Trading Update

Gresham House Energy Storage Fund

01 February 2024

 

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THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION

1 February 2024

Gresham House Energy Storage Fund PLC

("GRID" or the "Company")

Trading Update

Gresham House Energy Storage Fund plc (LSE: GRID), the UK's largest fund investing in utility-scale battery energy storage systems (BESS), today provides a trading update ahead of the publication of its audited annual results in April 2024.

The Company continues to be impacted by the weak revenue environment, due to a combination of:

·    BESS still being significantly under-utilised in National Grid ESO's (ESO's) Balancing Mechanism (BM) - its forum for trading the necessary amounts of electrical energy to balance supply and demand for each half-hourly period - resulting in 'skip rates' remaining high despite the recent launch of ESO's Open Balancing Platform (OBP), one of the key milestones in ESO's Balancing Programme;

·    the continued excessive use of legacy gas-fired electricity generation by ESO to provide the BM with flexible generation which in turn causes oversupply in the wholesale electricity market, reducing the revenue opportunity for BESS; and

·    the slower than expected pace of commissioning of new projects to date, due to elongated grid connection times.

The rising need for BESS as renewable generation increases remains as true as ever. The revenue environment is expected to improve, as discussed in the Market update below, although there is some uncertainty on the timing and trajectory of such improvement.

Also, notwithstanding challenges around the completion of connection works at certain projects, the Company remains on target to reach 1,072MW in total operational capacity (currently 740MW) and intends to complete a number of extensions to project durations in 2024, taking the average project duration to 1.6hrs (currently 1.2hrs), doubling the number of MWh installed over the course of the year. A more detailed update is included below.

In light of the uncertainties and challenges mentioned above, the Board and Manager's aim is to put the Company in the strongest possible position, to ensure it remains cash generative as it manages its way through the current low revenue backdrop and make certain that revenue accretive projects get commissioned during 2024. As previously reported, the increase in operational capacity detailed above would enable the Company to cover its historical dividend on a run-rate basis at depressed revenue levels.

Meanwhile, the Board and Manager are determined to take a proactive and disciplined approach to capital allocation, focusing on i) capex, ii) dividend policy, iii) share buybacks and iv) the Company's debt facility.

i)          Capex - In 2024, the Company intends to solely focus on completion of its 2023 pipeline projects comprising of a further 332MW, all of which are constructed and awaiting completion of grid connection related works, together with the duration extensions already committed to, given the potential for this to meaningfully increase the earnings capacity of the portfolio. A significant amount of this capex is expected to be financed by cash on hand (which stood at in excess of £40 million as at 31 December 2023).

ii)         Dividend policy - Given the recent difficult revenue environment, the Board has decided not to declare a dividend for Q4 2023. In terms of the dividend for 2024, if the current revenue environment endures, it will be challenging to generate the cash required to cover the dividend this year. As such, the Board intends to recalibrate the Company's dividend target for 2024, as well as the Dividend policy on an ongoing basis to better reflect the predominantly merchant nature of the Company's revenues. A further announcement in this regard will be made as soon as possible and not later than the announcement of our Annual Results.

iii)         Share buybacks - Noting the recent sharp decline in the Company's share price, the Board confirms its intention to commence a share buyback programme. Initial buybacks are not expected to exceed any reduction in the dividend. Further details will be announced in due course.

iv)        Debt facility - The Company also intends to enter into discussions with its lenders to seek certain amendments to optimise its debt facility. This may include a reduction in the size of the facility, to reduce the overall cost of funding given the whole of this debt facility may not be required. As of 31 December 2023, £110 million (also £110 million as at June 2023) was drawn under the £335 million debt facility.

In terms of recent construction progress, we are pleased to report that our 50MW/50MWh West Didsbury project has been commercially operational since December 2023. In addition, the 50MW/76MWh York project was energised in mid-January 2024 and is expected to be revenue-generating in February 2024.

Meanwhile extensions of project durations are getting underway. The Company has not previously reported which project durations are being extended. We are pleased to report that a total 340MW of projects are being upgraded, of which 305MW will have a 2 hour (h) duration;

·    Arbroath (35MW) is being extended to a 1.4h project and work is underway.

·    Nevendon is being extended from a 0.4h 10MW project to a 2h 15MW project. This is expected to complete in May.

·    Enderby (50MW) and West Didsbury (50MW), both built with extensions in mind, are increasing from a 1h to 2h duration. Works are set to start in March and are expected to take two months.

·    Penwortham (50MW) and Melksham (100MW), similarly built with extensions in mind are also being upgraded from a 1h to 2h duration with works expected from April and also expected to take two months.

·    Coupar Angus (40MW) is also being upgraded from 1h to 2h and works will commence in around June.

Given the focus on existing projects, the Company has decided to defer its investment in Project Iliad, which it intends to revisit once the market backdrop improves. The Company is continuing to progress a disposal of a subset of the portfolio and the process is ongoing.

