Early in the video (see link below) Brandt Vermillion, the ERCOT Market Lead at Modo Energy, says batteries are on track for £60K to £70K/MW/year this year (=calendar year I think). ERCOT asset revenue does vary, so GSF might have done a bit better than that?
Agree with the above, I’ve just been looking into this and UKW, think I will buy a blend of the two. With interest rates expected to fall that should add another tailwind to the share prices, hopefully reducing discount to NAV.
I've not looked in depth at UKW but I would expect a similar unwind to discount rates as interest rates fall. It wouldn't surprise me if there is something in the budget which benefits UKW.
Thanks for the article. Helps make a bit more sense of a not very straightforward investment. I'm very happy to allow my dividends on this to be reinvested at these levels.
Yes, the RA contract looks like great news. Not only financially, but also to reduce volatility (and so debt costs) and also to signal to the mkt that revenues are probably under-appreciated. A couple of smaller points: 1) £77k/MW/a seems way too high a starting point: it's currently nearer 50. Also, i can't see where in your model you've got interest costs on the $60m debt at Big Rock, or debt at the parent company. Finally, agree that augmentation to 2h makes economic sense, but where is GSF going to get the cash to do it (and also pay the divi)?
I think (but you don't make clear) that when you say £77k/MW/a seems way too high you are referring to Modo Energy's GB BESS index which is indeed nearer 50. (£50,248.42).
But this index is only until May 2024 so unless you are a Modo Energy data subscriber then neither of us know the precise index value for June to October, but extrapolating last years rate seemed a reasonable assumption to make for me.
Is there a specific reason you think FY25 repeating FY24 could not happen and would be "way too high"? Are there not reasons to think that there is an improving picture in GB actually? So more reasons for it being too low than too high? I'd be interested in any substantiation to your view of "way too high".
Regarding the interest costs - you raise an interesting point - I'll need to have a think about that, but I certainly agree the model should incorporate that cost.
Regarding the augmentation to 2h, with dividend cover forecast above 100% plus IRA tax credits, plus debt headroom, plus available cash, plus strategic funding via its battery partner Nidec (as was the case in FY24), even selective asset sales (discussed in the FY24 results) there seems a myriad of ways to fund the augmentation.
HEIT: The Company's operational Portfolio generated revenue (net of all electricity import charges and state of charge management costs) of £3.14 million over the Period (£45.3k/MW/Yr).
For the current Financial Year (9 months up to 31 July), the Portfolio generated revenue (net of all electricity import charges and state of charge management costs) of £11.08 million (£53.2k/MW/Yr).
Augmentation: yes, it's possible, but it's tight; and the ITC and sales aren't due any time soon
On the subject of rates, GSF are forecasting that after Dec 2026 rates in all regions will settle at about £80K/MW/year. See Figure 9 in the last annual report. Can GSF forecasts be trusted?
Surely there are significant long term risks here? What if new technology usurps the BESS assets which GSF have sunk costs in? They are paying all cashflow out as dividends which means the only way for them to buy new assets is via equity placings, which isn't going to happen whilst it trades below NAV. It's just far too concentrated in one specific area of renewables & deserves to trade well below NAV. The dividend yield is a classic value trap.
I'd be fascinated if you would share which new technology you think usurps a 2 hour Lithium battery - and when - and how quickly - and at what cost/performance superiority? I'd need actual evidence and hyperlinks please to take this seriously.
If you read my article you'll notice that the recent and forthcoming energisations mean all cashflow isn't paid as dividends. That there are tax rebates too. You will no doubt be pleased to learn that there is a robust market to trade and sell BESS assets so GSF could carry out selective disposals. GSF can also make use of debt. It has cash. So your concern that "the only way for them to buy new assets is via equity placings" is unwarranted.
I also disagree it is "far too concentrated". Other than energy storage and sales how do you think it should be or do to be less concentrated? What else would you have GSF do?!
I also disagree it "deserves to trade well below NAV" and is a "classic value trap". How so? Those statements don't make any sense to me either, sorry.
I don't think new tech is a risk: all of it is already well-known, see e.g. Corre Energy, and the economic lifetimes of BESS is only around 10y, so we are unlikely to be surprised. Modo already factors in domestic EV usage as batteries in their forecasts. Your point about paying out all income as divis against a depreciating asset is valid. Hence divi cover needs to rise to well above 1
I think if I were running this fund I wouldn't have staked the dividend beyond the cash flow, but we are where we are. And the market punishes those who cut a dividend - as I'm sure you know. Fortunately the projected cash flow more than covers the dividend.
Presumably you are aware that depreciation is an accounting cost and that that (impairment) cost is already factored in to the numbers - in accordance with IFRS9. So income is net of any depreciation. You say "all income as divis against a depreciating asset" - it would be more accurate to actually say "income net of depreciation against a depreciating asset".
This also addresses the 10 year replacement cycle you refer to and broadly agree that that level of degradation and replacement is the case with current technology Lithium batteries.
When I estimated Dogfish revenue I was just reading off a rate from Figure 9 in the last annual report.
