Acquisition and UK Capacity Market Scheme

RNS Number : 6709H

Gresham House Energy Storage Fund

16 November 2018

 

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Gresham House Energy Storage Fund Plc (the "Company")

16 November 2018

Acquisition of Seed Portfolio

Gresham House Energy Storage Fund plc (LSE: GRID) is pleased to announce that it has completed the acquisition of the Seed Portfolio, as set out in the prospectus published by the Company on 17 October 2018 and the supplementary prospectus published by the Company on 6 November 2018.

The Seed Portfolio, comprising five operational ESS Projects totalling 70MW: Staunch in Staffordshire, Lockleaze in Bristol, Littlebrook in Kent, Rufford in Nottinghamshire and Roundponds in Wiltshire, was acquired on 13 November 2018 for a total acquisition price of £57,220,000.* The Seed Projects support the Target Dividend and Target Total Return.

The Seed Portfolio was developed by the Gresham House Group and Noriker Power Ltd.

Announcement by the ECJ regarding the UK Capacity Market Scheme

The Company notes the decision of the European Court of Justice on 15 November 2017 annulling the European Commission's decision not to raise objections to the aid scheme establishing a capacity market in the UK.  In effect, the ruling states that the Commission should have done more to investigate whether the UK Capacity Market was in breach of State Aid rules when first introduced in 2014.  This ruling is pursuant to a case brought by Tempus Energy against the Commission in 2012.  The case was specifically in the context of Demand Side Response installations, which Tempus Energy claimed were unfairly disadvantaged under Capacity Market Rules.

In the context of this news, the Company would like to reiterate its dividend targets of 4.5p in the first full year and 7.0p thereafter and its target return net asset value total return of 8% per annum unlevered and 15% levered.

The UK government will now seek State Aid approval from the EC for the current or a modified scheme, according to a statement made by BEIS, affirming its commitment to the CM. The statement is available at https://www.gov.uk/government/collections/electricity-market-reform-capacity-market. 

The immediate impact is that the all Capacity Market (CM) contracts are suspended; no further payments will be made under existing contracts and future auctions have also been suspended.

The Investment Manager is of the opinion that the most likely outcome is that current contracts remain and that the matter is resolved prior to the commencement of the contracts.  This is because the Capacity Mechanism is an important product for National Grid in terms of assuring a stable electricity supply by providing reserve power at times of extreme demand.

It is also the case that several other EU countries, including Ireland, Italy and Poland, have successfully applied for and gained State Aid approval for capacity market schemes similar to the UK scheme in the last 12 months, increasing the probability that the outcome is favourable for the UK government, even if amendments are required.

The vast majority of CM payments today are received by thermal generation projects, including large-scale coal and gas-fired plants as well as smaller diesel and gas "peakers".

The projects comprised in the Seed Portfolio all have CM contracts.  The first contract commences in October 2019 for Staunch and the others all commence in October 2021, save for one contract, beginning in October 2020, for half of the capacity at the Roundponds project.

In percentage terms, the CM contracts on the Seed Portfolio are expected to represent c.1% of Seed Portfolio revenues in the extended first year between the IPO date and 31 December 2019, approximately 7% of revenues in 2020, and approximately 11% in 2021.

In the opinion of the Investment Manager, should the Capacity Mechanism not be reinstated or replaced with a similar product, it would accelerate the shift away from baseload generation to an electricity market dominated by renewable energy and flexible generation.  This would result in higher and more volatile intraday electricity prices.  Such greater volatility would provide an opportunity for owners of ESS projects to generate higher revenues under the asset optimisation model, which in the opinion of the Investment Manager could fully offset any loss of income associated from the withdrawal of the Capacity Mechanism.

In summary, in the Investment Manager's opinion, an electricity market driven more by market forces and less by regulatory mechanisms is likely to reinforce the Company's business model.

The Company will notify the market of further updates as appropriate. 

For further information, please contact:

Gresham House New Energy  Ben Guest		[phone]
Cantor Fitzgerald Europe        Richard Harris Robert Peel Alan Ray		[phone] [phone] [phone]
Montfort Communications Gay Collins / Louis Supple		[e-mail] [phone] / [phone]

Notes to Editors:

Gresham House Energy Storage Fund PLC is a specialist investment company that was established to take advantage of the significant market opportunity for battery-based energy storage systems ("ESS"). It was launched and admitted to trading on the London Stock Exchange in November 2018, having raised equity proceeds £100 million. The invested portfolio comprises five ESS projects, with a total grid connection capacity of 70MW, and is valued at £57.2 million.

The Company has appointed Gresham House Asset Management Limited as its investment manager and AIFM.

The Company is targeting dividend payments of 4.5p per Ordinary Share in respect of the financial year ending 31 December 2019 and 7.0p per Ordinary Share in financial periods thereafter combined with capital growth that, once the portfolio is fully invested, results in an unlevered Net Asset Value total return of 8 per cent. per annum, calculated net of the Company's costs and expenses.**

The Company expects, once the portfolio is fully invested and certain further asset management activities are completed in respect of the ESS projects it holds, to introduce leverage to the portfolio. The Company may borrow an amount not exceeding 50 per cent. of the Company's Net Asset Value at the time of drawdown. The target levered Net Asset Value total return, taking into account the asset management activities, is 15 per cent. per annum, calculated net of the Company's costs and expenses.**

* Not taking into account any debt owed, working capital balances or cash held by any of the Seed Project Companies.

** This is a target only and is based on current market conditions as at the date of the prospectus published by the Company on 17 October 2018 and is not a profit forecast. There can be no assurance that this target will be met or that the Company will make any distributions at all. This target should not be taken as an indication of the Company's expected or actual current or future results. The Company's actual return will depend upon a number of factors, including but not limited to the size of the Issue, the Company's net income and the Company's ongoing charges figure. Potential investors should decide for themselves whether or not the return is reasonable and achievable in deciding whether to invest in the Company. References to leverage refer to the ratio of borrowings to Net Assets.

Unless otherwise stated, capitalised terms used in this announcement but not defined have the same meaning as set out in the prospectus published by the Company on 17 October 2018

 

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