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Battery Energy Storage Trusts

A section that we had to omit from this month's newsletter due to space constraints:





Harmony Energy Income Trust (HEIT, 111p) did press on with its ‘C’ share issue and raised £15m against its £130m target, but in the near-term we expect fund-raising to be muted at best and perhaps entirely absent until the new year. HEIT is one of three trusts in the fledgeling battery sector, along with Gresham House Energy Storage (GRID, 164.25p) and Gore Street Energy Storage(GSF, 112.5p), and we had a highly illuminating chat about all three with Charlie Murphy, an analyst at Singer Capital Markets, who has really drilled down into the details of their operations. For a start, there is little doubt about the growing need for energy storage to help the National Grid adapt to renewable energy supply. National Grid has itself estimated it needs about ten times as much capacity available by 2030, and then another 2x-4x that amount by 2050. The problem is that it takes some time to build capacity, construction costs are rising, it is tricky to get grid connections, and there are also considerable issues now with the supply of batteries. The three trusts all have different capital structures, with different operational strategies, but their models have adapted as the market has developed, and Charlie reckons all three will ultimately do quite well. Increasingly, revenue models are focusing on power trading, charging up the batteries at slack times and then selling the power back at peak times when demand and prices are high. Ancillary services are becoming less important, though they still form part of the revenue mix for the moment. The early movers have advantages, and the sector’s immaturity means that good double-digit returns on capital can be earned in these first years, with uplifts to NAV when development projects become operational.


The trusts are all different, with GRID at the top of the tree in valuation terms, on an 11.5% premium to assets. Charlie said that GRID pitches its story well, has the largest operational capacity, is set up for the new generation of two-hour batteries, managing their life carefully, and is considered to have the safest dividend, yielding 4.3%. Next, a little smaller, is GSF on a 4.2% premium to NAV, with a less covered dividend yield of 6.2%, less fully invested, but working its batteries hard to achieve greater revenue for the installed capacity and generating more cashflow, and being less aggressive on forecasts for price. It has also chosen to move into international markets (notably Ireland), the only one of the three to have done so. HEIT is on a 4.9%. discount, much newer, with no operational assets yet, but with scope for marked NAV uplifts and possible share price revaluation as these come on stream from this quarter onwards. You can choose where you want to be on the risk spectrum, as the trusts are priced accordingly, or simply buy all three. The industry and policy risks seem low and these dividends should offer good diversified revenue from fairly reliable cashflows.

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