.

•    Some of the most important research questions answered by the paper are: a) Are crowdsourced earnings forecasts useful in the capital markets by capturing new information about future earnings? YES- Significant two-day excess returns (0.41%) surrounding large upward/downward EPS revisions were documented.  Notably, this excess return was not reversed over the following two weeks and was unrelated to confounding corporate events; b)Does crowdsourcing add incremental accuracy when combined with the conventional, sell-side earnings forecasts? YES - Including crowd sourced forecasts with either a statistical model or sell-side consensus resulted in significant improvements in the accuracy of forecasting actual EPS. The accuracy improvements extended to all forecast horizons; c) Is the crowdsourced consensus more or less related to earnings surprise announcement returns? YES - The crowdsourced consensus added incremental explanatory power to the three-day earnings surprise announcement returns, controlling for the sell side consensus forecast. With five or more contributors, the crowdsourced forecast dominated the sell side consensus in explaining the three-day announcement returns.

•    A crowdsourcing site such as Estimize attracts and utilises a wide variety of capable forecasters including analysts, portfolio managers, independent investors, corporate finance professionals and students. The results indicate that capable external forecasters, using their own content, are able to provide and distribute less biased, more relevant and incrementally useful information about future EPS.

2)        Buffet’s new mantra is ‘bad stocks at good prices’ What happened to ‘good stocks’? [Source: Economic Times ] 
•    Home Capital Group, the embattled Canadian lender that a regulator accused of misleading shareholders about mortgage fraud, recently announced that it was getting a $300 million investment from a unit of Berkshire Hathaway. Buffett's conglomerate will also extend a $1.5 billion line of credit. But it's clear that more than the money, which Home Capital certainly needed, what the lender wanted was the Buffett seal of approval. Home Capital's press release mentions Berkshire or Buffett in nearly every one of its 26 paragraphs, a total of 29 times. The press release's first bullet point says the investment is "a very strong validation and endorsement of Home Capital from world renowned long-term value investor." Buffett is quoted as saying Home Capital has "strong assets" and that "its ability to originate and underwrite well-performing mortgages" is what makes it a "very attractive investment."

•    However, it's pretty clear why Home Capital wants Buffett's endorsement. The company's stock sunk from more than C$30 at the beginning of the year to just less than C$6 after Canadian regulators accused the company of knowingly funding loans from dozens of brokers who falsified documents. Short-sellers have been saying it will go out of business. Buffett, through a private placement, is getting the right to buy shares for an average price of C$10. That was a 33 per cent discount to the just less than C$15 the stock was trading at before the deal. Home Capital's shares closed at C$19. All told, Buffett was looking at a paper gain of $272 million on a $300 million investment, a 91 per cent return - or 33,100 per cent annualised - in less than 24 hours. And that's before Berkshire pockets as much as another C$180 million interest on the line of credit in the next 12 months.

•    Buffett’s stated philosophy is that he buys good companies with good managements at good prices and holds on to them for years. And he does it in a generally good-natured, America-and-apple-pie sort of way. But in the past few years, Buffett has added financial rescue deals to his investment repertoire. He bought shares of Goldman Sachs Group Inc. during the financial crisis and struggling Bank of America Corp. a little later. And in a similar vein, he and his shareholders have been paid to lend his name to some deals that critics found less than savory. But the problem with these financial rescue deals is that they likely mean less than they appear. Buffett didn't buy shares of Home Capital. He bought something that is a share of Home Capital with 33 per cent protection. And investors who have followed Buffett's financial rescues haven't done so well. Goldman's shares rose just 17.5 per cent in the five years after Buffett invested $5 billion in the company. Buffett, though, because of the special warrants he received and a 10 per cent dividend, was up 67 per cent on the investment in the same period.

•    While it’s far-fetched to say that Buffett has lost his investment touch, Berkshire's book value, which Buffett has long said is a pretty good proxy for his investment performance, has underperformed the S&P 500 in four of the past five years. Buffett has also had some high-profile investment flubs, like IBM, which Berkshire has been selling and Buffett has said probably doesn't have the potential he once thought. Nonetheless, Buffett as an investment brand still has a lot of sheen. However, Buffett is having to reach down significantly deeper in quality to draw returns from his investment brand. Buffett's not likely to lose money on this deal. But unlike in the past, the chance that others will be able to make much following him into Home Capital is also pretty low, despite his endorsement that it's "a very attractive investment."

