Investors wanting decent yields are having to look further afield due to the impact of coronavirus.
Almost half of FTSE 100 members have cut dividends this year, while many government bond yields are now close to zero or even negative.
Institutions have already twigged renewable energy is one segment bucking this trend and have flooded money into wind farms and solar operators. But that is only half the story according to Alex O’Cinneide, the manager of the Gore Street Energy Storage Fund.
Green energy: With production of clean energy now established, a change in emphasis towards storage and batteries is on the way, according to the manager of Gore Street fund
The focus in renewables so far has been on generation and replacing fossil fuels, he notes, but with production now established a change in emphasis towards storage and batteries is on the way.
Gore Street was the first specialist battery fund to be listed in London and plenty of progress has been made since its IPO in 2018.
From an initial 6 megawatts (Mw), the fund now has 239Mw of capacity built or planned although its pipeline currently runs to an almost four times that at 900Mw worth of potential projects. And O’Cinneide believes that this is only the tip of the market going forward.
As coal and nuclear plants are decommissioned, ways to tailor renewable energy to meet peaks and troughs will be essential, he says, and this means energy storage or batteries.
The challenge with weather-fuelled electricity generation has always been the reliance on the wind blowing or the sun shining, but batteries solve the problem.
To function effectively, a renewable energy sector will need plenty of storage, believes O’Cinneide, and the combination of the transition to a low carbon economy and the rise of electric vehicles (EVs) is providing a spur to its development. Technology is advancing in leaps and bounds, he adds.
EVs are a big opportunity for battery makers and innovation to replace combustion engines has led to a massive drop in the cost of lithium-ion batteries that has also now made them economical for national electricity grids. Gore Street’s strategy is to follow that trend.
‘We can buy critical assets at cheaper and cheaper prices to supply the grid’s needs,’ O’Cinneide says.
The strategy is also around education, he explains, and to build an understanding of the benefits of storage both in the marketplace and among investors. ‘Wind and solar are understood from low carbon and cost angles, but the message about why storage is important is also starting to get through.’
That increased awareness is being reflected in easier planning rules for new UK projects, simpler ways to connect to the grid, and a more straightforward process for permits and building.
The combination of the transition to a low carbon economy and the rise of electric vehicles is providing a spur to the development of the energy storage sector
A recent UK law change, for example, means government approval is no longer required in England for projects over 55Mw and in Wales for over 350Mw. That was a big boost for Gore Street, says O’Cinneide, especially when combined with a continued decline in the price of lithium-ion batteries and steady growth in renewable usage.
‘As long as those two things continue, we will see growth in our asset class’.
Developments at a macro level suggest he is unlikely to be disappointed. The European Union (EU) has earmarked more €500billion to develop technologies to help break the current dominance of Asia-based battery suppliers.
Forecasts that the full battery cycle from mining and production through to recycling might be worth as much €250billion a year by 2025 underlines why the EU considers it so important.
Gore Street is still at a relatively early stage in its development, but it paid its stated dividend target of 7p for the first time with its recent results, which at the current share price of 104p gives a yield of 6.7 per cent.
At that price Gore Street is valued at £82million, which is modest given the sums being talked about, but O’Cinneide says it was a pioneer in London and is still building its track record.
The success it has had recently in raising money through a £20million funding round in the last financial year and a further £23.7million in June suggests it is rapidly building a following.
In the year to end-March, 2020, the fund’s net asset value (NAV) rose to 94.6p, so the shares currently trade at a healthy premium, though increasingly renewable assets are about consistent cashflow and less the underlying value.
As Gore Street’s portfolio matures and the trust overall gets larger and more diversified, it should score well on both counts and for income seekers this looks one to watch.