The UK’s beleaguered listed battery storage sector has found itself thrust back into the spotlight this week after a group of funds, controlled by Foresight Group, launched a surprise bid for Harmony Energy Income Trust (HEIT).

The Foresight funds’ bid trumps a previous bid from Drax Group for HEIT at 88p per share. Drax’s offer had the backing of HEIT’s board, but its directors have withdrawn their support and have proposed adjourning the meetings that had been called to allow the deal to proceed. Instead, the board has now given its endorsement to the Foresight funds’ offer at NAV – 92.4p per share.

At the time of writing, HEIT’s share price is up 9.8% on the day and very early indications are that this deal could finally refocus investors’ attention on a sector that has endured a bruising 18 months. Underlying fundamentals appear to be turning a corner and there could be an opportunity in the other battery storage funds.

Sector under pressure

GSF, GRID, and HEIT have all seen their shares fall substantially from their peaks, largely on the back of weaker-than-expected revenue generation. Income from ancillary services – supporting services that are essential for the electricity such as: maintaining the real-time balance between electricity supply and demand, frequency regulation, voltage control, and recovery from outages – were once the sector’s bread and butter. However, the revenues from these softened considerably as National Grid reformulated its procurement strategies, which increased competition and reduced pricing power for battery operators.

The dynamic containment service (this is part of frequency response – along with dynamic containment), which had previously been a high-margin, reliable income stream for the battery storage funds, has seen saturation – in short, there are currently too many batteries chasing too little revenue.

Meanwhile, attempts to pivot towards wholesale trading and the capacity market have been volatile and operationally complex. These require sophisticated strategies and round-the-clock trading desks – something that works well for large operators – which may partly explain Foresight and Drax’s interest in HEIT – but tends to be less feasible for smaller players.

Prior to the bidding activity for HEIT that began in March (which you can read more about here and here), all three London-listed battery energy storage funds – Gore Street Energy Storage (GSF), Gresham House Energy Storage Fund (GRID), and HEIT – were trading on wide discounts to net asset value (NAV), battered by revenue volatility and a more cautious market backdrop.

The interest in HEIT has seen that fund’s discount narrow dramatically – from just over 40% at the end of November 2024, to a 3.9% premium at the time of writing – and it would appear that the market is not completely oblivious to the reads across to both GSF and GRID, whose share prices are up 4.7% and 4.8% respectively, on the day, at the time of writing. However, even after accounting for these uplifts, GSF and GRID are still trading at discounts to NAV of 39.9% and 40.1% respectively. Even in the absence of a bid, progress is being made to resolve the problems the battery storage funds have faced and these discounts look significantly overdone.

Drax – yet to declare themselves out

Foresight’s offer effectively gazumps Drax, whose interest in HEIT stems from its desire to vertically integrate clean energy solutions into its supply model. However, there remains a credible possibility that Drax could return with an improved offer, particularly if it sees strategic value in HEIT’s project pipeline and operating assets, which align well with its push into “dispatchable” zero-carbon generation. However, any revised bid would likely need exceed the price offered by Foresight to win over HEIT’s board and shareholders – especially now that a viable alternative is on the table.

Foresight’s offer effectively gazumps Drax, whose interest in HEIT stems from its desire to vertically integrate clean energy solutions into its supply model. However, there remains a credible possibility that Drax could return with an improved offer, particularly if it sees strategic value in HEIT’s project pipeline and operating assets, which align well with its push into “dispatchable” zero-carbon generation. However, any revised bid would likely need exceed the price offered by Foresight to win over HEIT’s board and shareholders – especially now that a viable alternative is on the table. Given that Drax has deeper pockets than Foresight and ambitions to grow its renewable platform, a counterbid cannot be ruled out. The fact that HEIT’s shares are currently trading at 3.62p above Foresight’s offer price suggests that the market considers there maybe another leg in this battle. The potential read across is that GSF and GRID’s c40% discounts could be potentially even more attractive and both should be relatively digestible for either of the current bidders – GSF has a market cap of trading at just under £300m, while GRID comes in a bit larger at just over £350m, although GRID is an easier mouthful to swallow as it is more geographically concentrated. It is possible that the Foresight fund’s offer could be the starting gun for a new phase of industry consolidation, possibly drawing other potential bidders into the fray.

Implications for GRID and GSF

Both GRID and GSF have sought to weather the revenue downturn by focusing on new revenue streams, including arbitrage, capacity markets, and longer-duration projects that may benefit from evolving system needs. GRID, in particular, has been vocal in calling for market reform and more sophisticated revenue stacking.

However, like HEIT, both funds face capital constraints. With equity issuance largely off the table due to their wide discounts, funding growth and maintaining balance sheet strength is a real challenge and mergers or strategic partnerships could offer route to scale and stability.

The long-term case for BESS assets remains compelling

While recent revenue disappointment has dampened enthusiasm, the long-term case for BESS remains compelling. The UK’s net zero strategy depends heavily on batteries to smooth intermittency from wind and solar, and National Grid ESO forecasts a need for over 20GW of storage by 2030. That’s a huge leap from today’s installed base – and the listed funds are among the few players with operational track records, land, and grid connections – the latter being a bottleneck in expanding the installed base for batteries and renewable energy infrastructure more generally.

Foresight’s approach for HEIT might not be the last word and both GSF and GRID’s discount look compelling, particularly if the pursuit of HEIT turns out to be the beginning of a broader shakeout for the battery storage funds. With valuation gaps, strategic suitors circling, and regulatory reform on the horizon, we could see more movement in the months ahead.