Gresham House Energy Storage Fund — Focused on revenues and project completions

Gresham House Energy Storage Fund (LSE: GRID)

Last close As at 19/06/2024

GBP0.67

−0.60 (−0.89%)

Market capitalisation

GBP382m

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Research: Investment Companies

Gresham House Energy Storage Fund — Focused on revenues and project completions

Gresham House Energy Storage Fund (GRID) invests in utility-scale battery energy storage systems (BESS) in Great Britain. GRID and its peers saw sharp share price falls in H223 and early 2024, due mostly to an unexpected decline in revenues and the slower-than-expected utilisation of BESS by the UK’s Electricity System Operator (see our last note). In response to these events, GRID’s manager, Ben Guest, and its board have refocused the company’s use of capital and are now concentrating on maximising cash generation, completing GRID’s near-term project pipeline and reducing debt. GRID’s revenues have already begun to rise and are expected to improve further as new and extended projects come on line and structural changes within the sector play out. Investors may need to be patient while these measures, and improvements to the National Grid’s energy trading platform, take full effect, but the fundamentals of the BESS market are strong, suggesting GRID’s longer-term prospects remain positive.

Joanne Collins

Written by

Joanne Collins

Analyst, Investment Trusts

Investment Companies

Gresham House Energy Storage Fund

Focused on revenues and project completions

Investment trusts
Renewable energy infrastructure

20 May 2024

Price

57.8p

Market cap

£328.9m

AUM

£734.5m

NAV*

129.07p

Discount to NAV

55.2%

*Including income. As at 30 December 2023.

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

155.8p

38.3p

NAV* high/low

155.6p

95.6p

*Including income.

Net gearing at 30 December 2023

13.0%

Fund objective

Gresham House Energy Storage Fund 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 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

With the share price discount at such extreme levels, now may be a particularly good time to acquire or top-up exposure.

There is the prospect of capital growth as pipeline projects become operational and are revalued upwards.

BESS are making a significant contribution to the UK’s transition to net zero emissions.

Bear points

Some investors may be disappointed by the decision to cancel the dividend payments for Q423 and FY24, but the company expects to resume dividend payments in 2025.

Future trading revenues depend on the successful upgrade of National Grid’s trading platform.

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

Gresham House Energy Storage Fund (GRID) invests in utility-scale battery energy storage systems (BESS) in Great Britain. GRID and its peers saw sharp share price falls in H223 and early 2024, due mostly to an unexpected decline in revenues and the slower-than-expected utilisation of BESS by the UK’s Electricity System Operator (see our last note). In response to these events, GRID’s manager, Ben Guest, and its board have refocused the company’s use of capital and are now concentrating on maximising cash generation, completing GRID’s near-term project pipeline and reducing debt. GRID’s revenues have already begun to rise and are expected to improve further as new and extended projects come on line and structural changes within the sector play out. Investors may need to be patient while these measures, and improvements to the National Grid’s energy trading platform, take full effect, but the fundamentals of the BESS market are strong, suggesting GRID’s longer-term prospects remain positive.

Premium/discount to NAV since inception (%)

Source: LSEG, Edison Investment Research

The analyst’s view

The investment case for BESS rests on the integral role they play in the global transition to renewable energy. Regardless of recent volatility and uncertainty in the UK industry, demand for BESS will grow steadily as the UK strives to meet its net zero target. GRID is positioning itself to reap the full benefit of the opportunities available in this expanding sector.

Efforts are underway to increase the utilisation of BESS within the National Grid and this will enhance GRID’s revenues, as will the company’s efforts to increase its operational and trading capacity.

The decision to cancel the final interim dividend payment for FY23 and suspend dividend payments during FY24 disappointed investors, but the company expects to reinstate fully covered dividend payments in 2025.

Those focused on sustainable investments may appreciate GRID’s contribution to the transition to renewable energy. The company also offers the opportunity to invest in real assets that are often difficult to access.

