Gresham House Energy Storage Fund — Capacity augmentations the priority for 2025

Gresham House Energy Storage Fund (LSE: GRID)

Last close As at 02/12/2024

GBP0.51

0.30 (0.59%)

Market capitalisation

GBP290m

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Research: Investment Companies

Gresham House Energy Storage Fund — Capacity augmentations the priority for 2025

Gresham House Energy Storage Fund (GRID) invests in utility-scale battery energy storage systems (BESS) in Great Britain. The company recently hosted a site visit for analysts and investors to its 50MW capacity Enderby plant in Leicestershire, which included updates from GRID’s Manager Ben Guest, Deputy Manager James Bustin and Chairman John Leggate. This note outlines the day’s key takeaways, and subsequent news that gives the company more scope to pay dividends from distributable reserves if required.

Joanne Collins

Written by

Joanne Collins

Analyst, Investment Trusts

Investment Companies

Gresham House Energy Storage Fund

Capacity augmentations the priority in 2025

Investment trusts
Renewable energy infrastructure

23 October 2024

Price

47.85p

Market cap

£272.3m

AUM

£621.2m

NAV per share*

109.16p

Discount to NAV

56.2%

*Including income. As at 30 June 2024.

Yield*

0.0%

*No FY24 dividend expected.

Ordinary shares in issue

569.1m

Code/ISIN

GRID/GB00BFX3K770

Primary exchange

LSE

AIC sector

Renewable Energy Infrastructure

52-week high/low

111.4p

38.2p

NAV* high/low

146.1p

95.6p

*Including income.

Net gearing at 30 June 2024

1.4%

Fund objective

Gresham House Energy Storage Fund aims 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 located in the UK and Ireland. In addition, the company seeks to provide investors with capital growth through the reinvestment of net cash generated in excess of the target dividend.

Bull points

Efforts during H124 have stabilised revenues and increased operational capacity.

The company’s forthcoming capital markets day will reveal plans for further growth.

With the share price discount still at an extreme and arguably unjustified level, now may be a particularly good time to acquire or top-up exposure.

Bear points

The upgrade to NESO’s trading platform is taking longer than expected, and this is adversely affecting access to trading revenues.

Future expansion plans are dependent on the availability of funding.

A lack of infrastructure to support the generation and distribution of solar and wind power may slow the UK’s transition to renewable energy.

Analyst

Joanne Collins

+44 (0)20 3077 5700

Harry Kilby

+44 (0)20 3077 5700

Gresham House Energy Storage Fund is a research client of Edison Investment Research Limited

Gresham House Energy Storage Fund (GRID) invests in utility-scale battery energy storage systems (BESS) in Great Britain. The company recently hosted a site visit for analysts and investors to its 50MW capacity Enderby plant in Leicestershire, which included updates from GRID’s Manager Ben Guest, Deputy Manager James Bustin and Chairman John Leggate. This note outlines the day’s key takeaways, and subsequent news that gives the company more scope to pay dividends from distributable reserves if required.

Aerial photo of the Enderby site

Source: Gresham House Energy Storage Fund

GRID’s managers are currently focused on the completion of the company’s 2024 construction pipeline of new projects and augmentations to several already operational projects, including the Enderby plant, which hosted the recent site visit. All these works are on schedule to be finished by the end of 2024. The augmentation of Enderby’s batteries is already complete. Once concluded, the capacity of GRID’s operational portfolio will increase from its level of 790MW at the time of the interim report (up 14.5% from end December 2023) to over 1GW for the first time, with an average battery duration of 1.6 hours (see our last note).

GRID’s board and managers remain positive about the outlook for the BESS sector, given the inexorable global transition to renewable energy, which is dependent on BESS to store energy until it is required. The team also expects the current issues with the National Energy System Operator’s (NESO’s) energy trading platform to be resolved with time.