3)        Women are worse at Maths than men – and other myths [Source: Financial Times ] 
               Text for google: If we grasped the idea that male and female brains aren’t different
•    Nilanjana Roy, the author, feels that the modern world is designed according to the assumption that there are two chief categories, male and female, with the rainbow that is the rest of the gender spectrum trailing in some way behind. many people therefore believe, at some level, that the differences between male brains and female brains are significant. But what if there isn’t an innate, essential difference between the sexes at all? And what if much of the apparently significant research on gender differences merely reflects the fact that even scientists are not immune to cognitive bias?

•    Describing the work of journalist Angela Saini in ‘Inferior: How Science Got Women Wrong — and the New Research That’s Rewriting the Story’, Nilanjana says the latter isn’t the first science writer to question the basis of the research into sex differences, or the first to suggest that perhaps we are more “intersex” than we have historically believed. But her clarity and determined, patient research are a great introduction to the complicated landscape of this debate. The myths she debunks are large and persistent. The greatest is that male brains are fundamentally different from female brains — they are not, she reports. Women are not worse than men at mathematics and spatial reasoning; men are not hard-wired to be less empathetic than women. She uncovers research that challenges the theory of men as hunters, by demonstrating both the presence of women as hunters and the complexity of the tasks of gathering — and encouraging readers to discover that we were once a more egalitarian, not patriarchal, species. “The greatest barrier that still stands between women and full equality,” she writes, “is the one in our minds.”

•    Saini’s research spans many fields — neuroscience, psychology, evolutionary science, medicine and anthropology. The biggest challenge she faces is trying to find out “why so much we think of as true is actually unreliable”. One of the reasons why we have such a high regard for intellectual pioneers is because it’s incredibly difficult for most people to think outside the accepted wisdom of their times. Today, most thinking people accept that there is far more of a gender spectrum — that there are far more ways of living, loving, being human — than the narrow straitjackets of heterosexual man and heterosexual woman would suggest. But perhaps one of the hardest ideas to challenge is the belief that the sexes are different in the first place — it’s such an embedded concept.

•    Feminists have already argued for years that women are not less strong than men: if “strength” is defined as the ability to survive longer, to withstand pain, to make vast migrations while pregnant or nursing. Saini makes her own case that women are in no way inferior, and also helps us to recognise that scientists are human — as susceptible to prejudice or bias as any other profession. Demolishing the myth of sex differences clears the landscape.

4)        When Bombay overtook Calcutta – A history of India’s financial geography [Source: Livemint ] 
•    In its heydays, Calcutta did not just compete but was a much larger financial centre than Bombay. Charles Kindleberger, in his excellent 1974 essay ‘The Formation of Financial Centers: A Study in Comparative Economic History’, shows how major banks concentrate in political and commercial capitals leading to development of financial centres. Calcutta was not just the political but also the commercial capital of British. The trade volumes from Bengal were higher than Bombay for most part of the time period between 1871 and 1939. Accordingly, when the East India Company decided to establish joint stock banking in their Indian colony, they started in Calcutta in 1806 followed by Bombay nearly 34 years later in 1840. Just like trade data, the Bank of Bengal was also much larger than the Bank of Bombay as the former catered to a much larger population. Given the large population, the Bank of Bengal captured larger deposits as well. Bengal also saw a higher number of companies being floated. Nearly 45-50% of Indian companies were floated in Bengal compared to Bombay’s share of 13-15%. By 1918, Calcutta and Bombay controlled 43% and 40% respectively of rupee companies and 73% and 19% for sterling companies. This again shows the dominance of Calcutta over Bombay, especially in sterling markets mainly due to tea companies.

•    In per capita comparisons, though, Bombay was better placed than Calcutta. For instance, the Bank of Bombay collected four times more deposits per person than Calcutta. Even in terms of companies, Bombay had higher paid-up capital. So when did Bombay eventually accelerate past Calcutta? One gets some cues from intra bank payment time series in clearing house data. In 1913, total clearing house transactions were Rs65,035 lakh with Calcutta settling 51% of these transactions compared to Bombay’s share of 33.7%. However, the gap between Calcutta and Bombay narrowed with each subsequent year. In 1947, the shares became almost equal. In fact, 1947 becomes the inflection point as from that point onwards, Bombay starts to gain over Calcutta. In 1950, Bombay’s share was nearly 6% higher than Calcutta. By 1965, Calcutta’s share had declined to 28% and Bombay was at 35%. Thus, it was around independence that Bombay eventually replaced Calcutta as the leading financial centre. Why did this happen?