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

GRID: Market leader adapting to challenging times

Confronted by revenue challenges

GRID invests in utility-scale BESS in Great Britain. It is the largest UK-listed investment company investing in this market, as measured by operational capacity, commanding a market share of around 20%. The company seeks to capitalise on the intraday imbalances in electricity supply and demand caused by the market’s ever-increasing reliance on renewable energy, by accessing multiple revenue sources available in the power market. GRID celebrated its fifth anniversary in November 2023.

The company’s performance from inception in November 2018 until 30 June 2023 was strong, delivering an NAV total return of 90% and a share price rise of around 50%. However, conditions in the BESS sector shifted dramatically in the latter half of 2023 and early 2024. GRID and its main UK-listed competitors were adversely affected by a series of challenges to their capacity to generate revenues: a sharp decline in gas prices, a weak electricity market, persistent delays connecting completed projects to the national grid and the slower-than-expected adoption of BESS by the Electricity System Operator (ESO).

The ESO’s new electricity trading system is integral to the grid’s transition from gas-fired electricity generation to renewable energy, as it will improve the efficiency of the Balancing Mechanism (BM), which balances demand and supply within the market, by drawing on energy sources available at short notice. By their nature, BESS are ideally suited to supply energy in such circumstances, and demand for BESS services was expected to rise markedly once the system was launched in December 2023. However, the system encountered early problems and was shut down for several weeks soon after its launch, frustrating the expectations of GRID’s manager, Ben Guest, for an early and significant improvement in trading revenues. In all, the latest available revenue figures show that revenues for the financial year ended 31 December 2023 were £38.7m, down from £62.7m during FY22, while underlying EBITDA for FY23 was £25.8m, down from £48.8m in FY22.

As a result of these developments, GRID and its competitors experienced significant declines in their share prices in H223 and early 2024. GRID’s share price dropped by around 70% over this period, although it has since recovered part of this loss (see the Performance section for details).

But conditions have improved recently, lifting revenues

Market conditions began to improve from March, as the ESO increased its BESS utilisation, in part due to the launch of its Balancing Reserve, which opened a new revenue stream for BESS assets. Trading opportunities have also been expanded. The table below illustrates the recent improvement in GRID’s total revenues, which the manager considers to be ‘promising’, although he notes that overall revenues remain below long-term third-party forecasts.

Exhibit 1: BESS portfolio revenue

Month

BESS portfolio revenue*

(unaudited and rounded to nearest £100/MW/yr)

Fully operational BESS portfolio revenue**

(unaudited and rounded to nearest £100/MW/yr)

January 2024

£40,000/MW/yr

£43,800/MW/yr

February 2024

£37,100/MW/yr

£39,500/MW/yr

March 2024

£47,400/MW/yr

£52,600/MW/yr

1–15 April 2024

£71,100/MW/yr

£77,900/MW/yr

Source: GRID. Notes *BESS portfolio revenue includes all assets that were operational in the period. This includes assets that were in construction, extended commissioning and offline for augmentation works. **Fully operational BESS portfolio category excludes assets in construction, going through extended commissioning, or offline for duration extension works during the period in review. The assets excluded are West Didsbury, Arbroath, Enderby and Nevendon.

Strategic refocus on growth and cash generation

In response to the sharp deterioration in market conditions over recent months, GRID’s manager and its board have announced several measures intended to refocus the company’s use of capital. They are now concentrating on completing and commissioning the company’s existing 2023 project pipeline, increasing the duration of some already operational projects, maximising cash generation and reducing debt. The decision to focus capital on the completion of the near-term pipeline project, which will contribute to earnings in 2024, was announced in January 2024, and once all these projects and duration extensions (shown in Exhibit 2) are finished and connected to the grid, operational capacity is set to rise from 790MW at present to 1,072MW (ie more than 1GW, a significant landmark for the company) by end 2024.

The decision to focus on these near-term projects meant that the previously announced investment in the company’s first foreign project, the US-based Project Iliad has been deferred indefinitely. However, GRID’s chairman said in the company’s recently published annual report that work on the longer-term international and domestic pipeline will be pursued once earnings improve and capital is available.

