Gresham House Energy Storage Fund is one of the seventeen UK-listed renewable energy infrastructure trusts and currently boasts the best performance over the past 12 months.
It’s still a pretty new company, only joining the market in November 2018.
Most of my stake was bought in Spring and Summer 2019, followed by three smaller nibbles over the course of 2020.
The growing need for battery storage systems
Whereas most renewable energy ITs are focused on generating power from one or more of wind, solar, biomass, hydro, and anaerobic digestion, Gresham House Energy Storage is a little different.
It operates a number of sites across the UK that house lithium-ion batteries. These help National Grid maintain the power network in two ways:
- with services that ensure the nation’s electricity supply remains in a consistently tight frequency range; and
- by capturing excess supply from renewable generation sources and selling it back later on.
Solar and wind are becoming increasingly cost-effective but they are obviously more inconsistent producers than sources like natural gas – the sun doesn’t always shine and the wind doesn’t always blow.
This can lead to large variations in the amount of electricity generated at any one time and greatly increased short-term price volatility.
Power prices can sometimes soar to hundreds or even a few thousand pounds a megawatt-hour (MWh) compared to the more normal price of around £50.
On the flip side, power prices can go negative when there is excess supply from renewable sources, so that means battery operators like Gresham House can sometimes be paid to charge up their batteries. Without these battery storage systems, a lot of the energy generated from renewables would simply be wasted.
Here’s how the generation mix has changed over the last decade:
According to Imperial College, renewables accounted for 42% of UK electricity generation in 2020 surpassing fossil fuels (40%) for the first time. Coal has all but disappeared as a notable generation source and gas could be next.
With the UK passing a law earlier this year to target cutting emissions by 78% by 2035 compared to 1990 levels, we’re likely to see a lot more wind and solar in the coming years as we push to eliminate fossil fuels wherever possible.
Right now, Gresham House reckons there are 1.2GW of suitable battery storage systems operating in the UK. This trust runs around a third of that, making it the largest single operator.
Current UK renewable generation is 48GW with about 15GW more expected to come onstream by the middle of this decade. Gresham House predicts this could translate into the need for 10GW of battery storage systems (so eight times the current level) by 2023.
Too good to be true?
There are risks aplenty here.
Firstly, you are essentially dealing with a single customer in National Grid, with all the usual pitfalls that can entail.
Secondly, rapid expansion and the acquisition of new sites brings execution risk and the risk of overpaying.
On top of that, Gresham House Energy Storage is now getting involved earlier in the process, overseeing the construction of new sites. Although the company reckons this should increase the internal rate of return for the average project by at least one percentage point, there’s more that can go wrong, too.
This is a very new and rapidly changing business. The nature of the frequency services, currently the main revenue source, has changed significantly even since the trust joined the market less than three years ago.
Over time, it is expected trading (i.e. taking excess supply and selling it later) should become the more important of the two revenue streams, but it’s not clear how long the transition process will be.
There’s technology risk, both from the type of batteries used and possible changes to the sources of power generation. With the former, lithium-ion seems by far the most suitable technology right now but the situation is being continually reassessed.
Similar to solar and wind projects, the sites are not owned but operated on a long lease basis. But battery storage system sites tend to be smaller and less intrusive, so you would expect there to be no shortage of suitable locations. I suspect much of the equipment is fairly portable, too, should the need to relocate arise.
The newness of this type of business means the discount rate used by both Gresham House Energy Storage and rival trust Gore Street Energy Storage in their net asset value calculations tends to be higher (10%-ish) than the rates used by more mature renewable energy projects (6-8%).
Higher discount rates mean that future cash flows are valued at a lower level and the resulting NAV is lower as well.
Compared to Gore Street, Gresham House is more UK-focused, about 40% larger in market cap terms, and tends to own 100% of its projects. Gore Street was first to market, though, IPOing six months before Gresham.
Other renewable energy trusts are expanding into this area, notably JLEN Environmental Assets, Renewables Infrastructure Group, and Foresight Solar, with another of my holdings, Bluefield Solar Income Fund, likely to enter the fray soon.
Key stats for Gresham House Energy Storage
- Listed: November 2018 at 100p
- Manager and management firm: Ben Guest/Gresham House
- Ticker: GRID
- Sector: Renewable energy infrastructure (1st out of 13 over 1 year)
- Benchmark: None mentioned
- Recent price: 117.5p
- Indicated spread: 117p-118p (0.9%)
- Market cap: £410m
- Net asset value: 106.7p as of 31 Mar 21
- Premium to net assets: 10%
- Costs: 1.26% OCF, 1.35% KID
- Gearing: 0% (still investing cash from recent fundraising)
- Current dividend and yield: 7.0p (paid for 2020 and target for 2021)
- Results released: Apr (finals) and Aug (interims)
- Dividends paid: Mar, Jun, Sep, Dec
- Links: Website and AIC page
Note that this trust trades on the Specialist Funds Segment of the London Stock Exchange, which denotes it’s intended primarily for professional or sophisticated investors. Some brokers may not let you deal in its shares or require you to jump through some hoops first. Price data as of 10 May 2021.
