Interest in renewable energy investing has boomed this year as investors look for income and to back the transition to cleaner power and fuel.
As interest in the sector grows, so too do some of the options for savers to invest in and a number of investment trusts are targetting an area of the market considered essential for the future of green power – energy storage.
Two of those leading the way, Gresham House Energy Storage and Gore Street Energy Storage, have dividend yields above 5 per cent and posted total returns of 23 and 20 per cent, respectively, over the past year.
As nuclear and coal power plants are decommissioned, with a growing increase in intermittent renewable energy generation, energy storage funds have become an attractive investment proposition.
Weather-dependent energy sources can suffer from intermittent outages meaning battery storage has emerged as a key solution
Battery energy storage systems (BESS) allow energy from renewables to be stored and then released when customers need power most. Lithium-ion batteries are currently the dominant storage technology for the sector.
The funds investing in this area seek to target a growing need for energy storage, which is considered vital to smoothing out the relationship between the supply of electricity and demand for it.
This is particularly important with renewable energy, as wind and solar power can produce large amounts of energy at certain times and not others.
We look at whether storage funds might be a good way to diversify your portfolio and how the energy crisis is likely to affect performance.
Why invest in batteries?
As of 2020, oil, coal and natural gas still accounted for nearly 80 per cent of the total energy supply. But the 2050 net-zero carbon goals will require a far more diverse mix of energy supplies.
Energy grids will need to allow for higher penetration of renewable energy but there are challenges, chiefly intermittent energy outages on weather-dependent energy sources like solar and wind.
Rapid advancements in battery technology have enabled grid-scale battery storage systems to emerge as a key solution to solar and wind intermittency
Alex O’Cinneide, Gore Street Energy Storage Fund
‘This, combined with a changing power demand, poses a challenge to the overall balancing of networks supply and demand,’ says Alex O’Cinneide, CEO of Gore Street Capital, investor adviser to Gore Street Energy Storage Fund.
‘Rapid advancements in battery technology have enabled grid-scale battery storage systems to emerge as a key solution to solar and wind intermittency, as well as to serve as a pivotal tool in avoiding major grid outages and blackouts.
‘Hence, energy storage not only allows consumer demand to be met, but also enables the integration of renewable energy into the power grid, allowing renewables to represent a greater portion of the energy mix, ultimately contributing to the achievement of our global climate goals.’
Higher prices underlying the current energy crisis will hit consumers but for storage funds they represent an opportunity.
‘The spikes in peak power prices we’ve been seeing, are the result of the growth of renewables. Power price volatility, including price spikes, positively impact our trading revenues,’ says Ben Guest, manager of Gresham House Energy Storage Fund.
When it comes to the investment case, Mick Gilligan, partner at Killik, prefers energy storage to renewable energy generators. He says: ‘I am not so keen on the wind and solar plays as their NAVs are valued using long term power price forecasts, which are very difficult to predict.’
How to invest
Energy storage is still a nascent sector so there are only a few funds that invest solely in it. All three below are investments trusts and their close-ended structure – limited by shares rather than growing or shrinking with outflows – makes them more suitable for this kind of investing than an open-ended investment fund.
However, this does also mean that popular investment trusts such as these can have a share price that trades at a premium to their net asset value – meaning investors must pay more for a share than the stake in assets it represents.
Gresham House Energy Storage Fund (GRID) is the largest listed fund investing in utility-scale battery energy storage systems, with a market cap of £580million. The popular niche investment trust is currently trading on a 16.8 per cent premium.
It looks to provide income over the long term by investing in a portfolio of BESS projects across Great Britain, and the sizes of the projects are such that it allows them to feed into National Grid.
These primarily include those using lithium-ion battery technology but can also include energy storage technology.
It is one of the strongest performers in the AIC’s Renewables sector, having returned 23.1 per cent in a year and 46.5 per cent over three years. The wider sector returned 6.6 per cent and 18.8 per cent respectively.
In its interim report last June it said its NAV increased to £383million or 109.89 pence per share, ‘driven by revaluations of recently commissioned projects, cash retained over and above distributions to shareholders and improvements in third party forecasts’.
In the six months to 30 June 2021, profit and total comprehensive income came in at £36.3million. Total gross equity funds raised was £357.9million as at 30 June 2021.
As with other renewable assets, the holding period for energy storage projects is longer than stock market-based investing: Gresham recommends investors hold for a minimum of five years.
‘The trust now has a 30 per cent share of the UK BESS market and so has achieved scale quite quickly,’ says Gilligan.