Exhibit 2: Investment portfolio (as at 17 May 2024)

Existing assets

Location

Capacity*
(MW)

Battery size*
(MWh)

Site type

Commissioning status

Ownership status

1. Staunch

Staffordshire

20

3

Battery & generators, 0.5MW import

Operational

100% owned

2. Rufford

Nottinghamshire

7

9

Battery & generators, symmetrical

Operational

100% owned

3. Lockleaze

Bristol

15

22

Battery, symmetrical

Operational

100% owned

4. Littlebrook

Kent

8

6

Battery, symmetrical

Operational

100% owned

5. Roundponds

Wiltshire

20

26

Battery & generators, 16MW import

Operational

100% owned

6. Wolverhampton

West Midlands

5

8

Battery, symmetrical

Operational

100% owned

7. Glassenbury

Kent

40

28

Battery, symmetrical

Operational

100% owned

8. Cleator

Cumbria

10

7

Battery, symmetrical

Operational

100% owned

9. Red Scar

Lancashire

49

74

Battery, symmetrical

Operational

100% owned

10. Bloxwich

West Midlands

41

47

Battery, symmetrical

Operational

100% owned

11. Thurcroft

South Yorkshire

50

75

Battery, symmetrical

Operational

100% owned

12. Wickham Market

Suffolk

50

74

Battery, 40MW import

Operational

100% owned

13. Tynemouth

Tyne & Wear

25

17

Battery, symmetrical

Operational

100% owned

14. Glassenbury Extension

Kent

10

10

Battery, symmetrical

Operational

100% owned

15. Nevendon

Basildon

10

7

Battery, symmetrical

Operational

100% owned

16. Port of Tyne

Tyne & Wear

35

28

Battery, symmetrical

Operational

100% owned

17. Byers Brae

West Lothian

30

30

Battery, symmetrical

Operational

100% owned

18. Arbroath

Scotland

35

35

Battery, symmetrical

Operational

100% owned

19. Enderby

Leicestershire

50

50

Battery, symmetrical

Operational

100% owned

20. Stairfoot

North Yorkshire

40

40

Battery, symmetrical

Operational

100% owned

21. Coupar Angus

Scotland

40

40

Battery, symmetrical

Operational

100% owned

22. Grendon 1

Northamptonshire

50

100

Battery, symmetrical

Commissioned July 2023

100% owned

23. West Didsbury

Manchester

50

50

Battery, symmetrical

Commissioned Dec 2023

100% owned

24. York

York

50

76

Battery, symmetrical

Commissioned Jan 2024

100% owned

25. Penworthham

Preston

50

50

Battery, symmetrical

Commissioned May 2024

100% owned

Operational portfolio (A)

790

962

Pipeline summary

Pipeline projects

26. Melksham

Wiltshire

100

100

Battery, symmetrical

Target Q1 2024

100% owned

27. Bradford West

West Yorkshire

87

174

Battery, symmetrical

Target Q1 2024

100% owned

28. Elland 1

West Yorkshire

50

100

Battery, symmetrical

Target Q2 2024

100% owned

29. Shilton Lane

Scotland

40

80

Target H1 2024

100% owned

30. Duration upgrades

Various

5

328

2024

100% owned

Total operational or under construction

1,072

1,696

31. Walpole

Norfolk

100

200

2026

100% owned

Total portfolio owned by the company

(pre potential disposals)

1,172

1,896

Source: Gresham House Energy Storage Fund. Note: *Capacity in MW is the flow rate of energy, while MWh is battery size (ie storage capacity). A 1MW connection with a 1MWh battery takes one hour to discharge.

In addition to finalising the near-term pipeline, work is underway to increase the duration of several of GRID’s already operational projects. Duration extensions increase the amount of time a BESS takes to discharge from full capacity, and hence enhance its potential revenue generation. The planned extensions will lift the duration of the upgraded BESS by up to two hours, from current durations of one hour or less. This is particularly important when trading intraday volatility in power prices, and it is a key consideration for the manager given that trading activity is increasing.

