Gresham House Energy Storage slashes dividend

Gresham House Energy Storage has published a trading update ahead of the publication of its results in April 2024. It says that it is still impacted by a weak revenue environment, due to a combination of:

• battery energy storage (BESS) still being significantly under-utilised in National Grid ESO’s Balancing Mechanism – its forum for trading the necessary amounts of electrical energy to balance supply and demand for each half-hourly period – resulting in ‘skip rates’ remaining high despite the recent launch of ESO’s Open Balancing Platform (OBP), which we discussed here;
• the continued excessive use of legacy gas-fired electricity generation by ESO to provide the Balancing Mechanism with flexible generation which in turn causes oversupply in the wholesale electricity market, reducing the revenue opportunity for BESS; and
• the slower than expected pace of commissioning of new projects to date, due to elongated grid connection times.

The company says that the rising need for battery energy storage as renewable generation increases remains as true as ever. It thinks that the revenue environment will improve, as discussed in the market update below, although there is some uncertainty on the timing and trajectory of such improvement.

Despite problems in securing grid connection at certain projects, the company remains on target to reach 1,072MW in total operational capacity (currently 740MW) and intends to complete a number of extensions to battery discharge durations in 2024, taking the average to 1.6hrs from 1.2hrs, doubling the number of MWh installed over the course of the year.

Dividend cut

Given the constraints on its cash generation, the board and manager are keeping a tight control of capital allocation, focusing on i) capital expenditure (capex), ii) dividend policy, iii) share buybacks and iv) debt facilities.

i) Capex – In 2024, the company intends to solely focus on completion of its 2023 pipeline projects comprising of a further 332MW, all of which are constructed and awaiting completion of grid connection related works, together with the duration extensions already committed to, given the potential for this to meaningfully increase the earnings capacity of the portfolio. A significant amount of this capex is expected to be financed by cash on hand (which stood at in excess of £40m as at 31 December 2023).

ii) Dividend policy – Given the recent difficult revenue environment, the board has decided not to declare a dividend for Q4 2023. In terms of the dividend for 2024, if the current revenue environment endures, it will be challenging to generate the cash required to cover the dividend this year. As such, the board intends to recalibrate the company’s dividend target for 2024, as well as the dividend policy on an ongoing basis to better reflect the predominantly merchant nature of the company’s revenues. A further announcement in this regard will be made as soon as possible and not later than the announcement of the company’s annual results.

iii) Share buybacks – the board confirms its intention to commence a share buyback programme.

iv) Debt facility – The company also intends to enter into discussions with its lenders to seek certain amendments to optimise its debt facility. This may include a reduction in the size of the facility, to reduce the overall cost of funding given the whole of this debt facility may not be required. As of 31 December 2023, £110m was drawn under the £335m debt facility.

Market update

Open Balancing Platform (OBP)

• The launch of the ESO’s OBP took place as planned on 12 December 2023. The system was taken offline on 15 December to address minor technical issues and was relaunched on 8 January 2024.
• OBP is being actively used, and while the volume of trades allocated to BESS has increased since the launch, it remains far below its potential. As such the ‘skip rate’ has remained high.
• ESO has committed to reporting on its progress via its Operational Transparency Forum (OTF) webcast going forward.
• ESO has indicated that it will allocate a rising volume of trades to BESS, as pre-contracting of gas assets declines, which in turn will help increase volumes of trades to the OBP (and therefore BESS).
• Specifically, in accordance with ESO’s Balancing Programme milestones published here, we expected better utilisation of BESS:

1. 1. As BESS capacity in the Balancing Mechanism is seen as being present in sufficient volume for the control room to schedule marginally less gas-fired power. Expected timeframe: February 2024.
   2. As a result of the launch of Balancing Reserve (BR), BESS will be able to pre-contract their capacity in the day ahead market, in a competitive forum, head-to-head with gas-fired generation (for the first time since the small reserve from storage trials in 2020). This will allow BESS to be “seen” and used by the control room ahead of real time. This represents a new revenue stream for BESS while also ensuring less gas-fired power hits the market, leading to lower skip rates in real time. BR is intended to replace Regulating Reserve, through which gas-fired generation is currently reserved, and is expected to be a gigawatt-scale opportunity. Expected timeframe: BR launches 12 March 2024.
   3. Quick Reserve is set to launch in the summer and represents a further revenue opportunity for BESS. It is a service for reserving primarily BESS, to take advantage of their highly responsive capabilities. Expected timeframe: Summer 2024.

