REG - Gresham House Energy - Trading Update

Gresham House Energy Storage FundAnnouncement

07/09/2023 07:00

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RNS Number : 6220L  Gresham House Energy Storage Fund  07 September 2023

GRESHAM HOUSE ENERGY STORAGE FUND PLC

("GRID" or the "Company")

Trading Update for H1 2023

 

·      NAV Total Return of -3.5% as NAV per share declined to 146.66p,
reflecting lower third-party forecasts(1) and a weighted average discount rate
of 10.9%

·      2.5GWh target portfolio before potential disposals (310% growth
vs 31 December 2022) by mid-2025 achievable with no further equity funding

·      Lower H1 2023 revenues due to near-term systems and process
challenges being addressed at National Grid Electricity System Operator (NG
ESO), and cyclically low levels of power price volatility

·      Strong revenue recovery potential from current levels boosted by
growing operational portfolio

Gresham House Energy Storage Fund plc (LSE: GRID), the UK's largest fund
investing in utility-scale battery energy storage systems, is pleased to
provide an update on its performance for the six-month period ended 30 June
2023, ahead of the publication of its half-year results later this month.

H1 2023 highlights

As at 30 June 2023:

§ The unaudited NAV per share was 146.66p (31 March 2023: 156.61p and 31
December 2022: 155.51p) representing an 8.9p decline and a -3.5% NAV Total
Return for the period, driven by the following:

o  -15.5p from lower third-party revenue forecasts 1  (#_ftn1)

o  +3.4p from upward revaluations of projects as they have become operational

o  +1.6p from new Capacity Market contracts

o  +4.0p from higher inflation assumptions

o  -3.6p in dividend payments

o  +1.2p share in other changes

§ Operational MW reached 590MW as of 30 June 2023 while Grendon (50MW), the
Company's first 2-hour project, became operational in July and is now fully
commissioned

§ Weighted average discount rate (WADR) remains at 10.9% as at 30 June 2023
and includes an increase in the discount rate for government backed, Capacity
Market, contract revenues from 5.5% to 6.5%

§ Total debt drawn at the end of period was £110mn from a £335mn facility

§ Cash on hand was £85mn 2  (#_ftn2)

 

H1 2023 Performance

The Manager and the Board remain very positive about the outlook for the GB
BESS market and continue to be excited about maintaining GRID's leading market
position.

At the start of 2023 the UK electricity system included 55GW of operational
renewable generation capacity, of which 44GW was wind and solar. During Q1,
driven by wind and solar, renewables capacity grew by 2.9GW. By comparison,
the size of the energy storage market today is c.2.7GW, and as such the entire
GB BESS market is smaller than the incremental growth in renewables in Q1.
This highlights the widening gap between installed battery storage capacity
and renewables growth, and consequently the fundamental investment
opportunity.

Despite this positive backdrop, while revenues per MW were well above budget
in 2021 and 2022, revenues in H1 2023 have been lower and below budget. The
electricity market has been impacted by reduced demand as consumers face
higher power prices and more supply availability as renewable deployment
continues unabated and legacy power stations are taking longer to be
decommissioned. These fluctuations in supply and demand are expected to
normalise in due course.

Exacerbating the current picture, NG ESO 3  (#_ftn3) has not completed the
modernisation of its control room and associated processes in time to be able
to make effective use of BESS in the Balancing Mechanism (BM), despite the
successful trials demonstrating their potential back in 2020. Instead, despite
being cheaper and lower-carbon assets, batteries are consistently skipped over
in favour of assets such as fossil fuel gas plants. As such, all GB BESS are
earning less revenue than they should from the BM at this time.

Dividend cover, which was 0.6x in H1 2023, is expected to rise to a run-rate
of approximately 1x once the 2023 Pipeline projects are commissioned.
Additional project completions (including duration extensions), a normalised
market backdrop and the BM more effectively making use of BESS are expected to
see dividend cover rise significantly.

