Trading Update

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 forecasts¹ 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]

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]

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] 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] 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], 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 disposals)		1,812	c.3,527

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] market becomes saturated - something we have expected for years. 

"The exciting, much larger trading[7] 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	[phone]
Jefferies International Limited Stuart Klein Gaudi Le Roux	[phone]
KL Communications Charles Gorman Charlotte Francis Effie Aye-Maung-Hider	[e-mail] [phone]
JTC (UK) Limited as Company Secretary Christopher Gibbons	[e-mail]  [phone]

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/

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.

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[1] 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] Cash on hand includes cash in all subsidiaries of the Company as at 30 June 2023.

[3] 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] 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] 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] 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] 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.

 

END