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There are many clean energy technologies that, on paper, should be a slam dunk for investors. Yet in reality, their rollout is fraught. Electric vehicles are a prime example. In Britain, battery storage has also fallen into that category.
Britain’s desire for renewable energy to form the backbone of its electricity system by 2030 creates an obvious need for batteries. As such, a number of specialist investment trusts listed on the London market from 2018 onwards focus on lithium-ion battery projects.
But the share prices of the two investment companies focused solely on the British battery market, Gresham House Energy Storage Fund and Harmony Energy Income Trust, have plummeted since the start of 2023. They trade at discounts of close to 50 per cent to their net asset value.
True, green investment trusts generally have had a difficult few years as high inflation pushed investors towards lower-risk, high-yielding government bonds and cash products. Power prices fell to pre-Ukraine war levels much faster than expected.
Battery storage funds, though, trade at bigger discounts to diversified peers. This can be explained by their greater reliance on market prices than, say, offshore wind developers. The latter seek government contracts that guarantee a price per unit generated to cover a good slug of expected output. For batteries, the opportunity comes from storing electricity when prices are cheap and later selling high.
Battery storage developers also complain that Britain’s electricity system operator frequently “skips” batteries and calls on more expensive gas-fired power stations when there is insufficient renewable generation. The ESO admits this does happen — and blames ageing computer systems. An upgrade, though, will not be fully operational until 2027.
In the meantime, battery storage trusts face revenue uncertainty. Gresham recently marked down its NAV per share by 15 per cent to reflect lower forecasts. The focus has turned to cash preservation: both Gresham and Harmony earlier this year suspended their dividends.
Sensibly, both are trying to increase income from contracts. Gresham has just struck a deal to in effect lease battery capacity to Octopus Energy. This will fix revenues for the next two years on more than 50 per cent of Gresham’s portfolio, notes Edison’s Joanne Collins. This should contribute to £43mn of annualised contractual revenues for the length of the agreement. By contrast, total first-half revenues were less than half of that, at £17.9mn.
This should help with the aim of restoring shareholder payouts. But the bigger question will be how battery trusts can fund growth. Raising equity and taking on more debt look difficult. Battery funds look stuck at a slow rate of discharge for a few years yet.