•    Bimal C. Ghose points to several factors in his 1943 book “A Study of the Indian Money Market”: a)The world wars (especially WWII) weakened the position of Calcutta significantly leading to a decline in business in Calcutta affecting local money markets and banking. b) The fate of the Calcutta port post WWII made Bombay the colony’s leading port. Bombay was always much more naturally suited to being a port compared to Calcutta. Calcutta port was 80 miles up the river from the sea, making it difficult for cargo ships. Bombay was nearer to the Suez Canal and received the bulk of imports from Europe. The shipping rates were also higher in Calcutta. Thus, with maritime trade concentrating in Bombay, the finance sector followed as well. c) Development of railways linked Bombay to not just the Deccan but to Punjab as well. The port of Karachi was closer to Punjab, but Bombay was preferred, given the railway connectivity. d) Indigenous bankers in Bombay offered exceptional facilities and translated their practices into formal banking. e) Bombay was also home to three important markets: stock exchange, cotton and bullion. Calcutta just had jute, which was mainly exported. There was the Calcutta Stock Exchange but the one in Bombay was much older and more significant, perhaps due to its proximity to western financial centres. Further, the response of entrepreneurs in the two regions to shocks was very different. The ones in Bombay responded to shocks by pivoting to different business opportunities. The same was not the case with Calcutta-based entrepreneurs.

•    Large scale bank failures in Bengal during the period 1947-65, with 168 closing in Bengal vs. just 13 closing in the Bombay region, also helped strengthen the case of Bombay as the financial centre. Another factor is thechoice of location of India’s central bank. Initially both cities were joint headquarters for India’s central bank. However, in 1937, the then-governor James Taylor made a request to shift the head office to Bombay citing, “The experience of the last two years has shown that the present practice of migrating from one centre to another throws an impossible burden on the administration of the bank and involves great waste of time and duplication of work.” His request was acceded and in December 1937, the central office was permanently transferred to Bombay.

5)        How old writers saved the novel [Financial Times ] 
               Text for google: Philip Roth, Marilynne Robinson and Cormac McCarthy
•    Kazuo Ishiguro is known for great novels and a theory about their timing. From a scan of the canon, he surmised that genius strikes early, if at all, in a writer’s life. Hemingway published ‘The Sun Also Rises’ at 27. By 40, James Joyce had given the world ‘Dubliners’, ‘A Portrait of the Artist as a Young Man’ and ‘Ulysses’. Before the old arose to the taunt, Ishiguro tried to warn young writers against delay. In the 1980s, as if to corroborate his thesis, he pipped older novelists to the big prizes. That literature is a young person’s game was entirely plausible on the balance of historic evidence back then. After that, a mysterious change took place. From the 1990s, great books by writers nearer the end than the start of their lives began to proliferate,. Philip Roth wrote a sequence of immediate classics (Sabbath’s Theater, American Pastoral, The Human Stain) that culminated in The Plot Against America when he was 71. Saul Bellow, another who seemed to have taken demotion from the top tier with grace, fought back with Ravelstein. He was 85. Cormac McCarthy reconciled cult status with mass appeal in his 70s with ‘No Country for Old Men’ and ‘The Road’.

•    One theory for this change credits medical science for its elongation of human lives, but much of that gain came from the near-eradication of infant deaths. A Victorian who survived the first phase of life could hope to have what even we would rate as a decent innings. Still, Joseph Conrad and Henry James, in their fifties, were held to be old writers. Another view sees demand as more important than supply, with an ageing population keener to read old novelists. But this can only explain sales, not quality. For an explanation we must look to what was going on in the world when older writers started to dominate. It happened just as the internet was blooming. Perhaps writers who were formed before this wild invention, with its immediacy and shallowness, all of a sudden had something to react against. And that young people of a creative bent who might have otherwise mustered some competition began to see novels as a redundant form.

•    The books mentioned here tend to be large, immersive and connected to the past: they require of readers exactly those mental skills that the internet is thought to train out of them. Whether this was a deliberate statement by older writers, or a subconscious protest, matters less than the resultant work, which kept the novel vital when the circumstances were there for its slow death.

