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Harmony Energy Income to float with Tesla in initial portfolio

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Harmony Energy Income to float with Tesla in initial portfolio – A new investment company that will invest in UK energy storage assets, Harmony Energy Income, has announced its intention to undertake an initial public offering on the Specialist Fund Segment of the Main Market of the London Stock Exchange, targeting £230m.

The investment objective is to provide investors with an attractive and sustainable level of income returns, with the potential for capital growth, by investing in commercial scale energy storage  and renewable energy generation projects, with an initial focus on a diversified portfolio of battery energy storage systems located in Great Britain.

Harmony has contracted with Tesla Motors in respect of its initial portfolio of battery storage projects, to be acquired on IPO, which will benefit from Tesla’s 2-hour duration Megapack systems and Autobidder AI revenue optimization platform. Harmony Energy Advisors, the investment advisor, will provide investment advisory and operational asset services.

To date, Harmony Energy has developed BESS projects in Great Britain totalling 238.5 MW / 477 MWh of which 41.5 MW / 83 MWh is operational and 197 MW / 394 MWh is in construction.

The prospectus for the proposed IPO is due to be published shortly and the close of the Issue is expected to take place in early November 2021. On admission, the market capitalisation is expected to be c. £254m.

Key highlights

Attractive return profile

  • The Company is targeting a dividend yield of 8 per cent. per annum, payable quarterly from 2023 (increasing from 2 per cent. in 2022).
  • By investing predominantly in ‘shovel ready’ projects, the Company seeks to maximise the opportunity for potential risk-adjusted capital value growth and it is expected by the Investment Adviser that the Company’s assets will benefit from a future fair value uplift once operational.
  • The net proceeds from the Issue are fully committed to the acquisition of the Initial Portfolio (as defined below).
  • Once the net proceeds from the Issue have been fully invested and the projects are constructed and commissioned, the target unlevered net asset value total return for the projects is 10 per cent. per annum over the medium to long-term.

Fixed valuation of Initial Portfolio supported by an Independent Valuation

The acquisition value for the Initial Portfolio is based on a fixed funding requirement of £750,000 per MW on acquisition and is expected to increase to a value of c. £874,000 per MW once constructed, which are supported by an independent valuation, and with the majority of construction and supply costs fixed through the Pillswood Contracts and Framework Agreement with Tesla (as defined below).

Significant secure pipeline of projects

  • On Admission, the Company will acquire a portfolio of five BESS ‘shovel ready’ projects with an aggregate storage capacity of 213.5 MW (427 MWh) from Harmony Energy Limited (“Harmony Energy” and, together with the Investment Adviser, the “Harmony Group”), with an additional 99MW (198 MWh) advanced project to be acquired following Admission, taking the total initial portfolio to 312.5 MW (625 MWh) (together, the “Initial Portfolio”).  
  • In addition, the Company will have exclusive rights to acquire a pipeline of BESS projects of up to aggregate capacity of 687.5 MW, already within Harmony Energy’s control. This will take the Company’s initial target portfolio to 1 GW.
  • The Company has further preferential rights over Harmony Energy’s future projects.

World-leading delivery partner and technology

  • The Initial Portfolio will have the Tesla Megapack 2-hour duration battery systems installed which the Investment Adviser believes has a number of advantages over shorter duration batteries. The Tesla Megapack is a 2-hour duration system, which increases the number of MWh which can be utilised in both the wholesale markets and the balancing mechanism (“BM”), therefore providing greater revenue potential in these markets when compared to a shorter-duration system. In the event that revenues in the ancillary services markets become unattractive compared to wholesale/BM markets, the revenue strategy of the BESS Projects will adjust to focus more on the latter and the 2-hour duration capability which the Investment Adviser believes will provide a competitive advantage over the more common, 1-hour projects operating in these markets.
  • The supply of the batteries from Tesla, together with engineering, procurement and construction (“EPC”) services and on-going operational and maintenance (“O&M”) services are set out in the definitive contracts with Tesla in respect of the 98MW Pillswood Project (“Pillswood Contracts”) and a framework agreement with Tesla with agreed pricing and timing of delivery of the other projects in the Initial Portfolio (the “Framework Agreement”). In addition, pursuant to the arrangements with Tesla, Tesla will provide a 15 year warranty as to the performance of each Megapack system and will implement its Autobidder platform technology in acting as Revenue Optimiser.

Experienced developer with proven track record of delivering BESS projects through construction process

  • The Harmony Energy team has a significant and current track record and experience in developing and delivering renewable energy generation projects and more recently BESS projects. Harmony Energy started working with Tesla in 2016 and engaged Tesla as supplier and EPC contractor in relation to their first and second projects, Holes Bay (7.5 MW / 15 MWh) and Contego (34 MW / 68 MWh), which they developed jointly with FRV.
  • Harmony Energy, together with FRV, recently announced the commencement of work at the 99 MW / 198 MWh Clay Tye site using a system of Tesla Megapack lithium-ion batteries, together with Tesla’s Autobidder AI software for real-time trading and control.
  • The Investment Adviser team has relevant experience in revenue optimisation software development, giving them a high degree of understanding of relevant revenues and the maximization of returns and a network of relationships with a range of additional battery suppliers and revenue optimisers.

