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On August 9, 2019, a single lightning strike shut off 5% of the UK’s power. The bolt struck a transmission circuit just before 5 p.m., causing an unusual simultaneous outage at both the Hornsea offshore wind farm and the Little Barford gas power station. The loss of these huge generators reduced the frequency of the country’s electricity grid to 48.8 hertz, which is lower than the bottom limit of 49.5 hertz required by the National Grid’s Electricity Systems Operator (ESO) to maintain the power system.

When this kind of drop-off occurs, power is automatically shut off somewhere on the network to prevent frequency from falling further. In this instance, it just so happened that the lights went out in parts of central London as rush hour was getting under way. Traffic lights stopped working, trains ground to a halt and passengers stranded on platforms navigated out of stations using the torches on their mobile phones. 

Although power and services were mostly restored within a few hours, the 9 August blackout was the UK’s largest in more than a decade – and it could have been worse. Batteries were part of the reason the disruption was contained. At the time, National Grid (NG.) had a total of 200 megawatts (MW) of its own frequency-response batteries at its disposal. These assets are able to provide on-demand electricity in the event of a shortfall elsewhere on the network. 

The grid operator was also able to call on nearly 300MW of battery storage put in place by other organizations. “When the battery storage assets detected that drop in frequency, they ramped up their output milliseconds later,” explains Markuz Jaffe, an investment companies analyst at Peel Hunt. “This really speaks to the value they have on the grid.”

By the end of the decade, the consultancy Rystad Energy predicts that the UK will have some 24 gigawatts (GW) of battery storage installed – with enough energy in reserve to power 18mn homes for a year. As the country comes to rely on renewable energy sources, such as wind and solar, reliable sources of backup power will be needed for days without a strong breeze or adequate sunshine. 

In the recent past, gas or coal-fired power stations were responsible for grid-balancing activities. Some facilities, known as peaking plants, are only ever brought online to provide support during periods of high electricity demand. But as the UK moves towards a net zero energy system, it will need to stop relying on these fossil fuel assets. Last autumn, Drax (DRX) delayed the closure of its coal units at the request of the UK government, in order to provide 1.3GW of emergency backup following Russia’s invasion of Ukraine and the energy market turmoil that followed.

But Drax has said it will not do the same this year, citing “technical, maintenance, and staffing reasons”. The UK’s only other coal-fired power station, meanwhile, is due to close next year. But battery assets can pick up the slack. As of last month, there was 2.4GW of battery storage capacity operating in the country, as well as 66GW in the development pipeline. On a cold day in the UK, peak UK electricity demand stands at around 60GW.

The opportunity for investors seems obvious: policy dictates that there should be a massive battery build-out in the near future, but work has only just begun. “There are a lot of new assets coming online, and the revenue is predictable to a certain extent because we know how power demand varies throughout the day,” Jaffe says. “You’ve also got the backdrop of the electrification of transport and heating, and more renewables coming onto the grid. Batteries stand to benefit from all these factors that might inject volatility into the system.”

There are currently a handful of ways for UK-based retail investors to gain exposure to this prospective battery boom. Smart Metering Systems (SMS) derived around 12 percent of cash profits (Ebitda) from its battery storage assets last year, a proportion that’s likely to grow in the future. But the most straightforward way to invest in the sector is via one of three listed investment trusts: Gore Street Energy Storage (GSF), Gresham House Energy Storage (GRID) and Harmony Energy Income (HEIT).

But it will not be plain sailing to a battery-powered future. Like their peers across the wider world of UK infrastructure, the battery funds have struggled in the face of rising gilt yields, and falling power prices have also had an impact. June was particularly difficult for renewable energy infrastructure (REI) players – the average share price total return fell by 5.9 percent, compared with 3.4 percent for conventional infrastructure trusts. For the three battery trusts, the average fall was 5.4 percent. 

As of mid-July, the London-listed trio of battery funds traded on an average discount to net asset value (NAV) of 16.8 percent. By 8 August, the discount has widened further still to 19.4 percent. This figure is a measurement of the difference between the value of an investment trust’s underlying assets and the value indicated by its share price. If a fund is trading at a discount, as opposed to a premium, it’s a sign that markets have a bearish outlook on its near-term prospects. 

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“With [battery storage], a lot of the assets are still in the construction stage, so you see higher discount rates to reflect that,” says Elliott Hardy, a research analyst at Winterflood. “One of the main reasons the sector potentially looks cheap is the fact that you’ve got quite a lot of battery assets coming online over the next year or two across most of the funds.” At the moment, these new additions merely look like capital expenditure (capex) costs – once they’re connected to the grid, they’ll be cash flow contributors.