6)        With Alphabet, Google faces a daunting challenge: organising itself [Reuters ] 
•    Google’s self-professed mission is to organise the world’s information. But a company known for engineering excellence is still trying to solve the very human problem of how to organise itself. Nearly two years ago, Google co-founder Larry Page announced the tech giant would be remade as Alphabet, a holding company whose units would include Google and an array of unrelated pursuits in areas such as healthcare, self-driving cars and urban planning. Alphabet's top management aimed to boost accountability by appointing chief executives to head each of the “Other Bets”. Few people in Google's constellation of ventures had ever held the title prior to that. But so far Alphabet has failed to show it can convert its “Other Bets” from experiments to businesses with the reach, impact and money-making potential of Google’s core search and advertising operations. Interviews with two dozen former Alphabet executives and employees reveal an organisation grappling with how much time and resources “Other Bets” deserve in the pursuit of profitability.

•    Alphabet's early days have seen more pruning than expansion of its holdings. The company has scaled back plans for Google Fiber, which delivers rapid Internet service in 10 metro areas. This month, Alphabet agreed to sell robotics company Boston Dynamics to Japanese multinational SoftBank. It unloaded its Terra Bella satellite imaging business in February. At one point last year, it was even looking to sell Nest, the largest of the Other Bets. Meanwhile, a series of executives have departed since the reorganisation, including the heads of Nest, an Internet operation called Access and a venture capital firm known as GV. While Wall Street doesn’t look worried right now and Alphabet's stock is near an all-time high, it's not yet clear the structure will enable Alphabet to do what most companies cannot: conceive the next wave of innovation in-house or through the development of key acquisitions. That goal is central to both the company's mission and investor expectations.

•    The Alphabet structure is Google’s stab at an age-old corporate conundrum: sustaining innovation within a giant enterprise. Alphabet's strategy is to give entrepreneurs the autonomy of a startup, coupled with the discipline of a traditional corporate structure. However, Alphabet top brass continues to hold sway over key strategy and financing decisions, a dynamic that has chafed Other Bets chief executives who've complained they are treated more like chief operating officers than shot callers. Also, some companies acquired by Google found that being part of Alphabet wasn't what they'd bargained for. Two former Nest employees said they were promised generous funding and time to achieve profitability following the company's acquisition by Google in 2014. But after the restructuring, Alphabet executives were keenly focussed on revenue. Further, pricey overhead has made the path to profitability tougher, leading to Alphabet charging Other Bets for their portion of shared services such as security and facilities, ending what had previously amounted to a subsidy. The units also felt pressure to maintain Google perks such as free employee meals.

•    “One of the pitfalls (of Alphabet) is that those companies are asked to stand on their own two feet, but they may inherit the cost structure of Google," said Nest investor Peter Nieh, a partner at Lightspeed Venture Partners. While Alphabet has been looking to offload some of the ”Other bets” companies, the creation of the “Other Bets” has also changed what it means to work for Google. Some grumble that their role now is to subsidise innovation at their sister companies rather than to innovate themselves. Further, employee transfers to X, the illustrious “moonshot factory,” are more complicated now that it's a separate entity. That’s a striking shift, especially for high-performing employees accustomed to moving about the company almost at will.

7)        Male and Female entrepreneurs get asked different questions by the VCs, and it affects their funding [Source: HBR ]
•    There is an enormous gender gap in venture capital funding in the United States. Female entrepreneurs receive only about 2% of all venture funding despite owning 38% of the businesses in the country. Over the past several years, even as the US has seen an increase in the number of female venture capitalists (from 3% of all VCs in 2014 to an estimated 7% today), the funding gap has only widened. The authors’ research offers new evidence as to why female entrepreneurs continue to receive less funding than their male counterparts. They observed Q&A interactions between 140 prominent venture capitalists (40% of them female) and 189 entrepreneurs (12% female) that took place at TechCrunch Disrupt New York, an annual startup funding competition. They then tracked all funding rounds for the startups that launched at the competition. These startups were comparable in terms of quality and capital needs, yet their total amounts of funding raised over time differed significantly: Male-led startups in the sample raised five times more funding than female-led ones.

•    Analysis of Q&A sessions revealed that venture capitalists posed different types of questions to male and female entrepreneurs: They tended to ask men questions about the potential for gains and women about the potential for losses. According to the psychological theory of regulatory focus, investors adopted what’s called apromotion orientation when quizzing male entrepreneurs, which means they focused on hopes, achievements, advancement, and ideals. Conversely, when questioning female entrepreneurs they embraced a prevention orientation, which is concerned with safety, responsibility, security, and vigilance. This difference in questioning appears to have substantial funding consequences for startups.