ERCOT rates are very volatile. For the existing ERCOT assets GSF are presumably hoping the rate will be about £200K/MW/year until the end of 2024. Modo Energy give info on ERCOT rates up to June 2024 (see link below). (Rates for July onwards are not yet publicly available.) According to Modo Energy GSF's 2024 ERCOT rates are currently far below £200K/MW/year. I think GSF need some very good months from July to Dec in order to get ERCOT rates to £200K/MW/year for their financial year up to end of Dec 2024.
yes, I read this Modo article actually but my reading was that the 85% fall in June was due to milder system conditions. The bulk of the Texas FY24 earnings were over the summer months so GSF doesn't need 12 months of high rates - it earned the bulk of revenue (72%) over a few hot summer months in 2023. We also know that Solar build out has continued in 2024 in Texas, exacerbating the opportunities for peaks and troughs.
And we also know that Texas has been at record temperatures in 2024 including in July, August (100 year record temperatures) and in September. In May Modo reported £237k/MW/Yr for less hot conditions. See:
Hi OB, you make some good points. I think you're more knowledgeable than me! However, Modo Energy say that ERCOT system conditions evolved dramatically between June 2023 and June 2024. I think it's dangerous to assume (to put it crudely) that record temperatures in ERCOT will lead to record ERCOT rates. Let's see what the July ERCOT rates are. Presumably Modo Energy will publish them in the next few days (the June rates were apparently published on 19th Sept).
I made an error. The Modo Energy ERCOT data for July came out on 3rd Oct apparently. The article is partially subscriber only. I'm not a subscriber. Here's one quote: "Monthly revenues were 85% lower than in July 2023 - when batteries earned $152/kW/year, predominantly from Ancillary Services (including the then newly launched ECRS service)." Let's hope August and September were much much better than July. GSF of course know what their Aug and Sept ERCOT rates were - but they're not yet making them public.
One more point on ERCOT revenue. The August and September factsheets make reference to (sustained) high prices/high revenue in GER/NI/ROI (GSF don't give the rates though) but not in ERCOT.
Early in the video (see link below) Brandt Vermillion, the ERCOT Market Lead at Modo Energy, says batteries are on track for £60K to £70K/MW/year this year (=calendar year I think). ERCOT asset revenue does vary, so GSF might have done a bit better than that?
https://modoenergy.com/research/podcast-ercot-revenue-bess-battery-energy-storage-brandt-vermillion-transmission
Agree with the above, I’ve just been looking into this and UKW, think I will buy a blend of the two. With interest rates expected to fall that should add another tailwind to the share prices, hopefully reducing discount to NAV.
I've not looked in depth at UKW but I would expect a similar unwind to discount rates as interest rates fall. It wouldn't surprise me if there is something in the budget which benefits UKW.
OB
The Electricity Generator Levy no longer applied to renewables would be my guess
Thanks for the article. Helps make a bit more sense of a not very straightforward investment. I'm very happy to allow my dividends on this to be reinvested at these levels.
Yes, the RA contract looks like great news. Not only financially, but also to reduce volatility (and so debt costs) and also to signal to the mkt that revenues are probably under-appreciated. A couple of smaller points: 1) £77k/MW/a seems way too high a starting point: it's currently nearer 50. Also, i can't see where in your model you've got interest costs on the $60m debt at Big Rock, or debt at the parent company. Finally, agree that augmentation to 2h makes economic sense, but where is GSF going to get the cash to do it (and also pay the divi)?
Cassandra,
I think (but you don't make clear) that when you say £77k/MW/a seems way too high you are referring to Modo Energy's GB BESS index which is indeed nearer 50. (£50,248.42).
But this index is only until May 2024 so unless you are a Modo Energy data subscriber then neither of us know the precise index value for June to October, but extrapolating last years rate seemed a reasonable assumption to make for me.
Is there a specific reason you think FY25 repeating FY24 could not happen and would be "way too high"? Are there not reasons to think that there is an improving picture in GB actually? So more reasons for it being too low than too high? I'd be interested in any substantiation to your view of "way too high".
Regarding the interest costs - you raise an interesting point - I'll need to have a think about that, but I certainly agree the model should incorporate that cost.
Regarding the augmentation to 2h, with dividend cover forecast above 100% plus IRA tax credits, plus debt headroom, plus available cash, plus strategic funding via its battery partner Nidec (as was the case in FY24), even selective asset sales (discussed in the FY24 results) there seems a myriad of ways to fund the augmentation.
OB
https://www.bessanalytics.com/indices
https://modoenergy.com/research/gb-bess-outlook-oct-24-executive-summary-key-themes-and-trends-battery-energy-storage
HEIT: The Company's operational Portfolio generated revenue (net of all electricity import charges and state of charge management costs) of £3.14 million over the Period (£45.3k/MW/Yr).
For the current Financial Year (9 months up to 31 July), the Portfolio generated revenue (net of all electricity import charges and state of charge management costs) of £11.08 million (£53.2k/MW/Yr).
Augmentation: yes, it's possible, but it's tight; and the ITC and sales aren't due any time soon
On the subject of rates, GSF are forecasting that after Dec 2026 rates in all regions will settle at about £80K/MW/year. See Figure 9 in the last annual report. Can GSF forecasts be trusted?
