Harmony Energy Inc. - Trading Update

Harmony Energy Income Trust

02/02/2024 07:00

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RNS Number : 7841B  Harmony Energy Income Trust PLC  02 February 2024

2 February 2024

Harmony Energy Income Trust plc

(the "Company" or "HEIT")

 

Trading Update

 

Harmony Energy Income Trust plc, which invests in battery energy storage
system ("BESS") assets in Great Britain ("GB"), today provides a trading
update ahead of the publication of its quarterly Net Asset Value update and
audited annual results later this month.

 

Weaker Revenue Environment in 2023 and January 2024

BESS revenues for the year ended 31 October 2023 were markedly lower than
revenue generated in the same period in 2022. Whilst a reduction from the
remarkable highs of 2022 was expected and built into third party revenue
forecasts, the scale and the speed of the reduction has exceeded market
expectations.

There are multiple drivers of this reduction in revenue, both macro and
sector-specific:

·      Saturation of ancillary service markets. The high rate of
build-out of BESS in GB led to saturation of ancillary services and has driven
clearing prices to record low levels.  This was widely anticipated and the
Company positioned its 2-hr duration portfolio specifically to protect against
this event and take maximum advantage of the inevitable shift by BESS towards
wholesale market revenue strategies and the Balancing Mechanism ("BM").

·      Reduction in wholesale power price volatility and spreads. As a
2-hr duration portfolio, this is more relevant to the Company than ancillary
services.  Wholesale spreads in FY 2023 and FQ1 2024 have narrowed primarily
due to a reduction in natural gas prices, itself due to milder than expected
weather and high levels of European reserves.  In addition, GB has imported a
large volume of energy from Europe (via interconnectors) and high consumer
prices have encouraged a material reduction in consumer energy usage.

Wholesale price spreads are forecast by independent experts to increase during
2024 and beyond. This is driven by a range of factors including increased
consumer energy demand (as the cost-of-living crisis eases), continued
electrification of the country's heating and transport infrastructure, greater
penetration of intermittent renewables and an increase in pricing for natural
gas and carbon.

·     Implementation issues with National Grid ESO ("NGESO") Open
Balancing Platform ("OBP"). Another key factor in recent revenue weakness is
NGESO's continued sporadic use of BESS in the BM. Despite a well-publicised
policy and comprehensive plan from NGESO to increase BESS dispatch rates in
the BM via process and software enhancements over 2024 and 2025, the December
2023 launch of the new "bulk dispatch" software was curtailed due to technical
issues. Since its re-launch on 8 January 2024, NGESO appears to only be using
OBP intermittently, with the Company's portfolio seeing some days of high BM
volume, and some of zero.  BESS projects utilise algorithms and AI software
to execute revenue strategies, and so the inconsistent use of OBP by NGESO not
only limits BESS volumes in the BM, but also creates uncertainty over how much
daily capacity BESS can dedicate to other strategies and services.  The
Investment Adviser continues to have dialogue on this topic with NGESO
directly and also via stakeholder interest groups.  NGESO has a published
ambition to operate the GB system with zero carbon emissions by 2025 (i.e.
reducing its use of coal and gas). A consistent use of OBP in relation to BESS
by NGESO would, in the Investment Adviser's opinion, not only help accelerate
NGESO's progress towards this goal, but also result in a near-immediate and
marked increase in the Company's revenue performance.

Despite the conditions described above, the Company's operating Portfolio
continues to out-perform peers (on a £/MW basis).  The Company's Pillswood
(Phase 1) and (Phase 2) projects ranked #1 and #3 respectively for the
calendar year 2023, and every one of the Company's five operating assets
appear in the Top-10 leaderboard for January 2024 (excluding non-BM units and
estimated revenue from the Embedded Export Tariff) (Source: Modo Energy).

Operational free cash flow is forecast to increase in 2024 as the Company's
remaining three projects (c. 236 MWh / 118 MW - c.30% of the current
portfolio) complete construction and begin operations. The Company has
sufficient cash reserves to complete construction of these projects.

In addition, revenues going forward will be supported by the Company's
existing Capacity Market contracts, for which delivery only began in October
2023.

Postponement of First Quarterly Dividend for FY2024, and Strategy for 2024

In line with its stated dividend policy, the Company distributed 8 pence per
share to Shareholders in relation to FY ended 31 October 2023.  The first
quarterly distribution in relation to FY 2024 (2 pence per share) was expected
to be declared later this month and paid in March.  However the Board, with
support from the Investment Adviser has resolved to postpone this declaration.

While the reasons for the recent low revenue environment are understood, and
the market conditions are expected to improve, the short-term outlook remains
uncertain.  If these conditions do continue for an extended period, this will
impact on the ability of the Company to declare and make distributions.  It
is well understood that BESS revenues can vary across the course of a year and
therefore prudent cash management is required.