Wholesale electricity market

• The impact of gas-fired generation being turned on in order to meet flexibility requirements of the market is leading to oversupply in the wholesale market, and curtailment of renewables, in our view this is distorting half-hourly power prices.
• As gas-fired generation is used less often, gas will supply the marginal demand less frequently. This will result in more volatile power prices, unlocking again the revenue potential for BESS in the wholesale market.

Assets under construction

In terms of recent construction progress, the 50MW/50MWh West Didsbury project has been commercially operational since December 2023. In addition, the 50MW/76MWh York project was energised in mid-January 2024 and is expected to be revenue-generating in February 2024.

340MW of projects are being upgraded with longer life batteries, of which 305MW will have a two hour duration;

• Arbroath (35MW) is being extended to a 1.4h project and work is underway.
• Nevendon is being extended from a 0.4h 10MW project to a 2h 15MW project. This is expected to complete in May.
• Enderby (50MW) and West Didsbury (50MW), both built with extensions in mind, are increasing from a 1h to 2h duration. Works are set to start in March and are expected to take two months.
• Penwortham (50MW) and Melksham (100MW), similarly built with extensions in mind are also being upgraded from a 1h to 2h duration with works expected from April and also expected to take two months.
• Coupar Angus (40MW) is also being upgraded from 1h to 2h and works will commence in around June.

Given the focus on existing projects, the company has decided to defer its investment in Project Iliad, which it intends to revisit once the market backdrop improves. The company is continuing to progress a disposal of a subset of the portfolio and the process is ongoing.

Chair’s comment

John Leggate CBE, chair, commented:

“The challenging environment continues to persist for the battery storage industry in Great Britain as it transitions to a trading-focused business model, having been focused on frequency response until Q1 2023. These conditions, and their effect on revenues, are not unique to GRID. The UK’s need for increased energy storage capacity remains as clear as ever given the rising levels of committed renewable generation coming online over the period to 2030. In turn, clean energy dominates energy output more and more frequently, as legacy gas-fired electricity generation continues to be squeezed off the system by cheaper renewables, with battery storage the clear technological leader in tackling the consequential rising intermittency. The ESO’s efforts to improve access to the Balancing Mechanism for BESS via the Balancing Programme, are clear evidence of this and are welcomed. However, the rollout of ESO’s Balancing Programme must remain on track and enable improved utilisation of BESS, which has yet to manifest in a material way.

Proper utilisation of BESS will also result in lower energy bills for consumers and will accelerate the decarbonisation of our power system. It is therefore a matter of when, not if, BESS become better utilised and fully integrated into the ESO’s operating environment. Similarly, it is also a matter of time before our pipeline is completed and target capacity is reached.

Therefore, the decision to cut our Q4 2023 dividend and reallocate capital in GRID’s shares has been very carefully considered. The current level of the share price represents the most compelling historic opportunity to invest capital in GRID’s shares, and to enhance net asset value per share. It is for these reasons that, in parallel with today’s dividend announcement, we aim to commence a share buyback.

In the meantime, the board is working closely with the manager to continue to position the company to thrive, as further renewable generation comes online and ESO continues to improve battery storage utilisation in the Balancing Mechanism.”

[QD comment: Clearly shareholders will be extremely disappointed by the dividend cut and unnerved by the lack of a turnaround in National Grid revenues that was expected after its software upgrade. The uncertainty about when things will turn for the better is the killer. We would expect that this fund and Harmony Energy will be out of favour for some months to come. Gore Street Energy Storage seems to be in a much better position, however, as it derives much more of its revenue from other countries.]

GRID : Gresham House Energy Storage slashes dividend