But renewable developers in the UK have famously had to deal with long wait times to connect projects to the grid. It’s estimated that the country has the longest such queue in Europe. Stifel analysts, highlighting recent delays to projects under construction at Gresham House Energy Storage, said in March that they “expect grid connection dates are the main source”.

Trading opportunities

Markets might also be wary given the battery funds’ relatively limited trading history. Gore Street was the first of the cohort to go public in May 2018, followed by Gresham House in November 2018. Newcomer Harmony began trading in late 2021. And there is still some uncertainty surrounding the trio’s future revenue streams.

Some of the first battery storage systems provided what are known as ‘ancillary services’ to the grid – meaning they were paid to be on standby in the event of a sudden drop in frequency.

But this market has become saturated as more batteries come online and it’s believed that energy trading will soon become an important source of earnings. Within this field, there are a number of different markets – day ahead, intraday, and so on – where stored power can be sold. In late March, the managers of the Gresham House Energy Storage Fund said they would “focus more meaningfully on trading” in the future.

Winterflood’s Hardy says: “We’re moving from a predominantly ancillary services-based revenue structure, where these assets are just providing a regulatory service to the grid, to more of a wholesale, trading-based approach where the potential for return is greater, but revenue is less secure.”

While Harmony Energy Income is entirely UK-focused, it has been anticipating the saturation of the ancillary services market since its IPO. It therefore chose to install two-hour duration batteries, which are better suited to trading activities, across its portfolio. Storage duration refers to the amount of time a battery system can discharge at its power capacity before becoming depleted.

As it stands, battery funds already have a relative lack of revenue security compared with other renewables trusts, for whom at least two-thirds of revenues are typically fixed. Stifel thinks the battery sector’s attraction to investors would “increase meaningfully” if 30-40 per cent of revenues could be fixed for longer periods. Countries outside the UK offer greater potential for longer-term contracts, but all three funds have been signing one- and 15-year contracts over recent months.

Gore Street’s assets are the most diversified in terms of battery duration and location. The fund has storage sites in the UK, Germany, Ireland, Texas and California. The US systems all have two-hour durations, whereas the installations in Ireland have an average battery duration of 30 minutes. These variations are driven by the differing revenue opportunities in each market. Unlike its competitors, the fund thinks its future earnings will be driven by providing ancillary services to different regions – rather than trading energy domestically. 

“We have said that in the energy storage market, one needs to be diversified by energy system,” says Alex O’Cinneide, chief executive of Gore Street Capital. “We don’t, as yet, see trading as a big revenue opportunity for energy storage – it is driven by grid balancing.” In Texas, increasingly extreme weather events create opportunities in wholesale power markets as prices spike in line with fluctuations in supply and demand. Grid balancing could also play a bigger role in the UK in the future if batteries begin to be favoured by National Grid’s balancing mechanism.

Gore Street also owns two-hour assets in California as it thinks these are best placed to take advantage of the spread in peak prices found on the state’s grid. The other advantage is the US federal government’s generous subsidy regime. Under the Inflation Reduction Act, utility-scale energy storage projects can access investment tax credits worth around one-third of capex if construction begins by the end of 2024. 

“In California and Texas, we can get 30 per cent of our capex back the day we switch on an asset. That is not available to us either in mainland Europe or the UK,” says O’Cinneide. “As an investor with a global mandate, which we have, why would we not prefer the US?”

Fund managers at Gresham House say the delays are the main bottleneck facing the UK battery storage sector today. The industry is adamant that planning reforms and policy support are needed to ensure their systems can start contributing to the energy mix.

Some investors might look at the macroeconomic and sector-specific hurdles facing battery projects and not unreasonably conclude that they’re risky prospects. But there’s no escaping the fact that they’re also critical pieces of infrastructure for the 21st century.

“There are not many other assets that are as efficient as a battery in terms of managing the potential issues that come with increased [renewables] on the grid,” Hardy says. “They are really important in terms of balancing that supply and demand.”

Best Ways to Invest in the Energy Storage

There is a lot of chatter these days about alternative energy solutions, including wind, solar, and hydropower. Unfortunately, the global economy does not simply schedule its energy use for breezy or sunny days, nor does it place all production facilities near hydropower dams.

That implies the future of alternative energy is as dependent on infrastructure as it is on solar cells and other power producing technology. We will never be able to transition away from fossil fuels if we are unable to transfer or properly store that energy for usage at other times or locations.