Harmony Energy alignment

  • The majority of the consideration payable to Harmony Energy in respect the Initial Portfolio will be satisfied through the issue of c. 23.5 million Ordinary Shares, which will be subject to a five year lock-up period.
  • In addition, key principals of the Harmony Energy management team and their associates will subscribe for in aggregate 2.5 million Ordinary Shares, which will also be subject to a five year lock-up period.
  • The Investment Adviser fee is structured as 0.9 per cent. per annum of the lesser of the Company’s Net Asset Value or average Market Capitalisation, reducing to 0.8 per cent. on amounts in excess of £250 million. No other asset management fees or performance fees will be payable to the Harmony Group.

Experienced, independent and diverse board of directors

The company has established a fully independent, highly experienced diverse Board of directors with energy / BESS expertise, who will oversee acquisitions on behalf of the Company and will monitor the investment advisory and asset services provided by the Investment Adviser. 

Norman Crighton, prospective Chairman of Harmony Energy Income Trust PLC, said: “The Company offers investors the opportunity to invest in a rapidly growing part of the renewables sector; as wind and solar renewable energy projects increase, so too will the need for battery storage energy systems. The nation is becoming increasingly aware of the need to have the right infrastructure in place to secure our energy supplies. As we increase our reliance on renewable power, battery storage will have a crucial role to play. The battery energy storage sector is one that has seen remarkable growth over the past ten years; it will only grow further and the Company will be at the forefront of this growth. The Board believes that battery storage energy systems will be critical in helping the UK achieve net zero by 2050 and we are proud that Harmony Energy is part of ensuring a sustainable future for generations to come.”

Paul Mason, Managing Director of the Investment Adviser, added: “Battery energy storage offers exciting growth, with 1.2 GW built and operating today versus a potential energy storage requirement of up to 43 GW by 2050. Investing in battery storage energy systems requires extensive sector expertise and knowledge, and our team has decades of investment and industry experience.  Battery storage energy systems are a vital cog in the renewable energy value chain. We believe there is enormous potential in the sector and the 2-hour duration battery will be best placed to take advantage of this. We look forward to building out this opportunity.”

ESG commitment

The company’s primary focus in investing in utility scale energy storage projects will help facilitate increased use of renewable energy sources which by their nature are more volatile in supplying energy than traditional energy generation methods such as fossil fuels and nuclear power. An increased reliance on renewable energy sources is only possible, in part, due to solutions such as energy storage assets which can act to balance increasingly volatile supply and demand in the electricity system. The assets in which the Company will invest help deliver energy at the point of use.

The Board, the AIFM and the Investment Adviser have identified the key UN Sustainable Development Goals where the Company can make a positive contribution:

(7) Affordable and Clean Energy

  • Investing in energy storage assets which is essential infrastructure in the provision of renewable energy

(9) Industry, Innovation and Infrastructure

  • Continually looking to improve technologies through which energy storage can be facilitated

(10) Reduced Inequalities

  • Monitoring and managing the Company’s Board and the approach of key service providers to equality and diversity

(12) Responsible Consumption and Production

  • Identifying and managing all ways through which the production and supply of batteries is procured and how waste can be prevented or repurposed including the recycling of Lithium-ion in battery cells

Harmony Energy has placed great importance on positive societal benefits of its activities and investments. Examples of its past and ongoing social initiatives include: annual donations to selected local Parish Councils to support their own community projects; commitments to planting for nature and wildflower conservation, including hedgerow planting on the site of Harmony Energy and FRV’s recently-constructed Contego project; and seeking to promote biodiversity and local ecology on all future projects, where possible given the physical characteristics of the relevant site.

The Board has an ESG Committee to develop and monitor the Company’s ESG performance, alongside the ESG performance of the Investment Adviser. It has also identified key non-financial metrics to monitor its and the Investment Adviser’s performance.

Harmony Energy Income to float with Tesla in initial portfolio

3 thoughts on “Harmony Energy Income to float with Tesla in initial portfolio”

  1. Is there any fundamental difference in the basic infrastructure and power delivery abilities that Harmony intends to use that would place the investor at an advantage as opposed to Gore Street battery investment Fund? Is it merely replicating it to fill large and growing capacity opportunities or is it distinctively different?

    1. We are meeting them later today and will know more then, but essentially all these battery funds are doing the same job. There is significant need for energy storage projects as we increase the proportion of intermittent production from renewables on the grid. It is needed both to stabilise the grid and cover temporary shortfalls in generation. Batteries have an important role in this, but other forms of energy storage will be needed too.

  2. Hi Calvin, we’ll publish something in more detail later in the week, but a key differentiating factor between this fund and the existing players appears to be the new Tesla batteries that it has secured which have a 2 hour duration. This should give them an advantage when it comes to arbitraging power price fluctuations. The high target dividend, extensive pipeline and relatively low management charge look interesting too.

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