Such extensions to existing projects are also a much faster route to revenue increases than the development of new projects, as all the projects involved are already prepared for duration extensions and do not require new grid connections. They offer a comparable return on investment to greenfield projects and the related cost is relatively low (between £10m and £20m in total, according to the manager). Some of the duration extensions are already complete and when all are upgraded, they should add 5MW to GRID’s operational capacity.

However, operational capacity may not quite reach the ultimate level suggested in Exhibit 2, as the manager is considering the disposal of some smaller operational projects, to raise capital and create operational efficiencies. Some negotiations are underway, and further details are expected to be announced over the next month or two.

Dividends expected to be reinstated in 2025

Another key announcement made in January 2024 was the decision not to declare a final dividend for FY23, and to review GRID’s dividend policy for 2024 and beyond. In a subsequent trading update in April 2024, GRID announced that it would suspend dividend payments for 2024. Guest explained that the basis for this move was that commissioning the company’s existing 2023 pipeline projects provides a better return on available capital than dividend payments (or the share buyback programme implemented in February 2024). However, the company aims to reinstate fully covered dividend payments in 2025.

The decision to cancel the Q423 dividend means that shareholders received three interim dividends each of 1.84p, in respect of the first three quarters of the FY23. The last of these was paid in December 2023, and means the total dividend payment for the year was 5.51p, rather than the 7.35p previous foreshadowed. This compares with dividend payments of 7.0p per share paid in each of the three previous financial years.

Debt facility reduced

The decision to redirect cash away from dividend payments also allowed GRID to cancel £110m of debt commitments that are surplus to requirements. This will reduce the facility to £225m, more than sufficient to fund the completion of the existing pipeline. Associated fees could be reduced to around half their previous level.

GRID manager and board confident about the longer term

GRID’s manager and its board insist that the prospects of the BESS industry, and GRID, remain positive. In the near term, the projected increase in GRID’s operational capacity, combined with other developments within the BESS sector, lead GRID’s manager to expect revenues to continue to rise over the remainder of this year. According to Guest, the new and extended projects have the potential to ‘approximately double’ the earnings capacity of the portfolio, compared to FY23 revenues. Once commissioned, these projects will also be revalued, lifting GRID’s NAV (see the Performance section for further discussion).

Trading revenues should also continue to rise as the ESO’s automated trading platform becomes fully operational in 2027, and trading opportunities for BESS increase accordingly. The company is therefore in the process of moving its non-BM assets into the BM to capture these greater revenue opportunities as they become available. (Half of GRID’s operational BESS portfolio was registered in the BM (as at 23 April 2024), and more projects may be registered as value emerges.)

GRID’s is also set to benefit from some longer-term developments. The general move towards renewable energy is inexorable, as the UK pursues its net zero carbon emissions target. And the country’s need for battery storage capacity will continue to increase, given the rising levels of renewable generation coming online. It is estimated that renewables will meet 70% of UK demand by 2027, up from 45% today, increasing the need for the flexible generation BESS provide.

Performance: Hit by lower revenues and system issues

Exhibit 3: Five-year discrete performance data

12 months ending

Total share price return (%)

Total NAV return
(%)

CBOE UK All Companies
(%)

MSCI World High Dividend Yield Index (%)

World Renewable Energy Index (%)

30/04/20

(0.1)

6.2

(17.2)

(7.0)

39.1

30/04/21

24.7

12.5

25.3

13.4

124.8

30/04/22

36.2

31.2

9.1

11.0

(7.5)

30/04/23

15.4

23.5

7.0

(1.2)

(5.1)

30/04/24

(64.0)

(3.8)

7.4

5.5

(30.2)

Source: LSEG. Note: All % on a total return basis in pounds sterling. NAV return based on end December 2023 NAV, the latest available.