The Board recognises the importance of dividends to Shareholders and therefore
is preparing to implement a series of short-term actions which would better
position the Company for long-term stability and growth. These actions will
include a restructuring of the Company's existing debt facilities (to reflect
that 70% of the portfolio's MW capacity is now operational), coupled with one
or more asset sales.  Any cash proceeds from such sales would be used, in
priority, to reduce gearing and then to fund future dividend distributions for
FY 2024 and 2025. These distributions could take the form of income and/or
capital distributions.  The ambition of the Company remains the payment of 8
pence per share per annum. Any funds available after the payment of dividends
could be used to repurchase shares. Further updates will be communicated to
Shareholders in due course.

Asset Valuations have been Consistent

Despite the recent weak revenue environment during 2023, it is important to
note that discount rates applied to the Company's "operating" and "under
construction" assets remained stable. Asset valuations have been supported by
long-term average revenue forecasts from independent experts, as well as
evidence of market transactions. The sale by the Company of its Rye Common
asset in September 2023, at a 1.5% premium to the carrying value, is an
example. The Investment Adviser continues to opine, based upon its own
enquiries and intelligence gathered from other industry stakeholders, that
there remains a high level of appetite amongst private investors for BESS
assets, especially whilst 2-hr duration operational BESS projects are
relatively scarce and well-positioned to outperform once revenues conditions
improve.

Full Year Results for the year ended 31 December 2023 Results and Q1 FY2024
NAV

The Company is currently completing the audit of its financial results for the
year ended 31 October 2023 and expects to publish its annual report and
accounts alongside its Q1 NAV for the period ended 31 January 2024 in the week
commencing 26 February 2024.

 

END

 

For further information, please contact:

 

 Harmony Energy Advisors Limited
 Paul Mason

 Max Slade

 Peter Kavanagh

 James Ritchie
 info@harmonyenergy.co.uk (mailto:info@harmonyenergy.co.uk)

 Berenberg                                                        +44 (0)20 3207 7800

 Ben Wright

 Dan Gee-Summons

 Stifel Nicolaus Europe Limited                                   +44 (0)20 7710 7600

 Mark Young

 Edward Gibson-Watt

 Rajpal Padam

 Madison Kominski

 Camarco                                                          +44 (0)20 3757 4980
 Eddie Livingstone-Learmonth

 Andrew Turner

 JTC (UK) Limited                                                 +44 (0)20 3832 3877
 Uloma Adighibe

 Harmony.CoSec@jtcgroup.com (mailto:Harmony.CoSec@jtcgroup.com)

 

LEI: 254900O3XI3CJNTKR453

 

About Harmony Energy Advisors Limited (the "Investment Adviser")

 

The Investment Adviser is a wholly owned subsidiary of Harmony Energy Limited.

 

The management team of the Investment Adviser have been exclusively focussed
on the energy storage sector (across multiple projects) in Great Britain for
over seven years, both from the point of view of asset owner/developer and in
a third-party advisory capacity.  The Investment Adviser is an appointed
representative of Laven Advisors LLP, which is authorised and regulated by the
Financial Conduct Authority.

 

Important Information

 

 

This announcement does not constitute an offer to sell or the solicitation of
an offer to acquire or subscribe for shares in the Company in any
jurisdiction. This distribution of this announcement outside the UK may be
restricted by law. No action has been taken by the Company that would permit
possession of this announcement in any jurisdiction outside the UK where
action for that purpose is required. Persons outside the UK who come into
possession of this announcement should inform themselves about the
distribution of this announcement in their particular jurisdiction.

 

This announcement contains (or may contain) certain forward-looking statements
with respect to certain of the Company's plans and/or the plans of one or more
of its investee companies and their respective current goals and expectations
relating to their respective future financial condition and performance and
which involve a number of risks and uncertainties. The Company's target
returns are a target only and there is no guarantee that these will be
achieved. This Company cautions readers that no forward-looking statement is a
guarantee of future performance and that actual results could differ
materially from those contained in the forward-looking statements.

 

It should also be noted that any future NAV per share announced by the Company
in due course will, in addition to the matters described in this announcement,
also be affected by valuation movements in the Company's Portfolio and other
factors including, without limitation, purchase prices of battery energy
storage systems and components, project development and construction costs,
income and pricing from contracts with National Grid ESO and other
counterparties, the potential for trading profitability in the wholesale
electricity markets and/or Balancing Mechanism, performance of the Company's
investments, and the availability of projects which meet the Company's minimum
return parameters in accordance with the Company's investment policy.

 

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