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

"The challenging environment continues to persist for the battery storage industry in Great Britain as it transitions to a trading-focused business model, having been focused on frequency response until Q1 2023. These conditions, and their effect on revenues, are not unique to GRID.

"The UK's need for increased energy storage capacity remains as clear as ever given the rising levels of committed renewable generation coming online over the period to 2030. In turn, clean energy dominates energy output more and more frequently, as legacy gas-fired electricity generation continues to be squeezed off the system by cheaper renewables, with battery storage the clear technological leader in tackling the consequential rising intermittency. The ESO's efforts to improve access to the Balancing Mechanism for BESS via the Balancing Programme (BP), are clear evidence of this and are welcomed. However, the rollout of ESO's BP must remain on track and enable improved utilisation of BESS, which has yet to manifest in a material way.

"Proper utilisation of BESS will also result in lower energy bills for consumers and will accelerate the decarbonisation of our power system.

"It is therefore a matter of when, not if, BESS become better utilised and fully integrated into the ESO's operating environment. Similarly, it is also a matter of time before our pipeline is completed and target capacity is reached.

"Therefore, the decision to cut our Q4 2023 dividend and reallocate capital in GRID's shares has been very carefully considered. The current level of the share price represents the most compelling historic opportunity to invest capital in GRID's shares, and to enhance net asset value per share. It is for these reasons that, in parallel with today's dividend announcement, we aim to commence a share buyback.

"In the meantime, the Board is working closely with the Manager to continue to position the Company to thrive, as further renewable generation comes online and ESO continues to improve battery storage utilisation in the Balancing Mechanism."

Ben Guest, Fund Manager of Gresham House Energy Storage Fund plc, added:

"As GRID goes through this low point, we are determined to take the right capital allocation decisions to position the Company prudently. The Manager fully supports the Board's decision to not pay a Q4 2023 dividend and agrees with the need to reposition the Dividend policy, further details of which will be announced soon. We firmly believe that in light of prevailing market conditions, focusing capital on buying back shares and on building out committed pipeline projects is the right approach for the medium and longer term success of GRID and for delivering returns to its shareholders.

"ESO has always said that its Balancing Programme progress will occur in stages during 2024 and we look forward to learning of and reporting on progress, particularly around the imminent launch of Balancing Reserve in March 2024, as well as communicating continued progress on our construction and asset enhancement programme."

Market update

Open Balancing Platform

·    The launch of the ESO's OBP took place as planned on 12 December 2023. The system was taken offline on 15 December to address minor technical issues and was relaunched on 8 January 2024.

·    OBP is being actively used, and while the volume of trades allocated to BESS has increased since the launch, it remains far below its potential. As such the 'skip rate' has remained high.

·    ESO has committed to reporting on its progress via its Operational Transparency Forum (OTF) webcast going forward.

·    ESO has indicated that it will allocate a rising volume of trades to BESS, as pre-contracting of gas assets declines, which in turn will help increase volumes of trades to the OBP (and therefore BESS).

·    Specifically, in accordance with ESO's Balancing Programme milestones published here, we expected better utilisation of BESS:

i.    As BESS capacity in the Balancing Mechanism is seen as being present in sufficient volume for the control room to schedule marginally less gas-fired power. Expected timeframe: February 2024.

ii.    As a result of the launch of Balancing Reserve (BR), BESS will be able to pre-contract their capacity in the day ahead market, in a competitive forum, head-to-head with gas-fired generation (for the first time since the small Reserve from Storage trials in 2020). This will allow BESS to be "seen" and used by the Control Room ahead of real time. This represents a new revenue stream for BESS while also ensuring less gas-fired power hits the market, leading to lower skip rates in real time. BR is intended to replace Regulating Reserve, through which gas-fired generation is currently reserved, and is expected to be a gigawatt-scale opportunity. Expected timeframe: BR launches 12 March 2024.

iii.   Quick Reserve is set to launch in the summer and represents a further revenue opportunity for BESS. It is a service for reserving primarily BESS, to take advantage of their highly responsive capabilities. Expected timeframe: Summer 2024.

Wholesale electricity market

·    The impact of gas-fired generation being turned on in order to meet flexibility requirements of the market is leading to oversupply in the wholesale market, and curtailment of renewables, in our view this is distorting half-hourly power prices.

·    As gas-fired generation is used less often, gas will supply the marginal demand less frequently. This will result in more volatile power prices, unlocking again the revenue potential for BESS in the wholesale market.

The Manager will be holding two webinar and Q&A sessions for investors. During these, Fund Manager, Ben Guest will discuss this Trading Update and investors will have the opportunity to ask questions.

Thursday 1 February at 11:15am - please register here.

Thursday 8 February at 10:30am - please register here.