NG ESO have publicly committed to resolving the issues affecting BESS usage in
their BM. This starts with the launch, in December 2023, of a new trading
platform in combination with a new optimisation tool for BESS along with
several other upgrades and changes which together are expected by the Manager
to see NG use BESS much more effectively.

NG ESO is holding a key event on 2(nd) October to guide industry participants
through their modernisation program. The Manager has also been closely engaged
with executives at NG ESO in the meantime.

 

Updated Portfolio and Pipeline

The Manager has carried out a thorough review of its strategy over the last
six months to maximise value in the current environment and to continue to
drive the Company's scale and competitiveness. The result is a 1.3GW / 2.5GWh
target portfolio before any potential disposals (+130% / +310% growth
respectively on 31 December 2022 levels) in the next 18 to 24 months with no
additional equity fundraising required.

Over the coming quarters the Manager aims to:

§ Complete construction of GRID's fully funded 1,027MW/1,287MWh 2023 target
portfolio. Due to ongoing issues in the industry 4  (#_ftn4) GRID has seen a
further delay on up to 150MW of construction completions which may slip into
2024 which if they do are expected to be energised in H1 2024.

§ Build at least two new 2-hour projects in GB: Shilton Lane (40MW) which is
due to commission in April 2024 (where construction has been underway for
several months) and at least one more 50+MW, 2-hour duration project in GB
(the project is to be selected from the Manager's pipeline in the near
future).

§ Focus on MWh (vs MW): Instead of growing the GB portfolio faster in MW
terms in the near term 5  (#_ftn5) , the Company will focus on adding c350MWh
by extending the battery duration to up to 2 hours on up to 375MW of existing
projects. This has the benefit of being a quicker route to revenues as the
projects being extended are already prepared for extensions, don't require new
grid connections and require less additional capital.

§ Acquire and build out Project Iliad (c.160MW of solar collocated with
4-hour BESS in California): Due diligence is substantially complete and is now
subject to final DD and negotiations. The deal is expected to be signed in
2023 and construction to commence in early 2024.

The Manager has carried out extensive due diligence with an additional focus
on:

-     US market commercials and project rights requirements

-     the Investment Tax Credit and challenges associated with the current
trade backdrop in the US given certain reliance on Chinese equipment

-     exploring the different approaches to debt financing available in
the US

§ Explore the potential to dispose of certain non-strategic operational
portfolio assets: to raise capital for the accretive transactions above and
increase operational efficiencies.

§ The updated Portfolio & Pipeline is shown below.

 

Company portfolio: Operational, in-construction & pre-construction
projects, and exclusive pipeline

                                      Project Name                         Capacity (MW)  Battery size (MWh)  Operational Status at 30 June 2023  Ownership %
 1                                    Staunch                              20             3                   Operational                         100%
 2                                    Rufford                              7              10                  Operational                         100%
 3                                    Lockleaze                            15             22                  Operational                         100%
 4                                    Littlebrook                          8              6                   Operational                         100%
 5                                    Roundponds                           20             26                  Operational                         100%
 6                                    Wolves                               5              8                   Operational                         100%
 7                                    Glassenbury                          40             28                  Operational                         100%
 8                                    Cleator                              10             7                   Operational                         100%
 9                                    Red Scar                             49             74                  Operational                         100%
 10                                   Bloxwich                             41             47                  Operational                         100%
 11                                   Thurcroft                            50             75                  Operational                         100%
 12                                   Wickham                              50             74                  Operational                         100%
 13                                   Tynemouth                            25             17                  Operational                         100%
 14                                   Glassenbury Ext.                     10             10                  Operational                         100%
 15                                   Nevendon                             10             7                   Operational                         100%
 16                                   Port of Tyne                         35             28                  Operational                         100%
 17                                   Byers Brae                           30             31                  Operational                         100%
 18                                   Arbroath                             35             35                  Operational                         100%
 19                                   Enderby                              50             50                  Operational                         100%
 20                                   Stairfoot                            40             40                  Operational                         100%
 21                                   Couper Angus                         40             40                  Operational                         100%
 Operational portfolio at 30 June 2023                                     590            638

