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James Carthew: Irish deal throws Gore Street Energy a lifeline

11 June 2019

The minnow of the renewable energy sector, Gore Street Energy Storage Fund, has secured £30 million of backing from Ireland’s National Treasury Management Agency, which could double its size.

The minnow of the renewable energy sector, Gore Street Energy Storage Fund (GSF), has plans to expand. It has secured the backing of Ireland’s National Treasury Management Agency, which, subject to certain conditions being fulfilled, will stump up £30 million of new money for the fund, doubling its size.

One of those conditions is that other investors must invest at least £15 million at the same time. If everything goes according to plan, GSF could be on its way to rivalling Gresham House Energy Storage (GRID).

I felt a bit sorry for GSF, which blazed the trail for the battery storage funds but missed its fundraising target by some margin by attracting only £30 million in May last year, only to see GRID rake in £100 million in November and a further £50 million at the end of May this year.

There are other funds investing in this area as well. For example, when I wrote about Aquila European Renewables Income (AERS) two weeks ago, I neglected to mention that it includes battery storage within its remit. AERI successfully raised €154 million (£136 million) in its flotation. This investment area appears to be gaining some traction.

GSF’s share price fell in March when it acknowledged the hit to its net asset value (NAV) from the suspension of the UK’s capacity market mechanism judged by the European Court of Justice to be illegal state aid. Under this scheme, battery operators could have been paid for providing emergency supply to avoid power outages.

This situation needs to be resolved and it may be that a no-deal Brexit provides the answer that the UK government is looking for as the UK could then ignore the ECJ ruling. To be fair, the way that the UK had structured the capacity market was flawed. For example, it was encouraging the creation of new diesel power plants – one of the most polluting forms of electricity generation.

In the absence of a resolution to the capacity market problem, the battery storage funds are focusing on other sources of revenue. In May, GRID made a series of presentations during its fund raising in which it explained how the money these funds – in particular, the need to balance the frequency on the transmission grid; the benefits of spreading periods of peak power generation over more of the day (especially when spikes in production from renewables mean that, even shedding generation from other sources, more power is being produced than is needed); and the money to be made from trading power in spot markets.

GRID points out that there are often periods when the half-hourly spot rate is negative, reflecting attempts to discourage excess production. Battery storage firms can make money by ‘buying’ at negative or low prices, storing the power and selling it again when prices improve.

GRID was after £75 million from its placing, so didn’t quite get as much as it wanted. That could mean that it can deploy its placing proceeds before the 31 March 2020 self-imposed deadline it said it was working towards.

GSF has a £77 million, 160MW pipeline of deals available to it should its fundraising succeed consisting of two Northern Irish projects of 50MW each and a further two projects of 30MW each in the Republic of Ireland.

It says that the potential returns from these projects are ‘significantly higher’ than the 10%-12% returns (before fees and overheads) it was aiming for back in May 2018 when it came to the market. in addition, it says there is another 190MW of projects that it could target if it had the cash.

Commendably, GSF has said that it will not dilute existing shareholders by issuing shares at a discount. That presents it with a problem though as the share price is 83.5p and the last published NAV is 91.9p.

That problem may not be insurmountable, however. It is likely that there is only a small overhang in monetary terms at least of stock weighing on the share price. Every other trust in the renewable energy sector trades at a premium above NAV. In GRID’s case this is 4.5%.

Yes, GSF has disappointed early investors, but the fundraise and the Irish deals could prove transformational. They will greatly alleviate the illiquidity in the fund’s shares, which could help narrow the 5% spread between its bid and offer price.

They will, assuming GSF’s estimate of potential returns is correct, help underpin its dividend target for the current financial year of 7p per share, equivalent to an 8.4% yield on the current share price and 7.6% on the NAV. It will also help drive down the fund’s ongoing charges ratio.

I would like to see GSF succeed in its ambitions, it is always good to have a few competing trusts to choose from and I fear that, if it can’t expand, GSF may struggle to survive.

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