ECJ ruling hits battery storage funds – Gore Street Energy Storage and Gresham House Energy Storage comment on ruling
The European Court of Justice (ECJ) has ruled that the UK’s capacity market mechanism (which enables generators and battery projects to bid for contracts to provide back-up power to the grid during times of peak demand) could be in breach of EU State Aid Rules. As a consequence, the National Grid has temporarily suspended the Capacity Market and payments for all existing agreements. The UK Government has responded by saying that it will be “working closely with the European Commission so that the capacity market can be reinstated as soon as possible“.
The judgement by the ECJ was issued in response to a legal challenge by Tempus Energy, the clean technology firm, which argued that the mechanism for securing back up power in this way unfairly favoured fossil fuel generators over newer, cleaner technologies. The UK government will now seek State Aid approval from the EC for the current or a modified scheme, according to a statement made by BEIS, affirming its commitment to the CM. The statement is available at https://www.gov.uk/government/collections/electricity-market-reform-capacity-market.
Perceived impact on Gore Street Energy Storage
Gore Street says that it views this development as positive as it should ultimately strengthen the importance of electricity storage to the UK electricity market. It says that, although, in the short term, the ruling may have an adverse impact on the future revenues of its projects, if the position on this ruling is not clarified promptly, the board does not expect this to be material in the longer term. In fact, it believes the prospective rebalancing of the mechanism in favour of battery storage generators could have a materially positive revenue impact on the fund.
Alex O’Cinneide, CEO of Gore Street Capital, the investment manager, commented: “We expect that the UK government will propose new rules to the European Commission as quickly as possible and to work to restart this market in the near future. What is clear is that these new proposals will have to be positive for cleaner technologies over traditional fossil fuel generators, and we are therefore encouraged that it will further support the importance of storage to the UK electricity market. Capacity payments were a minor portion of the revenue of the portfolio and so view this on balance as containing positive implications for Gore Street’s portfolio.”
Perceived impact on Gresham House Energy Storage
Gresham House Energy Storage has reiterated its dividend targets of 4.5p in the first full year and 7.0p thereafter and its target return net asset value total return of 8% per annum unlevered and 15% levered.
It says that the immediate impact is that all capacity market contracts are suspended; no further payments will be made under existing contracts and future auctions have also been suspended. Its manager believes the most likely outcome is that current contracts remain and that the matter is resolved prior to the commencement of the contracts. This is because the capacity mechanism is an important product for National Grid in terms of assuring a stable electricity supply by providing reserve power at times of extreme demand.
It points out that several other EU countries, including Ireland, Italy and Poland, have successfully applied for and gained State Aid approval for capacity market schemes similar to the UK scheme in the last 12 months, increasing the probability that the outcome is favourable for the UK government, even if amendments are required.
The vast majority of capacity market payments today are received by thermal generation projects, including large-scale coal and gas-fired plants as well as smaller diesel and gas “peakers”.
Gresham House Energy Storage has just completed the purchase of its seed portfolio. This comprised five operational storage projects totalling 70MW: Staunch in Staffordshire, Lockleaze in Bristol, Littlebrook in Kent, Rufford in Nottinghamshire and Roundponds in Wiltshire, were acquired on 13 November 2018 for a total price of £57,220,000.
The projects comprised in the Seed Portfolio all have capacity market contracts. The first of these starts in October 2019 (for Staunch) and the others all run from October 2021, save for one contract, beginning in October 2020, for half of the capacity at the Roundponds project.
In percentage terms, the capacity market contracts on the seed portfolio are expected to represent only 1% of that portfolio’s revenues in the period between the IPO date and 31 December 2019, approximately 7% of revenues in 2020, and approximately 11% in 2021.
The manager thinks that, if the capacity mechanism is not reinstated or replaced with a similar product, it would accelerate the shift away from baseload generation to an electricity market dominated by renewable energy and flexible generation. This would result in higher and more volatile intraday electricity prices. Such greater volatility would provide an opportunity for owners of energy storage projects to generate higher revenues, which it thinks could fully offset any loss of income associated from the withdrawal of the capacity mechanism.
[QD comment: Uncertainty such as this is unhelpful, especially so early n the life of these funds. Gore Street’s share price has fallen from 99.5p to 97p on the news but the Gresham House fund’s price is unchanged. Hopefully, the managers are correct in their belief that this is good news in the long run. Time will tell.]
GSF / GRID : ECJ ruling hits battery storage funds
