Gore St Energy Storage - Portfolio Addition

Earlier this year, the government decided to up its ambition on climate change and pledged to reduce emissions by 78% by 2035 and totally decarbonise our electricity grid by the same date. This will basically mean less oil and gas and much more renewable energy. More wind - both offshore and onshore and more solar...however the drawback is intermittency so we will require far more energy storage capacity to facilitate the transition.

Renewable energy currently provides over 40% of our energy - up from just 5% a decade ago - and this will only increase as we move to electric vehicles and heat our homes and offices with heat pumps.

There are several ways of storing energy...battery, hydro, flow and hydrogen and we will need at least 20GW by 2030 so quite an increase from the current 1.4GW.

Surprisingly there are still only the two energy storage plays in the UK renewable infrastructure sector - Gresham House (GRID) which joined my portfolio two years ago and Gore St Energy Storage which I have just acquired.

The Set-Up

The fund invests in a portfolio of utility scale energy storage facilities located throughout the UK and more recently Ireland. The fund will have a combined stored capacity of 577MW when the latest acquisitions come on stream later this year. This is rapid growth compared to the 29MW capacity at launch back in 2018.

These facilities provide energy storage for the National Grid and help to provide more stability and flexibility for the entire grid system. The majority of revenues are from frequency response services to the grid. This is mainly dynamic containment which is designed to give a rapid response to significant frequency deviations and then balancing mechanism which is the energy platform used by the grid to buy and sell electricity and manage the system in real time.

As we have witnessed this year, wholesale energy prices have been volatile with gas increasing five-fold due to increased global demand. The company recently announced that this volatility resulted in a doubling of normal revenues for September. This volatility is likely to continue for several months so it will be interesting to see the effect for the energy storage market. Half year results should be out next month.

Alex O'Cinneide, CEO of Gore Street Capital, the Company's Investment Manager, commented:

"It is a critical time for the energy infrastructure systems of the GB and Irish grids as they continue to face new challenges to deliver consistent energy supply, and meet our important obligations towards further onboarding intermittent sources of renewable power. We are only at the start of the growth curve in our industry, as energy storage continues to play an increasingly vital role in balancing energy systems.

Gore Street's portfolio of technologically advanced assets uniquely combined with our in-house expertise of engineering and energy markets, means that we are well positioned to capitalise on the highly attractive pricing available for our services, just as we did when we took first mover advantage and moved our GB portfolio into Dynamic Containment contracts during Q3 2020. We will continue to monitor closely the situation in the energy markets going forward over the Winter months and shall optimise revenue stacking strategies to create additional value for our shareholders."

The company recently raised £74m from a share placing (107p) which will be used to expand the operation with an expected 1GW of capacity in the US and Western Europe.

The trust is attractive to those seeking income and pays 7.0p  in annual dividends (paid quarterly) which gives a yield of 6.0% at the current price.

Conclusion

The global transition to clean energy is now becoming a priority for governments in the UK, Ireland and globally. I expect this to become more urgent in the crucial period to 2030 as we try to curb emissions and limit warming to 1.5C. Energy storage is likely to expand rapidly over the coming decade and will play a pivotal role in the green transition.

One of the factors which has put me off this trust until now has been the relatively high charges - over 3% in 2019/20 incl. performance fee (applied where NAV exceeds a 7% hurdle) but this came down to just under 2% this year and I hope it will continue to become a lower percentage as the company grows. The share price currently trades at a premium to NAV of around 15% which seems to be par for the renewables sector.

GSF share price & NAV past 3 years

The trust is not as sensitive to power prices compared to the likes of the wind/solar infrastructure trusts but benefit more from price volatility which is likely to increase as we continue to reduce our dependence on fossil fuels. The shares were purchased at 115p last week and account for just 2% of my green portfolio.

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation - always DYOR!