When Gresham House Energy Storage listed it bought a seed portfolio of 5 assets with a capacity of 70MW.
By the end of 2019, capacity was 174 MW rising to 315MW by December 2020.
COVID delayed some of the trust’s expansion plans but there has been more activity in 2021, taking capacity to 425MW.
In addition, there is 275MW due to start construction soon, scheduled to become operational in the first quarter of 2022. These next five sites should all be funded by what’s left of a £120m fundraising in November 2020.
After that, there are eight more sites, pencilled in to become operational before the end of 2022, which would add a further 527MW.
There are likely to be plenty of tweaks to this plan along the way but, as it stands, it would lift capacity to 1,227MW, nearly triple the trust’s current figure.
You can see from the table above that the sites have become steadily larger over time. The battery size in MWh and export capacity are typically fairly close (i.e. 50MW and 50MWh), meaning it takes around an hour to fully charge or drain each set of batteries.
According to the trust’s manager, Ben Guest, the current state of the market means there’s little to gain from going much beyond the one-hour mark.
Fundraising to date
Renewable energy trusts tend to start pretty small and then go back to the market to raise more and more funds once they have established themselves.
Gresham House Energy Storage has raised the following so far:
|Total / average||373||103p|
At the end of 2020, the trust had cash of £111m on its books and owed £15m in 5% ‘Power Bonds’ issued in October 2020.
It looks like the next fundraising could be a debt one, with Gresham House exploring its options in this regard. The trust has the authority to gear up to 50% of gross assets but says it would be seeking a level of debt “materially below this cap” at this stage.
Ben Guest said on the results webcast that shareholders shouldn’t be surprised to see gearing rise to 30% over time.
The 2020 results had this useful chart showing how monthly revenues have evolved since the IPO:
There are a few distinct stages, beginning with older frequency services in the first several months. Many of the sites were then taken offline for planned upgrades, ensuring they would be ready when the revenue mix shifted more to trading.
COVID caused some turmoil, as it did for many businesses, with power prices falling for several months. Most recently, there’s been a marked increase in the monthly revenue run rate as a new frequency service, Dynamic Containment, began.
The grey bars indicate profit before depreciation and this is now significantly higher than the orange line which shows the estimated level needed to fund the current 7.0p dividend target.
The temporary decrease in revenues meant that the dividend wasn’t fully covered over the course of 2020. It was covered 0.9 times over the whole year but 1.1 times in the final quarter and 1.35 times in the first quarter of 2021.
The above chart doesn’t show the revenue effect of the increased capacity over time as it is measured in pounds per MW per month.
Here’s a breakdown of 2020 revenue by type:
In 2019, revenues were £10m with 75% coming from FFR and 24% from TRIADs. These are both effectively legacy services with Dynamic Containment becoming the single largest revenue source in 2020 despite the fact it only started in October.
Here’s a collection of snippets discussing this new service in the trust’s latest results:
Dynamic Containment has much stricter performance requirements than FFR. In particular, batteries have to respond within a narrower performance range during, ramp up and operation and performance needs to be measured and reported 20 times per second. These tougher requirements versus FFR have been a challenge for a lot of battery operators and as such this service commands a much higher fee than FFR and it is of higher value to National Grid.
Since launch in October 2020, [Gresham House Energy Storage] has dominated this market. Having been the only entrant at launch, it had a 63% share of the market as at 31 December 2020. Through to December 2020 the Company’s investments were able to achieve 99.7% of achievable contract revenues in this service highlighting strong performance to date.
In December 2020, [National Grid] announced increased procurement of Dynamic Containment from January 2021, growing to up to 1.4GW by May 2021 versus 500MW in December 2020. Further, since 27 January 2021, assets have been permitted to trade in a limited way while delivering a Dynamic Containment service, thus allowing sites to earn additional income.
The Dynamic Containment service represents the first of three anticipated frequency response services with the other two being Dynamic Modulation (DM) and Dynamic Regulation (DR). These additional services will emerge out of an internal process at National Grid named Response Reform. These additional services are likely to be introduced towards the end of H2 2021 or early 2022.
So it looks like there could be more to come from this new revenue source although it’s very early days and it could take a little time before it settles into a more predictable revenue stream.
Trading became more important in 2020 but it still only accounted for 10% of revenues. However, one benefit of this is that battery health has remained high across the portfolio as frequency services usually require fewer cycles, putting less strain on the equipment. The battery health range was 96.1%-99.6% across the portfolio compared to 97.1%-100.0% in 2019.
The other operating metric presented is battery availability for frequency services which was 98.8% across the year down from 99.8% in 2019.
We don’t have a lot to compare these operating figures to at the moment but it’s something to keep an eye on for the future. The high 90%s sounds great in isolation of course.
It’s worth noting that nearly £3m came from damages due to new project delays in 2020. I’m not sure how much COVID played a role here but now that the trust is buying assets prior to construction may mean there is less compensation if there project delays in the future.
