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QD view – more power to battery growth story

This week, Gore Street Energy Storage published its annual results, and I had a call with Alex O’Cinneide who is the investment adviser to the fund.

10x bigger in just two years

We wrote about Gore Street Energy Storage back in June 2020. Back then, the share price was just over £1 and the market cap of the fund was about £55m. Today, the share price is 121p and the market cap is over £580m. What’s more, shareholders have been earning some pretty chunky 7p per share dividends.

The NAV per share rose by 6% over the 12 months ended 31 March 2022 and this helped drive an NAV total return of 13% for the year. The company now has 21 projects with a total capacity of 668.3 MW of which 291.6 MW is operational.

The impressive expansion of the fund over the past couple of years reflects the global need for investment in energy storage as we dedicate more of our energy generation efforts to renewable sources in the fight against climate change. Renewables like solar and wind produce energy intermittently. The plant that takes up the slack when renewable supply drops can take a little while to fire up and so battery storage helps fill in the gaps. Battery storage helps stabilise the frequency on the electricity grid too.

Keeping the lights on

Gore Street’s facilities are helping to keep the lights on in Great Britain and the island of Ireland, and the company has recently been expanding into areas such as Germany and Texas (which is investing heavily in renewables). The market dynamics are fairly similar across all of these markets, although the regulatory setup does vary. Gore Street spent a long time getting comfortable with the regulations in Germany and Texas before making its move.

Gore Street’s battery facilities need to be reliable, and so it puts a great deal of emphasis on the quality of its operations and maintenance activities. Pleasingly, it is outperforming against targets. Lucrative new contracts from the National Grid added to revenues too. The average revenue per MW in the assets in Great Britain was 18.3% higher than the adviser’s forecast at the start of the year.

The fund’s last capital raise was in April this year, when it raked in £150m from investors – double the amount it was originally looking for, demonstrating the popularity of this fund. Gore Street now has £175m to spend, and Alex says we should expect to see an announcement or announcements in coming weeks about the deployment of this money.

Building the portfolio

A sizeable proportion of the fund’s portfolio (63% as at 31 March 2022) is in assets that are under construction. Alex foresees this scenario persisting for some time yet. He wants to continue to raise money to grow the fund and expand the portfolio and believes there is no shortage of projects available, especially given the fund’s expansion into new territories.

This week’s announcement said that the fund is actively reviewing opportunities in GB, Ireland, Western Europe, North America and Australia. The total pipeline stands at about 1.7 GW (two and a half times the size of the current portfolio) with transactions in exclusivity or advanced negotiations amounting to about 495 MW.

Once the construction phase for assets is complete and they become operational, the risk attached to these projects falls. That should translate into an NAV uplift for the fund.

There are some constraints to getting assets built currently. A global shortage of key components such as transformers and inverters (but not batteries) is holding up some projects. It can also take some time to secure connections to power grids. Managing these constraints is an important part of the investment adviser’s job.

Rise of the underdog

To me, this is the story of the underdog come good. The three battery funds have almost £1.5bn of assets between them now. Gore Street offers the highest yield of the three currently, and trades on a more reasonable premium than its main competitor, Gresham House Energy Storage.

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