This confidence is reflected in their keenness to increase capacity further in coming years. It is clear from comments made by the managers during the site visit that the managers’ priority in 2025 will be further augmentations to GRID’s existing operational projects. Their objective is to lift the current average duration of 1.6 hours to two hours. This plan was foreshadowed in the company’s H124 results, which were released in September, and would add 300–400MWh to existing capacity of 1,701MWh.

Boosting battery duration is already lifting revenues

Augmentations offer several benefits. Primarily, they are a very cost-effective way of increasing capacity. Battery prices are falling, and Manager Ben Guest recently said that augmentations represent ‘an exciting revenue opportunity’ for GRID. The managers have seen revenues from two-hour augmentations almost double compared to one-hour batteries. This is because the longer duration batteries can capitalise on both the morning and evening peaks in electricity demand. Sensitivity analysis undertaken by the managers shows that, on average, every £150,000 spent on battery augmentation would bring £30,000–40,000 in additional revenue per annum, so augmentations effectively pay for themselves within four years. The returns from augmentation at Enderby have been higher, as the site already had spare batteries.

At a practical level, augmentations are quicker to implement than constructing new projects from scratch, in part because the time-consuming process of connecting batteries to the national grid has already been done. In addition, the majority of the augmentation work can be undertaken without significant outages, as at least 50% of each site can remain operational. Finally, in theory, increasing the duration of a battery should increase its life, as discharging a battery over a longer period reduces wear and tear.

November’s CMD will detail project plans and financing options

In addition to these augmentations, the managers have also signalled their wish to resume work on GRID’s longer-term construction pipeline. However, these plans all require financing. The company is due to hold a capital markets day (CMD) in November, at which it will give more information on its construction plans, and possible funding sources.

One potential source of funding is asset sales. During the Enderby site visit, the managers confirmed that they are continuing their efforts to raise capital from the disposal of one or more projects from their operational portfolio. They say there is significant interest from the market, and discussions are ongoing, but no agreements have been reached.

Another possible source of funding is higher revenues, either from augmentations, or from further tolling agreements similar to the one struck this year with Octopus Energy (see our last note for details). Such tolling agreements do limit potential revenue upside, by dedicating battery storage capacity at a set price and time period. This limits opportunities to take advantage of more lucrative, but short-term opportunities, especially from trading. However, tolling agreements offer the prospect of steady revenue streams at rates above the spot price, so there is a balance to be struck between these considerations.

The managers indicated that they are also considering co-investment opportunities as a further means of funding their growth plans. Any developments on this front will also be revealed at the CMD.

An update on the dividend policy expected at the CMD

The CMD and the forthcoming three-year plan are also expected to provide more information on GRID’s revised dividend policy. The company suspended dividend payments in February this year as the revenue environment worsened, to free up cash to fund the 2024 construction programme and the initial round of battery augmentations. However, the board understands that returning capital in the form of dividends is important to many shareholders, and, as indicated in the recent H124 report, the resumption of dividend payments in 2025 remains ‘a key priority’.

As announced on 22 October, a decision by the High Court of Justice of England and Wales may assist with the board's desire to resume dividend payments. The High Court confirmed the cancellation of GRID's share premium reserve and B ordinary shares arising out of the capitalisation of the company’s merger relief reserve (the ‘Reduction in Capital’).

In a statement announcing the High Court’s decision, GRID said that the ‘purpose of the Reduction of Capital is to provide the Company with a significant pool of reserves which can be used in the future, if required, to fund dividend distributions, returns of capital or to provide flexibility for any other general corporate purposes, in accordance with applicable law.’ 

Shareholders will be looking to the CMD and three-year plan for further detail on any resumption of dividend payments, and how the board will balance the desire to resume dividend payments against the possibility of using this newly available pool of reserves and revenues to fund further capacity expansion.

We will provide a further update after the CMD.


General disclaimer and copyright

This report has been commissioned by Gresham House Energy Storage Fund and prepared and issued by Edison, in consideration of a fee payable by Gresham House Energy Storage Fund. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

This report has been commissioned by Gresham House Energy Storage Fund and prepared and issued by Edison, in consideration of a fee payable by Gresham House Energy Storage Fund. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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