Entrepreneurs who fielded mostly prevention questions went on to raise an average of $2.3 million in aggregate funds for their startups through 2017 — about seven times less than the $16.8 million raised on average by entrepreneurs who were asked mostly promotion questions. In fact, for every additional prevention question asked of an entrepreneur, the startup raised a staggering $3.8 million less, on average. Controlling for factors that may influence funding outcomes — like measures of startups’ capital needs, quality, and age, as well as entrepreneurs’ past experience — the authors discovered that the prevalence of prevention questions completely explained the relationship between entrepreneur gender and startup funding.

•    The study also revealed that the majority of entrepreneurs (85%) responded to questions in a manner that matched the question’s orientation: A promotion question begets a promotion answer, and a prevention question begets a prevention answer. This pattern of behavior perpetuates a cycle of bias in the Q&A process that can aggravate the funding disparity. By responding in kind to promotion questions, male entrepreneurs reinforce their association with the favorable domain of gains; female entrepreneurs who respond in kind to prevention questions unwittingly penalise their startups by remaining in the realm of losses.

•    Fortunately, the authors identify a silver lining to the findings: If entrepreneurs change how they respond to prevention questions, they may be able to raise more funds. TechCrunch Disrupt entrepreneurs who were asked mostly prevention questions but gave mostly promotion responses went on to raise an average of $7.9 million in total funding. Conversely, those who responded to mostly prevention questions with mostly prevention answers went on to raise an average of only $563,000. So, an entrepreneur who is asked to defend her startup’s market share would be better served by framing her response around the size and growth potential of the overall pie than by merely stating how she plans to protect her share of the pie.

8)        The Israeli wonder woman vows the box office [Source: Financial Times ] 
               Text for google: An unknown Israeli actor has taken the summer by storm
•    Gal Gadot, an Israeli model and former soldier, turned actor, is indeed Wonder Woman, taking the title role in this summer’s juggernaut blockbuster, directed by Patty Jenkins. The Warner Bros production has so far taken more than $600m worldwide, and is on course to become the highest-grossing film directed by a woman. After a decade of male superhero franchises, Warner Bros eventually took the gamble that audiences would turn out in sufficient numbers to make a female-led film, fronted by an unknown actor, commercially viable. It worked, and injected new life into Diana Prince, Wonder Woman’s alter ego, who first appeared in a comic book in 1941. The woman embodying this cultural phenomenon had been acting for years, including in the Fast and Furious series, but stardom eluded her. Ms Gadot was on the verge of giving up when invited to audition for a secret part — she was only told later it was Wonder Woman.

•    Israel, a country of 8.7m people, has produced a disproportionate number of Nobel laureates, acclaimed writers such as David Grossman and Amos Oz, and political household names like Golda Meir. It is also making a mark in quality TV: Homeland and In Treatment have been adapted for global viewers. But it has few pop-culture celebrities. Ms Gadot may live in Los Angeles, with her property developer husband Jaron Varsano and their daughters, but her homeland has greeted her global stardom with rapture. Audiences living through the uncertainties — and activism — of 2017 have been highly receptive to the feminist superhero fantasy. Women report being moved to tears, such is their surprise and delight at seeing Ms Gadot’s superpowers on screen.

•    Translated literally, Ms Gadot’s first name — common in Israel — means “wave” and her surname means “banks” (as in riverbanks); the family’s original name was Greenstein, but like many immigrants to Israel they Hebraicised it. After she left school, her mother suggested that in the months before she joined the Israel Defense Forces for her compulsory national service she could enter the 2004 Miss Israel pageant. “I never thought I would win — and then I did win and then it scared me,” she told an interviewer. At 20, she went into the army and became a combat instructor. Ms Gadot has been forthright in her patriotism, which doesn’t attract controversy with most Israelis, but made her a target of abuse by the Jewish state’s critics. Ms Gadot’s nationality has been controversial among some Palestinians and other Arabs. Neighbouring Lebanon banned the film. Jordan, where animosity towards Israel runs high but which has a peace treaty with the Jewish state, allowed it to be shown. Mohammad al-Momani, the kingdom’s communications minister, said that an actor’s citizenship could not be grounds for banning any film. Sadly, while Wonder Woman’s on-screen fight is to end “the war to end all wars”, a century on from those battles the entrenched conflicts endure in Ms Godot’s own homeland and beyond.