‘The UK’s increasing reliance on renewable energy and increasing electrification raises the demand for balanced power transmission and distribution and increased short-term power price volatility. This is a very good backdrop for GRID’.
Gore Street Energy Storage Fund (GSF) primarily invests in lithium-ion battery projects and like Gresham has outperformed the AIC’s Renewables sector. Its share price has returned 17.3 per cent over a year and 44.4 per cent over three years.
At the end of 2021, GSF posted a ‘significant’ rise in NAV from 110.9p on 31 March to 103.3p at the end of September, driven by revenues at the company’s two Northern Irish sites.
Net assets increased to £285.3million as at 30 September from £145.1million a year earlier.
The fund has 15 projects in its portfolio, mainly across Great Britain and Ireland but has said it will consider projects in North America and Western Europe.
In an update this month, Gore Street said it had been ‘flexible’ against the backdrop of historic highs in energy prices as well as volatility, which had been driven by low wind generation, unplanned outages and high gas prices.
‘The continuous scale up of renewable energy generation, and the consequential need for grid flexibility to support such growth, suggests that the market fundamentals will remain supportive, thus sustaining high levels of volatility throughout 2022.’
The trust is currently trading on a 14.3 per cent premium.
Harmony Energy Income Trust (HEIT) listed in November 2021 and is the third energy storage fund to float in London. It is trading on a 2.45 per cent premium.
It is targeting a dividend yield of 8 per cent per annum – but 2 per cent in the first year – with a target total return of 10-12 per cent.
The trust has an advantage in that it uses two-hour batteries while most of the existing stock in Britain is one-hour.
This ‘puts it in a stronger position to take advantage of changes in supply and demand and thereby profit from energy trading,’ says Gilligan.
GRID trades at a 16 per cent premium to NAV while GSF is at a 9 per cent premium. HEIT shares are trading close to NAV which Gilligan says reflects lower liquidity – its market cap is £210m compared to GRID at £576million and GSF at £392million.
It also has a less established portfolio and its yield of two per cent expected this year is lower than the six per cent plus from both GRID and GSF.
On IPO HEIT acquired an initial portfolio of five projects totalling 213.5 MW and two of the initial projects are with Tesla to supply and install two-hour batteries.
Gilligan says: ‘If HEIT can continue progressing as planned, I fully expect to see it rerate before too long.’
ENERGY STORAGE FUNDS
|Market cap (m)
|Ongoing charge (%)
|Gore Street Energy Storage
|Gresham House Energy Storage
|Harmony Energy Income
|Source: AIC (24/02/2022)
How will the energy crisis affect these funds?
Oil prices have rocketed on Russia’s invasion of Ukraine and it has sparked concerns about energy and commodity prices continuing to rise across the board..
What does this mean for renewables and specifically energy storage funds?
O’Cinneide said: ‘On one hand, Russia is a key player in the supply chain of metals such as platinum, nickel, aluminium cobalt, copper, and palladium, and some of these metals are important components of battery cells.
‘On the other hand, the sequence of events seen in the Russia/Ukraine crisis has also shown us a trend of Western nations seeking energy independence from Russia.
‘Germany has since suspended approval for Nord Stream 2 gas pipeline, which would have doubled its reliance on Russian gas. This is where renewables come into play: to set us on a path of long-term national security, nations should focus on supplying the energy needed now while pacing the way for renewables supply chain.
‘The more renewables, the more demand for grid balancing services. Therefore, we envision that a possible outcome of this crisis is a deeper commitment to renewable energy generation and energy storage by western nations, making the business case of the Fund even more compelling.’
What are the risks of renewable energy investing?
For investors considering investing in the broader renewable energy market, where dividends can look highly attractive, there are some things to watch out for.
‘I would highlight long term power price uncertainty and the negative impact of higher interest rates,’ says Gilligan.
‘Many trusts trade at premiums due to the market valuing their income generation more highly than is assumed by the NAV. For example, renewable infrastructure plays like Greencoat UK Wind and Bluefield Solar Income apply discount rates to their cashflow to arrive at their NAVs.
‘In the same way that £100 today is worth £105 or £110 in a year’s time (if you compound it at 5 per cent or 10 per cent), £100 in a year’s time is worth £95 today if you discount it at 5 per cent or £91 today if you discount it at 10 per cent.
‘So, if the market is willing to apply a lower discount rate than the trusts themselves, this results in a high present day value (ie. a premium to NAV).
‘This willingness to apply a lower discount rate seems to have increased as interest rates have fallen and there are fewer alternative sources of income.’
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