Surely there are significant long term risks here? What if new technology usurps the BESS assets which GSF have sunk costs in? They are paying all cashflow out as dividends which means the only way for them to buy new assets is via equity placings, which isn't going to happen whilst it trades below NAV. It's just far too concentrated in one specific area of renewables & deserves to trade well below NAV. The dividend yield is a classic value trap.
Tom,
I'd be fascinated if you would share which new technology you think usurps a 2 hour Lithium battery - and when - and how quickly - and at what cost/performance superiority? I'd need actual evidence and hyperlinks please to take this seriously.
If you read my article you'll notice that the recent and forthcoming energisations mean all cashflow isn't paid as dividends. That there are tax rebates too. You will no doubt be pleased to learn that there is a robust market to trade and sell BESS assets so GSF could carry out selective disposals. GSF can also make use of debt. It has cash. So your concern that "the only way for them to buy new assets is via equity placings" is unwarranted.
I also disagree it is "far too concentrated". Other than energy storage and sales how do you think it should be or do to be less concentrated? What else would you have GSF do?!
I also disagree it "deserves to trade well below NAV" and is a "classic value trap". How so? Those statements don't make any sense to me either, sorry.
OB
I don't think new tech is a risk: all of it is already well-known, see e.g. Corre Energy, and the economic lifetimes of BESS is only around 10y, so we are unlikely to be surprised. Modo already factors in domestic EV usage as batteries in their forecasts. Your point about paying out all income as divis against a depreciating asset is valid. Hence divi cover needs to rise to well above 1
Cassandra,
I think if I were running this fund I wouldn't have staked the dividend beyond the cash flow, but we are where we are. And the market punishes those who cut a dividend - as I'm sure you know. Fortunately the projected cash flow more than covers the dividend.
Presumably you are aware that depreciation is an accounting cost and that that (impairment) cost is already factored in to the numbers - in accordance with IFRS9. So income is net of any depreciation. You say "all income as divis against a depreciating asset" - it would be more accurate to actually say "income net of depreciation against a depreciating asset".
This also addresses the 10 year replacement cycle you refer to and broadly agree that that level of degradation and replacement is the case with current technology Lithium batteries.
OB
Hi OB
When I estimated Dogfish revenue I was just reading off a rate from Figure 9 in the last annual report.
ERCOT rates are very volatile. For the existing ERCOT assets GSF are presumably hoping the rate will be about £200K/MW/year until the end of 2024. Modo Energy give info on ERCOT rates up to June 2024 (see link below). (Rates for July onwards are not yet publicly available.) According to Modo Energy GSF's 2024 ERCOT rates are currently far below £200K/MW/year. I think GSF need some very good months from July to Dec in order to get ERCOT rates to £200K/MW/year for their financial year up to end of Dec 2024.
https://modoenergy.com/research/ercot-june-2024-battery-energy-storage-revenues-owners-ancillary-services-arbitrage-bess-index-nowcast-eolian-non-spinning-reserve
Hi Chris,
yes, I read this Modo article actually but my reading was that the 85% fall in June was due to milder system conditions. The bulk of the Texas FY24 earnings were over the summer months so GSF doesn't need 12 months of high rates - it earned the bulk of revenue (72%) over a few hot summer months in 2023. We also know that Solar build out has continued in 2024 in Texas, exacerbating the opportunities for peaks and troughs.
And we also know that Texas has been at record temperatures in 2024 including in July, August (100 year record temperatures) and in September. In May Modo reported £237k/MW/Yr for less hot conditions. See:
https://weatherspark.com/h/y/7137/2024/Historical-Weather-during-2024-in-San-Antonio-Texas-United-States
So with 4 hot months instead of 3 months similar to 2023 you could virtually arrive (96%) to a £200k/MW/Year overall annual average.
Can the other 4% of revenue be generated in the other 8 months? Doesn't seem too difficult.
So I don't agree with you that GSF are "presumably hoping for rates for the rest of their financial year" (to March 2025).
OB
Hi OB, you make some good points. I think you're more knowledgeable than me! However, Modo Energy say that ERCOT system conditions evolved dramatically between June 2023 and June 2024. I think it's dangerous to assume (to put it crudely) that record temperatures in ERCOT will lead to record ERCOT rates. Let's see what the July ERCOT rates are. Presumably Modo Energy will publish them in the next few days (the June rates were apparently published on 19th Sept).
I made an error. The Modo Energy ERCOT data for July came out on 3rd Oct apparently. The article is partially subscriber only. I'm not a subscriber. Here's one quote: "Monthly revenues were 85% lower than in July 2023 - when batteries earned $152/kW/year, predominantly from Ancillary Services (including the then newly launched ECRS service)." Let's hope August and September were much much better than July. GSF of course know what their Aug and Sept ERCOT rates were - but they're not yet making them public.
One more point on ERCOT revenue. The August and September factsheets make reference to (sustained) high prices/high revenue in GER/NI/ROI (GSF don't give the rates though) but not in ERCOT.