2022 Q3 ESG Market Commentary
ESG Update: Battery Storage Systems
You will be reading enough during these days about the energy crisis facing the UK and although we don’t want to add to the flood of material we feel it’s essential to offer a brief recap to better frame the conversation around renewable energy and storage which is the topic of this quarter’s newsletter.
With the intention of phasing out of damaging pollutants like coal, the UK has built a serious dependency problem with natural gas which today accounts for 40% of our electricity.
The unexpected war in Ukraine as well as insufficient storage capacity has put the energy supply under intense pressure just as winter approaches. After western economies sanctioned Russia to condemn their invasion, the total supply of energy drastically dropped, raising prices. The Kremlin responded by threatening to cut off the energy supply to Europe as a whole, prompting some to buy excess energy in fear of more sanctions. All of this resulted in a shortage of energy and an increase in cost, putting energy supply companies at risk with many having to close down.
To avoid finding ourselves in “perfect storm” events like these it’s essential to think about reliable and independent sources of energy production. Despite the high fixed cost of installation, renewable energy sources such as solar and wind farms offer the lowest marginal cost alternative to fossil fuels.
One drawback of such technologies is their intermittency, the sun isn’t always shining and wind is volatile throughout the year, so we need to develop the capacity to store more of the generated energy which is where battery systems come into play.
Battery Energy Storage Systems (BESS) are devices that enable green energy, such as solar, wind or hydro, to be stored and released when most needed such as at times of higher demand during the day ensuring a smooth supply to industrial, commercial and residential buildings. The dominant storage technology available currently is lithium-ion batteries, employed by operators of large-scale renewable plants. They use algorithms to coordinate production and decide whether to keep or release power depending on the time of day with the ultimate objective of keeping a steady flow.
The UK government estimates that – through the integration of more green power via battery storage technology in the UK energy system – up to £40 billion by 2050 could be saved. Obviously, private capital has once again a very important role to fulfil, and at IPS Capital we invest not only in renewable generators but also in operators of battery storage systems.
In terms of implementing this theme in our portfolio, the BESS sector is newer and smaller compared to green energy production. The sector is comprised of three funds with a combined market capitalisation of around £1.5bn. The largest and most mature fund in this sub-sector is Gresham House Energy Storage, incepted in November 2018 and investing in utility-scale operational BESS in Great Britain.
The investment approach of this fund aims at building multiple revenue streams from the assets to deliver diversified returns. In addition to balancing supply and demand based on changes in the grid’s electrical frequency, the fund can also trade in power markets and take advantage of the daily spread by buying at times of low usage and selling at peak. In a volatile energy market, we expect solid fundamentals as well as growth from this sub-sector since according to National Grid, in order to fulfil the ambitious government plan relating to Net Zero, investments in the space has to grow at least at a rate of 10x in the short/medium term with 15GWh required by 2030 vs the 1.5GWh available today.
In a volatile year where it has been difficult for asset managers to allocate to well performing assets, Gresham House has delivered an attractive total return of 15.1%, and an annualised 15.26% since inception.
Head of Research