Gresham House Energy Storage (GRID) has published a trading update and the highlights of its three-year plan, which were presented at its capital markets day on 27 November 2024. In its trading update, GRID says that its financial position is improving. Its capital allocation policy in 2024 has focused on cash preservation which it says has allowed it to manage through the recent challenging operational backdrop. It adds that prudent capital deployment is expected to result in its installed MWh capacity growing 116% from 31 December 2023 through to Q1 2025, with a 13% increase in total capital.

GRID expects to generate around £45mn of EBITDA in 2025, two thirds of which is contracted, creating revenue visibility. GRID’s focus on disposals to allow it to reduce its debt continues while current debt arrangements remain in place, although it will maintain compliance with its debt terms, with net debt expected to peak at 20% of gross asset value. GRID has commenced a process to refinance its existing debt facilities with new sustainable amortising debt to align with launch of GRID’s new 3-year plan (see below) which envisions the transition of its portfolio away from a primarily merchant asset base and sizing debt off contracted revenues

GRID says that it is aiming to set a valuation benchmark that proves its NAV. As part of this it is looking at an equity investment into 50MW Glassenbury project, which is under exclusivity that is expected to close in the first quarter of 2025. GRID is targeting a pre-money valuation at the project’s current valuations, which is reflected in its NAV, adding that the prospective investment provides funding for an accretive augmentation to a 4-hour duration.

Plans to reinstate GRID’s dividend policy

GRID says that it expects to reinstate its dividend policy in 2025 once the current debt has been refinanced. The future dividend policy will be focused on providing sustainable, fully covered dividends (after costs) comprising three smaller quarterly distributions with a final larger payment linked to performance. If EBITDA reaches £45-55m in 2025, cashflow per share is expected to be in the region of 4.5-6.2p.

Clean Power 2030

Clean Power 2030 is the Labour government’s commitment to decarbonise the UK’s energy system by 2030 and aims to increase the UK’s energy security by significantly reducing the UK’s dependence on fossil fuels and replacing them with renewable energy sources. This plan shows a strong commitment to BESS in Great Britain, requiring some 22GW of BESS and up to 81GW / 99GWh of Long Duration Energy Storage (LDES).

GRID says that BESS sector fundamentals are providing tailwinds including: The National Energy System Operator’s (NESO) Open Balancing Platform (OBP) rollout; continued growth in wind & solar generating capacity; ongoing demand growth – for example, electric vehicles are just 4% of cars on UK roads; slower UK BESS growth in 2024 is expected to result in less competition in the near term; baseload capacity has decreased with coal fired generation now offline and it says that the gas and nuclear fleets set to shrink [QD comment: while this is probably true in the short term, it is clear that Britain will need to expand its nuclear fleet to meet its clean power commitments as well.]; and the long duration storage cap and floor opportunity adds a new dimension to the BESS industry as well.

GRID’s three-year plan

GRID has set itself a target of achieving £150mn EBITDA. It says that, subject to a successful refinancing, its indicated level of £45m of EBITDA during tolling period is targeted to increase as follows:

• 2025-2027: 1.5GWh augmentation of existing portfolio targeting incremental EBITDA of £33mn
• 2026-2027: 680MW targeting incremental EBITDA of £47mn
• 2025-2027: Increased revenue stack: agreement in principle reached; targeting EBITDA of £25mn

The above does not assume any improvement in the trading backdrop, which is based on £45,000 per MW per year for uncontracted projects.

With regards to the debt refinancing, GRID says that experience tells it that only low leverage is appropriate on merchant revenues. However, long-term revenue contracts are now emerging and a “blended approach route to market” looking forward means that debt can now be sized off these long term contracted revenues while maintaining an uncontracted asset base to capture upside potential. GRID adds that project financing with contracted revenues significantly reduces risk of unexpected drops in revenues and provides a more stable platform for optimising GRID’s capital structure and payment of future dividends. It says that potential returns remain strong thanks to project financing offering a lower cost of capital and unlocks growth through augmentations and its new pipeline.

Comments from John Leggate CBE, chair of GRID

“Following a review of the Company’s performance over recent years and a considered view of the outlook for the coming three-year period, the Board and Manager are able to offer a positive view that the BESS sector in the UK is turning a corner and is on a path to improving performance. The underlying rationale is based on:

• The UK’s Net Zero policy and regulatory regime becoming progressively more favourable to BESS
• NESO’s operating practices, as the Operational Balancing Platform rollout progresses, more opportunities are created for BESS
• The Company has significantly reduced counterparty risk with NESO by reducing merchant revenue exposure by c.50%
• The recently launched process to refinance should move from debt servicing based on merchant revenues to one where the debt is sized off contracted revenues and amortised over a longer term

Therefore, taking these factors into consideration, the Board and the Manager are feeling more confident of delivering growth for the Company and re-instating the ability of the Company to pay covered dividends during 2025.”