Recent events have had an inevitable impact on GRID’s performance. The company publishes its NAV once a quarter, and the latest available NAV is for the financial year ended 31 December 2023. At that date, GRID’s NAV stood at 129.07p per share, down 11.6% from the NAV of 146.08p at end-Q323 and 17.0% lower that the NAV of 155.51p at end FY22. This decline over the past year reflects several factors, most notably the fall in third-party revenue forecasts, which adversely affects project valuations, along with weak revenues from operational projects over the period. In addition, the manager has made further cuts to revenue assumptions for the period covering 2024 to 2026, while the payment of a partially uncovered dividend for FY23 also had an adverse impact. However, the NAV did receive some partially offsetting support from other factors, including upward valuations to new projects as they became operational. Site upgrades also contributed, as did a significant number of additional Capacity Market 12-month contracts, which began on 1 October 2022. Increases in estimated inflation rates also supported the NAV over the period.

Exhibit 4: Investment trust performance to 30 April 2024

Price, NAV and benchmark total return performance, since inception rebased (%)

Price, NAV and benchmark total return performance (%) *

Source: LSEG, Edison Investment Research. Note: *All NAV performance calculations use end-December 2023 NAV, the latest figure currently available. One-year, three-year and since inception performance figures are annualised.

While GRID does not have a formal benchmark and its assets are very different from conventional financial instruments, it is nonetheless of some interest to compare the fund’s performance to the broader UK market. Exhibit 4 uses the CBOE UK All Companies Index as a proxy for the UK market. It shows that while events over the past year adversely affected GRID’s relative performance, the company has outperformed the UK market in NAV terms since inception. (As the Q124 NAV is not yet available, the NAV performance calculations in Exhibit 4 use the end-December 2023 NAV.)

The near-term revenue environment, and GRID’s revenue outlook, remain uncertain, but we can be confident that the company’s NAV will be subject to some positive influences over 2024. Its Q124 NAV is set to benefit from some new revenue contracts, and the share buybacks undertaken between February and April 2024 are accretive to the NAV. As mentioned above, the upward valuations of pipeline projects as they are commissioned will also lift the NAV over coming months.

Discount may present an opportunity to invest at a low price

GRID’s shares usually trade at a premium to cum-income NAV (see chart at the start of the note), but the sharp share price drop over the past six months or so has seen the share price tumble deep into discount territory. The discount reached its widest reading of more than 60% in February 2023, at which point the company initiated a programme of share buybacks to support the share price. These continued until mid-April 2023, after which the company decided to redirect capital to the development of its project pipeline, as discussed above.

These buybacks, combined with the recent improvement in revenues, have, arguably, provided support for the share price. It is also likely that investors have begun to see value in the shares, which one analyst estimates are now trading below the replacement cost of GRID’s BESS assets. GRID’s discount narrowed to around 50% in recent weeks.

For those who share the confidence of GRID’s manager and board in the long-term viability of the battery storage industry and the company’s prospects, the sharp decline in the company’s share price may provide an opportunity to invest at an unusually low price. It may take some time for conditions in the sector to normalise, and for GRID’s revenues to fully recover from recent events, but as and when they do, the company’s share price discount has scope to narrow back towards its historical levels.


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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.

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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.

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Immix Biopharma — All roads lead to NEXICART-2

Immix Biopharma’s Q124 report reflected a period focused on its lead CAR-T asset, NXC-201, targeting amyloid light chain amyloidosis (ALA), which was recently bolstered by incremental NEXICART-1 data. The quarter saw a pick-up in preparatory activities in advance of the US NEXICART-2 trial initiation with the finalization of a manufacturing facility in California and selection of the lead clinical trial site. We await the first-patient dosing, expected in mid-2024. We also expect an update on the addition of the autoimmune indication for NXC-201 by year end. The Q1 operating loss of $5.6m was in line with our expectations, and Immix anticipates it will maintain a cash runway through Q225 ($29.3m cash at hand at end-Q124). Our valuation adjusts to $139.5m or $5.3/share, slightly changed from $142.2m or $5.4/share, previously, with the roll forward of our model and quarterly update.

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