The following seven investment ideas will benefit from the upcoming energy storage boom. It is impossible to forecast precisely how the landscape of utility and energy companies will evolve, but these enterprises are ahead of the next generation of energy storage infrastructure.

Tesla Inc. (TSLA)

Known for its “gigafactory” designs, Tesla is a natural fit for any list about battery technology. The firm changed its formal name from Tesla Motors in 2017 to acknowledge the fact that it does much more than just cars, including its SolarCity residential solar products and Powerwall integrated battery systems that allow homeowners to store and manage their home’s energy.

In fiscal 2022, TSLA recorded more than $3 billion from non-automotive revenue – good for about 12% of total operations. You’ll have to make your peace with Tesla making most of its profits from electric vehicles rather than storage, but that may not be too much of a deterrent for many investors given the fact that Tesla has nearly doubled year to date in 2023.

BYD Co. Ltd. (BYDDY)

Lithium batteries are seen by many as the future of energy storage. They are used in everything from cell phones to electric cars, and their fast-charging and high-capacity nature makes them exemplary of 21st-century energy technology. BYD is among the largest manufacturers of both lithium-ion and nickel batteries – though, like domestic rival Tesla, it also has a decent-sized EV biz, too.

By some measures, there are larger lithium battery companies out there, including China’s Contemporary Amperex Technology Co. Ltd. (300750.SZ) and Korea’s LG Energy Solution Ltd. (373220.KRX). But without U.S. stock listings, these companies can be difficult to trade. BYD is reasonably liquid with about 200,000 shares changing hands daily, and it provides a good alternative for those looking to play the China-based growth in the lithium battery sector.

Albemarle Corp. (ALB)

Albemarle is a step away from battery specialists and is instead a direct play on the chemicals that go into energy storage devices – mainly, lithium compounds. Founded in 1887 and the largest lithium miner on the planet, this firm is a key part of the global supply chain for battery metals. It may not have as much flash as an EV manufacturer, but it is a broader and more direct participant in the megatrend of next-gen energy storage. Interestingly enough, ALB stock has underperformed significantly in the last year or so – despite expectations of 30% to 40% growth in lithium sales this year, and a growth rate expected to range from 20% to 30% through 2027.

Fluence Energy Inc. (FLNC)

A hybrid energy storage and artificial intelligence play, Fluence offers energy storage products with integrated software in addition to the batteries and hardware itself. Its offerings include industrial-grade energy storage products, and that makes FLNC stock a great way to invest in large-scale energy storage applications.

The fact that it also provides engineering and delivery services to support its products also gives it a unique way to invest in the ongoing maintenance of any “smart grid” technology in the future. The company is small, valued at just $3 billion or so, and it roughly breaks even from an earnings standpoint – so there’s a high degree of risk here. Still, it’s a great example of a startup with growth potential in the energy storage industry.

Global X Lithium & Battery Tech ETF (LIT)

Rounding up these stocks, and others like them is this $2 billion-plus Global X exchange-traded fund that is designed to be a diversified play on lithium and battery storage technology. LIT invests in about 40 companies that are involved in every part of the lithium cycle, from mining to battery production, cutting across traditional sectors and geographic definitions to give a holistic exposure to this industry. Albemarle is the top holding, followed by Tesla, so if you can’t decide from the previous stocks, this fund is a good one-stop investment to play the pending energy storage boom.

First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN)

With more than $1 billion under management and about 60 components, this First Trust fund is another interesting and diversified way to play energy storage. It’s got a lot of similar names, including Tesla as the top holding, but it looks beyond just battery tech to include specialized chipmaker ON Semiconductor Corp. (ON) and integrated solar company First Solar Inc. (FSLR). If you want a bit less EV exposure, this clean energy ETF could be a good alternative to investing in the broader trend of clean energy and related storage concerns.

First Trust Nasdaq Clean Edge Smart GRID Infrastructure Index (GRID)

Another interesting energy storage ETF is GRID, which is focused on alternative energy infrastructure companies such as power management company Eaton Corp. (ETN), industrial conglomerate Johnson Controls International PLC (JCI), and electronics and automation pioneer Abb Ltd. (ABB). About 100 total stocks make up this $1 billion fund, and each component is a direct player in the future of a smart grid and related utility-grade energy storage solutions.

Furthermore, about half of the stocks are U.S.-based, and the rest are headquartered overseas to give it wide exposure to the global nature of sustainable energy concerns. If you want to play the infrastructure of energy storage, GRID is a great way to do so.

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