For further information, please contact:

Gresham House New Energy

Ben Guest                                                                   [phone]
James Bustin

Jefferies International Limited

Stuart Klein                                                                  [phone]
Gaudi Le Roux
Harry Randall 

KL Communications                                                    [e-mail]
Charles Gorman                                                         [phone]
Charlotte Francis
Effie Aye-Maung-Hider

JTC (UK) Limited as Company Secretary                   [e-mail]
Christopher Gibbons                                                   [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 internationally. 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 Ltd, a specialist alternative asset manager. Gresham House is committed to operating responsibly and sustainably, taking the long view in delivering sustainable investment solutions.

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.

DISCLAIMERS

This announcement has been prepared for information purposes only. This announcement does not constitute a prospectus relating to the Company and does not constitute, or form part of, any offer or invitation to sell or issue, or any solicitation of any offer  to subscribe for, any shares in the Company in any jurisdiction nor shall it, or any part of it, or the fact of its distribution, form the basis of, or be relied on in connection with or act as any inducement to enter into, any contract therefor. The merits or suitability of any securities must be independently determined by the recipient on the basis of its own investigation and evaluation of the Company. Any such determination should involve, among other things, an assessment of the legal, tax, accounting, regulatory, financial, credit and other related aspects of the securities.

This announcement may not be used in making any investment decision in isolation. This announcement on its own does not contain sufficient information to support an investment decision and investors should ensure that they obtain all available relevant information before making any investment. This announcement does not constitute or form part of and may not be construed as an offer to sell, or an invitation to purchase or otherwise acquire, investments of any description, nor as a recommendation regarding the possible offering or the provision of investment advice by any party. No information in this announcement should be construed as providing financial, investment or other professional advice and each prospective investor should consult its own legal, business, tax and other advisers in evaluating the investment opportunity. No reliance may be placed for any purposes whatsoever on this announcement or its completeness.

The information and opinions contained in this announcement are provided as at the date of the announcement and are subject to change without notice and no representation or warranty, express or implied, is or will be made in relation to the accuracy or completeness of the information contained herein and no responsibility, obligation or liability or duty (whether direct or indirect, in contract, tort or otherwise) is or will be accepted by the Company, the Manager, Jefferies International Limited (Jefferies) or any of their affiliates or by any of their respective officers, employees or agents to update or revise publicly any of the statements contained herein. No reliance may be placed for any purpose whatsoever on the information or opinions contained in this announcement or on its completeness, accuracy or fairness. The document has not been approved by any competent regulatory or supervisory authority.

Any investment in Company is speculative, involves a high degree of risk, and could result in the loss of all or substantially all of their investment. Results can be positively or negatively affected by market conditions beyond the control of the Company or any other person. Any data on past performance contained herein is no indication as to future performance and there can be no assurance that any targeted or projected returns will be achieved or that the Company will be able to implement its investment strategy or achieve its investment objectives. Any target returns published by the Company are targets only. There is no guarantee that any such returns can be achieved or can be continued if achieved, nor that the Company will make any distributions whatsoever. There may be other additional risks, uncertainties and factors that could cause the returns generated by the Company to be materially lower than the target returns of the Company.

The information in this announcement may include forward-looking statements, which are based on the current expectations, intentions and projections about future events and trends or other matters that are not historical facts and in certain cases can be identified by the use of terms such as "may", "will", "should", "expect", "anticipate", "project", "estimate", "intend", "continue", "target", "believe" (or the negatives thereof) or other variations thereof or comparable terminology. These forward-looking statements, as well as those included in any related materials, are not guarantees of future performance and are subject to known and unknown risks, uncertainties, assumptions about the Company and other factors, including, among other things, the development of its business, trends in its operating industry, and future capital expenditures and acquisitions. In light of these risks, uncertainties and assumptions, the events in the forward-looking statements may not occur and actual results may differ materially from those expressed or implied by such forward looking statements. Given these risks and uncertainties, prospective investors are cautioned not to place undue reliance on forward-looking statements.

Jefferies International Limited, which is authorised and regulated by the Financial Conduct Authority in the United Kingdom, is acting only for the Company in connection with the matters described in this announcement and is not acting for or advising any other person, or treating any other person as its client, in relation thereto and will not be responsible for providing the regulatory protection afforded to clients of Jefferies or advice to any other person in relation to the matters contained herein. Neither Jefferies nor any of its directors, officers, employees, advisers or agents accepts any responsibility or liability whatsoever for this announcement, its contents or otherwise in connection with it or any other information relating to the Company, whether written, oral or in a visual or electronic format. Each of the Company, the Manager, Jefferies and their affiliates and their respective officers, employees and agents expressly disclaim any and all liability which may be based on this announcement and any errors therein or omissions therefrom.

No representation or warranty is given to the achievement or reasonableness of future projections, management targets, estimates, prospects or returns, if any. Any views contained herein are based on financial, economic, market and other conditions prevailing as at the date of this announcement. The information contained in this announcement will not be updated.

 

END