The building blocks of a new energy economy are slowly slotting into place. The foundation stones were laid many years ago with the huge wave of investment in renewable energy production technologies, notably on and offshore wind power and solar panel farms. This has resulted in an explosion of output from green energy sources. Next step came the reinvention of the humble lithium ion battery as a source of powering not only phones but also new cars (Tesla, chief amongst them). This has turbocharged investment in all manner of battery technologies, with Tesla’s new home storage units just one small example of change. But the new energy grid has also resulted in increased volatility in terms of power output wind and solar power don’t always produce the right amount of energy on the right days and times. Somehow, we need to build a more robust and decentralised grid where power can be turned and off in a matter of seconds – and crucially we’ll need a system that could cope with a potential six-fold increase in peak grid demand. Cue the rise of energy storage.
I’ve talked to a number of entrepreneurs who’ve been running around the country touting the latest evolution of the humble container – as hosts of dozens and dozens of lithium-ion based energy storage units. The idea is actually none too complicated. Pack lots and lots of lithium ion batteries into the humble container, hook it up on one end to a source of power and then on the other end to an output that ends up with the grid. As renewables provide intermittent and unpredictable power, these new battery units can be used as one (small part) of a robust baseload system.
And clearly, there’s a policy objective at work as well. If we want a cleaner, greener grid, we’ll need this distributed back up power – with attractive market pricing for the right operators who can get the right sites, now. So, all that’s needed is a source of finance with the right contracts in place to build or buy these container units dotted around the country.
Enter a new fund which has just gone live with its IPO. It’s called the Gore Street Energy Storage fund and is looking to raise upto £100m to fund a rollout of across the UK. Crucially this is another yield co play – the targeted yield is around 7% of NAV after year 1, with a steady proposed dividend cover of 2.95 times cash earnings. According to the managers behind this proposed new fund, the IRR on these projects should be around 10 to 12% per annum. The main counterparty for the fund will be National Grid and the fund’s managers are keen to emphasise that their revenue projections are NOT reliant on government subsidies or exposed to power price fluctuations. Two trade based strategic investors are pumping money into this putative fund – NEC, a lead supplier of batteries is investing either 10% of the proceeds or £8m and Nippon Kei (an engineering business) is investing £6m. Three seed assets have been identified including one in Yorkshire which is co-located next to an industrial mining operation – this talks to the need of industrial businesses to have their own backup source of uninterruptible power.
This is the first of its kind and my guess is that it will have a receptive audience, especially amongst those income-based investors who want a source of dividends that isn’t overly reliant on government subsidy. If the existing renewable funds are any measure, this new fund might eventually trade at a modest (5%) premium to NAV although the size of the fund will matter hugely – if fund raising doesn’t hit its target and the fund only raises say £50 to £80m, it might be regarded as subscale. Nevertheless, my suspicion is that won’t happen and this will be seen as a useful diversifier for income-focused renewables investors.
You can see more details at www.gsenergystoragefund.com.