 22                                   Grendon 1                            50             100                 Commissioned: July 2023             100%
 Current operational portfolio                                             640            738

 23                                   West Didsbury *                      50             50                  Target energisation: October 2023   100%
 24                                   Penwortham *                         50             50                  Target energisation: November 2023  100%
 25                                   Melksham *                           100            100                 Target energisation: December 2023  100%
 26                                   York *                               50             75                  Target energisation: November 2023  100%
 27                                   Bradford West *                      87             174                 Target energisation: Q1 2024        100%
 28                                   Elland 1 *                           50             100                 Target energisation: Q1 2024        100%
 2023 / early 2024 target portfolio                                        1,027          1,287

 29                                   Shilton Lane                         40             80                  Target energisation: April 2024     100%
 30                                   Rothienorman                         50             100                 Target energisation: H2 2024        Exclusive pipeline
 31                                   Duration upgrades                    -              c.350               2024                                100%
 32                                   Project Iliad                        160            640                 H1 2025                             Exclusive pipeline
 Target portfolio before potential disposals                               1,277          c.2,457

 33                                   Grendon 2                            50             100                 TBC                                 Exclusive pipeline
 34                                   Walpole                              100            200                 Target energisation: 2026           100%
 35                                   Thurcroft 2                          85             170                 Target energisation: 2026           Exclusive pipeline
 36                                   Elland 2                             100            200                 Target energisation: 2025           Exclusive pipeline
 37                                   Monet's Garden                       50             100                 Target energisation: 2025           Exclusive pipeline
 38                                   Lister Drive                         50             100                 Target energisation: 2025           Exclusive pipeline
 39                                   Bradford West 2                      100            200                 Target energisation: 2025           Exclusive pipeline
 Total portfolio including pipeline         (before potential              1,812          c.3,527
 disposals)

 

2.5GWh funded pipeline represented by the first 32 projects in the table
above. The remaining projects (numbers 33 to 39 above) represent additional
pipeline that would require additional funding. Rothienorman is used as
placeholder for the additional 50+MW 2-hour project that is funded but may be
replaced by one of the other similar sized projects subject to commissioning
timeframes.

*Part of the remaining 387MW targeted for 2023 or early 2024.

 

John Leggate CBE, Chair of Gresham House Energy Storage Fund plc, commented:

"Revenues in H1 2023 have been lower and below budget, therefore impacting
dividend cover. We expect this to return to full cover on a run-rate basis
once 2023 Pipeline projects are commissioned, with cover expected to rise
significantly as National Grid Electricity System Operator resolve issues with
BESS in the Balancing Mechanism, additional projects commission and markets
normalise.

"GRID's US project plans are making progress: due diligence has gone well, and
we aim to sign the Project Iliad deal before the end of 2023, with
construction commencing in early 2024.

"We have also reviewed GRID's strategy in the current environment and continue
to target scale, project deliverability and strategic positioning, with a
1.3GW / 2.5GWh target portfolio before any potential disposals focusing in the
near term on adding MWh duration rather than MW capacity, which is a quicker
route to revenues, with no additional equity fundraising required.

"We are fully engaged with the BESS industry to ensure that National Grid ESO
is taking every step possible to adhere to its promised timeline for the
launch of their new trading platform and process upgrades by this December."

 

Ben Guest, Fund Manager of Gresham House Energy Storage Fund plc &
Managing Director of Gresham House New Energy, added:

"The Energy Storage market is going through a first phase of maturity as the
small frequency response 6  (#_ftn6) market becomes saturated - something we
have expected for years.

"The exciting, much larger trading 7  (#_ftn7) opportunity is ahead of us and
is the reason BESS are being built at scale.

"The fundamental drivers for battery storage continue to be strong, with
growth in BESS capacity continuing to lag the pace of renewables growth. At
2.7GW, more UK wind and solar was added during the first quarter of 2023 than
the existing size of the entire battery energy storage sector.

"Delays at NG ESO in launching the necessary tools for the Control Room is
impacting revenues today. However, we are confident that NG ESO will have
taken the important steps to resolve this in the coming months.