9)        Amazon is building beehive shaped fulfillment centers [Source: inc.com ]
•    Imagine a facility that resembled a beehive-like tower, with drones hovering around it. That could be Amazon's vision for a new fulfillment center, and it looks like something from the future. The online retail giant's patent application for the new facility was filed in December 2015, and published on June 22 by the U.S. Patent and Trademark Office. Amazon imagines the towers will be filled with robots, and drones can restock in the docking stations before flying out for delivery.

•    In the patent filing, Amazon says its fulfillment centers are regulated to the outskirts of urban areas, where there is plenty of room for the large warehouses. But that could hinder business, as the facilities are far away from cities and not convenient for quick deliveries. Amazon plans to change that by building structures that blend into urban landscapes, where drones can be utilised for faster shipping times.

•    Like its fulfillment centers now, the design includes plans for robots that help human employees complete orders. However, these robots may also carry drones that will need to receive maintenance, be recharged, or restocked. What's more, to prevent a drone break-in, Amazon describes plans for landing platforms with locked doors that authenticate a drone before it's allowed to enter.

10)        Energy storage ‘will wipe out battery storage’ [Source: theenergyst.com ]
•    There are quick bucks to be made from battery storage. But in 3-4 years, many assets will be in the bin, reckons energy storage firm redT chief Scott McGregor. He claims sustainable energy storage that can handle multiple functions for decades without degrading is now viable. Predictions for battery storage penetration vary wildly. UK Power Networks recently reported it had received 12GW of connections requests in little over a year, much of it for batteries, much of it “highly speculative”. Western Power Distribution has 1GW of storage connections agreements on its network, with a further 1GW offered. National Grid, meanwhile, sees up to 18GW of all forms of electrical storage on the system by the 2040. The Government predicts around 4GW of batteries by 2033. But McGregor believes market sizing predictions and the recent rush to secure “frequency response contracts” obscure fundamental truths. (Frequency is a crucial parameter in an AC electric power system. Deviations from the nominal frequency are a consequence of imbalances between supply and demand; an excess of generation yields an increase in frequency, while an excess of demand results in a decrease in frequency. Storage with a very fast ramp rate can provide the relatively new ancillary service called frequency response. Storage used for frequency response actually monitors the AC frequency and responds to anomalies, over timeframes of milliseconds. The objective is to keep the frequency as close to the target frequency – 60 cycles per second in the United States – as possible.)

•    McGregor says battery storage as opposed to energy storage is unsustainable – and many of today’s frequency response “arbitrage exploitation” opportunities may not exist in three years’ time. Neither, he says, will some of the assets.

•    “The returns [for frequency response] are currently good. That’s nice, but they are batteries which will degrade and have to be thrown away – and that revenue opportunity will also run away pretty quickly.” McGregor points to California, which he suggests is suffering a lithium hangover. Battery owners that piled into frequency response now spy other revenue streams. But, says McGregor, “they can’t access them because the battery is only warrantied to provide one service – and if they do more it will burn out”. Yet most battery providers offer ten-year warranties. “Lithium is very good if you focus it on a short cycle, not very often. Do that and it will last you ten years,” he says. “But if you try to frequently perform multiple functions, the lithium will be gone in a few years.” That poses a problem, given the need to ‘stack’ revenue streams together to build business cases and secure finance.

•    McGregor thinks the solution is flow-based energy storage, potentially in tandem with lithium or lead acid as a hybrid. “The energy technology, such as a flow machine, is your workhorse. It will handle 60-80% of the work all day long: shifting solar, providing long duration services. Your lithium will provide short spikes of power. Combine the two and the lithium will last ten years, potentially even 15,” says McGregor.
Flow batteries store energy in liquid form. McGregor claims the electrolytes in such batteries “never degrade”, making them “infrastructure assets”. He believes that will bring debt finance into the storage market. “It is very hard to finance a battery. If your battery degrades, you have to throw out 100% of that capital cost. So it is not a long-term asset.”

•    “Utility industry debt finance is what expanded the renewables industry significantly. Storage will be the same,” says McGregor. “All of it is equity financed at the moment. Once you prove that storage is around for 20 years, debt will pile in.” Moreover, when investors realise there are assets that can provide multi-services over decades without degradation, “they will wipe out those short return assets,” says McGregor. McGregor claims current flow paybacks are “seven to nine years, which in terms of an infrastructure asset, is a pretty good return”.