Net asset value on the rise
NAV calculations for these trusts tend to be more art than science, depending on the assumptions made regarding future cash flows, tax rates, inflation, power prices, and so on.
Shareholders don’t get to see the details behind these numbers so comparisons are typically made with other similar trusts to see if the direction of travel is largely the same.
Here’s how the trust’s NAV has changed over time:
A number of renewable trusts have seen their NAVs reduce recently due to lower power price forecasts and the proposed increase in the corporation tax rate from 19% now to 25% by 2023.
These factors have played a part with Gresham House, too, but have been more than offset by higher asset revaluations, thanks to the discount rate used being lowered from 11.2% to 10.8%.
Gore Street does seem to use a slightly lower discount rate from what I can tell, so that suggests Gresham House is being the more cautious of the two.
As the technology matures, it seems likely the discount rate used will come down a little more although I’m not sure if the gap with other renewable trusts will close entirely. However, it should mean that Gresham’s NAV has a tailwind behind it for a few years.
The current premium to NAV of 10% is also the average for the sector, which ranges from a discount of 3% for NextEnergy Solar to a premium of 17% for Greencoat Renewables and JLEN Environmental Assets.
Dividends held for now
Like many trusts in this sector, the dividend often makes up the bulk of overall returns.
The payout target was 4.5p in 2019, the trust’s first full year, and then 7.0p in 2020. Both of these targets were met.
I was hoping for a gentle increase for 2021 but the target has remained at 7.0p with no obvious hint of when it might rise.
Given the lack of dividend cover in 2020, maybe a cautious approach is being adopted while the trust remains in hyper-expansion mode and the Dynamic Containment market develops.
However, if the high level of dividend cover in the first quarter of 2021 (1.35 times) can be maintained then perhaps we might see an increase in 2022.
The 7.0p dividend is currently being paid in four equal instalments of 1.75p per share with the payment year running from June, September, December, and through to March.
Skin in the game
A notable plus point for me is the holdings of the trust’s management firm and the management team. According to the notes in the accounts:
- Gresham House owns 8.8% (£36m)
- Ben Guest owns 5.74% (£24m)
- Bozkurt Aydinoglu owns 0.57% (£2.3m)
- Gareth Owen owns 0.49% (£2.0m)
It’s good to see this level of detail being disclosed as well, as it’s often missing from many investment trusts.
That said, the percentage holdings look exactly the same as they did in the 2019 accounts so I’m wondering if there’s been a cut and paste error given the number of total shares in issue has increased significantly.
Combined, the four directors own about 87,000 shares worth just over £100,000 in total — and each of them own at least £15,000.
Pleasingly, they’ve more than trebled their collective holding since December 2019, when they owned around 25,000 shares.
Charges for this type of trust tend to cluster between 1% and 1.3% and Gresham House Energy Storage is towards the top end of that.
The management fee is tiered and there is no performance fee:
- 1.0% for net assets <£250m
- 0.9% for net assets from £250m-£500m
- 0.8% for net assets >£500m
The tier should see the annual charge come down a little over the next few years given the trust’s expansion plans.
There’s a lot to take in when assessing trusts like these so it’s often a case of deciding how deep you want to go with your analysis.
I do still feel this is an inherently more difficult business to understand than my other ‘alternative asset’ holdings of HICL Infrastructure and Bluefield Solar.
From what I can tell, though, things seem to be processing pretty smoothly on most fronts. Indeed, Gresham House Energy Storage looks to be leading the way both in terms of size and the range of services it offers.
While the trust seemed to struggle to raise larger amounts in its early days (the IPO was aiming for £200m but ended up at £100m), the chunkier fundraise towards the end of 2020 suggests investors are warming to it.
That said, the sheer amount of money investors have thrown at this sector in recent years — total net assets are now well over £10bn — suggests a little caution wouldn’t go amiss. And there is also the question of whether individuals owning a trust like this has any environmental impact.
The complexity of the power market, the newness of battery storage as a business model, taking on construction risk, and the single-customer factor are the main dangers I see. Consequently, I think this is likely to remain one of my smaller positions for a little while yet and I don’t think it’s one you can simply tuck away in the bottom drawer.
A 27% share price return, including dividends, since the IPO two and half years ago is pretty respectable. While it’s only a percentage point or two ahead of the renewable energy sector as a whole, it’s been achieved with a significant cash drag pretty much the entire time. And Gore Street has returned 21% over three years, although it’s bounced back strongly after a difficult first year.
The annualised NAV return for Gresham House Energy Storage is 8.7% which is just above its ungeared target of 8%. We could see the annualised rate tick up a bit should the trust secure the debt funding it’s evaluating. And more debt funding might also allow the trust to start increasing its dividends from its current 7.0p target level.
Please note that I may own some of the investments mentioned above -- you can see my current holdings on my portfolio page.
Nothing on this website should be regarded as a buy or sell recommendation as I'm just a random person writing a blog in his spare time and I am not authorised to give financial advice. Always do your own research and seek financial advice if necessary!
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