"We therefore believe the Company is set up for a powerful recovery. The
combination of MW and MWh operational capacity growth, careful structuring, an
expected upturn following today's cyclical downturn created by last year's
market gyrations and NG ESO modernising its systems is expected to lead to
strong levels of cash flow and dividend cover".

 

For further information, please contact:

 Gresham House New Energy

 Ben Guest                              +44 (0) 20 3837 6270

 

 Jefferies International Limited

 Stuart Klein                           +44 (0) 20 7029 8000

 Gaudi Le Roux
 KL Communications                      gh@kl-communications.com (mailto:gh@kl-communications.com)

 Charles Gorman                         +44 (0) 20 3995 6699

 Charlotte Francis

Effie Aye-Maung-Hider

 JTC (UK) Limited as Company Secretary  GHEnergyStorageCoSec@jtcgroup.com (mailto:GHEnergyStorageCoSec@jtcgroup.com)

 Christopher Gibbons

                                      +44 (0) 20 7409 0181

About the Company and the Manager:

Gresham House Energy Storage Fund plc seeks to provide investors with an
attractive and sustainable dividend over the long term by investing in a
diversified portfolio of utility-scale battery energy storage systems (known
as BESS) located in Great Britain and in Overseas Jurisdictions. In addition,
the Company seeks to provide investors with the prospect of capital growth
through the re-investment of net cash generated in excess of the target
dividend in accordance with the Company's investment policy.

The Company targets an unlevered Net Asset Value total return of 8% per annum
and a levered Net Asset Value total return of 15% per annum, in each case
calculated net of the Company's costs and expenses.

Gresham House Asset Management is the FCA authorised operating business of
Gresham House plc, a London Stock Exchange quoted specialist alternative asset
manager. Gresham House is committed to operating responsibly and sustainably,
taking the long view in delivering sustainable investment solutions.

http://www.greshamhouse.com/ (http://www.greshamhouse.com/)

Definition of utility-scale battery energy storage systems (BESS)

Utility-scale battery energy storage systems (BESS) are the enabling
infrastructure that will support the continued growth of renewable energy
sources such as wind and solar, essential to the UK's stated target to reduce
carbon emissions. They store excess energy generated by renewable energy
sources and then release that stored energy back into the grid during peak
hours when there is increased demand.

 1  (#_ftnref1) Third party revenue forecasts have been unusually volatile in
recent quarters, reversing previous forecasts which were at their highest
level since IPO at the end of 2022 and at their lowest level since IPO as at
30 June 2023.

 2  (#_ftnref2) Cash on hand includes cash in all subsidiaries of the Company
as at 30 June 2023.

 3  (#_ftnref3) NG ESO is responsible for keeping the lights on as
cost-effectively as possible by making sure that supply and demand is always
in balance. NG ESO does this by adjusting supply and demand as required by
trading capacity available to it (including Batteries) as cheaply as possible.

 4  (#_ftnref4) At least two Independent Connection Providers (ICPs), licensed
contractors who work on the connecting infrastructure between projects and
networks, have gone into administration in H1 2023.  This has created delays
at projects exposed to these contractors and created tight conditions in this
segment of the market. GRID was exposed to one of these ICPs at three projects
but has moved swiftly to new contractors to minimise delays.

(( 5  (#_ftnref5) )) The greatest bottlenecks in the industry are with ICPs
(see 4 above), HV equipment, DNOs and National Grid, so there is a logic to
driving revenues via project duration upgrades as there are no significant
bottlenecks associated with these sorts of works as they don't require new
grid connection works.

 6  (#_ftnref6) Whereby batteries are contracted to address residual
supply/demand imbalances in real time. This market requires up to 2GW of BESS
capacity while the BESS market has now grown to 2.7GW.

 7  (#_ftnref7) Supply/demand imbalances arise all the time in the half-hourly
market and are reflected in the power price creating incentives to trade away
these imbalances, either actively in the wholesale market or relying on NG ESO
in its Balancing Mechanism.

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