Yesterday saw the first day of trading by the Gresham House Energy Storage fund, under the ticker GRID on the specialist funds segment of the LSE. The shares were issued at 100p and Gresham House raised £100m which will be used to acquire a seed portfolio of 70MW. The fund will have exclusivity over an additional 132MW ready to build projects and a further pipeline project of 80MW is currently in an advanced stage of negotiation. The fund is aiming to pay a dividend of around 7p per annum after an initial 4.5p in the first year.
I have to say this is rather good news, not least because I am a non-executive director on this new fund. Readers of this blog won’t want to hear me talking up a fund in which I’m involved too bullishly but I do think it is important I share with readers why I decided to join the board of this excellent fund.
Quite apart from the fact that I was impressed by Gresham House and the manager Ben Guest, for me, there is a much bigger narrative at work – explained in the three charts below, which are taken from the prospectus.
We are at the tipping point of a new electric grid. You don’t need me to tell you, dear reader, that electric cars and lorries and planes and maybe even boats (OK, possibly not the last), are coming down the track fast. Government’s are serious about making the green, lower carbon emission shift and they are also serious about shutting coal-fired power stations and increasing renewables. They are allegedly serious about nuclear base load, but the private sector seems far less thrilled at the risks attached. The first chart tells the story of the changing power mix over the next few decades. Renewable energy usage will increase. If JC and Labour get into power, that transformation will be even swifter, but the direction of travel remains the same.
The traditional structure of the power industry has been based on baseload power generation by big coal plants, topped up by gas and a few energy storage projects lurking in the mountains of Wales.
As renewables make their slow but inexorable way to output dominance, we’ll be faced with a base power conundrum.
We’ll be shutting the last few dirty, coal-fired power stations.
We’re also not building enough nuclear power stations (a tragedy in my view).
Gas can, of course, help fill the gap but the new investment is nowhere near enough.
Which leaves renewables which produce power on a less than predictable basis. This has a knock-on impact on the live power trading markets, where we are seeing intraday spreads rapidly increase – the subject of the next chart.
The important point here is that there are now two crucial energy storage solutions, based on battery technology. The first is general first frequency response on a day to day basis, to make sure that the grid is balanced and technically tip top.
But the chart below suggests another, almost merchant capital like possibility. Notice that power rates are increasingly going negative. This means that on some parts of some days the price of wholesale power actually goes negative. The drivers of this are obvious – wind blows at certain times and solar isn’t much use in the dark. Sadly, in winter much of the demand is when solar contributes nothing and wind turbines are idle. So, prices can peak at certain times and then crash at other times. Surely, there’s an opportunity here to charge up a bunch of batteries when prices are negative and then discharge them when they are positive?
At which point we of course then encounter the Tesla point. Talk to everyone and their Grandma and they’ll say “isn’t that lovely man in America churning out lots of cheap batteries” to help solve this challenge. He is of course, but so is everyone else, as battery prices keep tumbling. Which speaks to my third chart below which shows how the price of battery cells is steadily falling. I’ve heard general price depreciation of around 20 to 30% per annum based on existing technology. But this also ignores any radical new technologies that may come along which might cut costs even lower. This disruption is I think, a near certainty but at industrial scale, my hunch is it is still quite a few years away.
In which case you could buy lots of efficient batteries, situate them in the right place with the right permits and at the right scale and then use them to feed in power when needed and drain power from the grid when demand is low.
Batteries won’t, of course, be the only solution. Gas peakers and diesel engines will have a place as will transmission lines from other countries (France, Iceland…) and who knows maybe even a whole new generation of smaller scale nuclear power stations. All of these are solutions (over the longer term), but the scale of the challenge is huge. We have a market where demand for electricity is set to grow as all those electric vehicles hit the road whilst we also buy more and more gadgets which gobble up ever more electricity. The imbalance is obvious and has the potential to turn into a crisis unless properly planned. In the meantime, there’s a real opportunity for a more opportunistic solution that can be deployed speedily, at scale and make a profit. Using batteries.
Anyway, if you want to find out more about the newly listed fund visit Gresham House’ website at http://newenergy.greshamhouse.com/funds/esf/
Or you can download the prospectus HERE –