Low power, please charge: Battery storage troubles leave investors on the hook

Developing the UK’s battery storage capacity is crucial to the green transition. 

One of the downfalls of renewable energy, such as wind and solar, is that it is beholden to the elements and can’t always provide a continuous output of power. 

But if that renewable energy can be stored in batteries when it isn’t being used, suddenly it becomes a lot easier to call upon in times of high demand. 

So beginning in 2018, a number of specialist battery storage investment trusts, along with many of the big energy players, jumped on the opportunity to invest in and develop swathes of battery storage facilities. 

However, the three main listed battery storage investment trusts in the UK have had a terrible start to the year. 

The Gresham House Energy Storage Fund has seen its stock price fall 49.7 per cent since the beginning of January, while Harmony Energy Income Trust is down 56.2 per cent, after they both decided to cancel their fourth-quarter dividends. 

The third main competitor in the space, Gore Street Energy Storage Fund, has been somewhat spared due to its more international focus, but even its share price has dropped 27.7 per cent since the beginning of the year.

However, their share prices have been struggling for some time. 

Rupert Robinson, managing director of Gresham House, said in an investor call last week that the last month has been a “pretty chastening experience”.

However, he was confident that downturn in revenues in the battery storage sector were a “painful one time shift”, and that the dividend cancellation was part of a “cautious approach” to ensure the trust would not run out of cash.

But why are revenues falling in the battery storage sector? 

Running out of power?

Battery storage firms make their money by selling energy to the grid, which is purchased by the National Grid’s Electricity System Operator (ESO).

The ESO’s tool for buying the right amount of electricity the system needs is known as the balancing mechanism. 

In effect, it is a continuously open auction where power suppliers, such as battery firms like Gresham, Harmony, and Gore Street or major gas companies submit bids to supply power to the ESO. 

But Ben Guest, managing director of Gresham’s trust, explained to CityAM that the software behind ESO’s balancing mechanism has a legacy preference to default to fossil fuel-linked bids. 

“The balancing market is operated in order of merit, so if you’re competitive, you should be used,” Guest said, but “gas-fired stations with storage have been there for decades, and the grid is used to dealing with them.”

“We didn’t have an appreciation of the high skip rate because there was no transparency on that information at the time,” Guest said. “We assumed the system would work around us… [we were] naive perhaps.”

In Harmony’s recent announcement that it would be postponing its dividend, the trust said the fall in natural gas prices and more players in the battery storage market was also making the bidding process more competitive. 

National Grid declined to comment, but it is understood that it is upgrading its software to make greater use of battery assets. However, there isn’t a concrete timeline for when this upgrade will be completed. 

Are the trusts safe?

The declining revenues from battery storage assets has dented the valuations of these trusts. 

The valuations are now so low, questions are being asked about whether the trusts might face a takeover attempt or be pressured to sell assets. 

The market signal right now is either the battery funds are in some kind of distress or the overall market should not be invested in. That’s obviously nonsense and highlights an overreaction in the performance of the share price.

Ben Guest, managing director of Gresham’s trust

“The market signal right now is either the battery funds are in some kind of distress or the overall market should not be invested in. That’s obviously nonsense and highlights an overreaction in the performance of the share price,” Guest insisted. 

Elliott Hardy, who works as an analyst at investment trust specialist Winterflood, told CityAM that “the jury remains out” regarding demand for the trusts’ shares, given their recent volatility.

Between the trusts, Hardy said Harmony looked in “a relatively good position to attract attention for its assets” but warned that a takeover might be tricky due to the high debt burden of the trust. 

At the start of this month, Gresham took the controversial step of beginning to buy back its hugely discounted shares – money that could have otherwise been used to invest in its portfolio of assets.

Guest said: “We are trying to send a message without confusing investors. We basically got quite a lot of signals from other investors going ‘you have got to buy back stock and now you’ve got to focus and pay down debt’,” he said. “We’re trying to do logical things with the circumstances that we’re living through.”

“We’ve got a pipeline [of battery storage assets] that’s going to double our revenue generating potential roughly this year, so that’s really, really important to get right this year,” Guest added. 

The struggle of the three firms does not change the fact that the National Grid ESO is, in some respects, tied to them.

A recent note from investment bank Stifel stated that Gresham, Harmony and Gore Street represent roughly one-third of the UK’s battery operational capacity.

This, the bank said, means “their messaging to the grid is likely to be taken seriously.”

How long it will take for the National Grid ESO to start making changes and buying more of their power, however, remains to be seen.