To Invinity - and Beyond!

Sometimes even a Hero needs more power

Dear reader,

Invinity is a £51m Market Cap; 11.5p/12p bid/ask.

When a tiddly company like Invinity strikes a deal with one of the big boys you have to wonder.

When the size of that partnership could equate to 4 years of Invinity current capacity you really have to wonder. After all, Invinity’s new facility in Motherwell is sized to build 500 MWh capacity per year, but can be expanded at a very low capital cost. Its Canada factory can produce 200 MWh more too, plus its licencing agreement with Everdura in Taiwan adds 500MWh per year more capacity too.

The big boy, Frontier Power have signed a master supply agreement for first refusal on 2GWh of capacity. Frontier will pay an upfront “capacity reserve fee” upon reaching financial close of any projects to provide the working capital.

After all at $650k per MWh 2GWh would equate to $1.3bn of revenue.

But nothing is yet sold. Ofgem’s Long Duration Energy Storage bidding round will be later in 2025. Is it certain to occur? I believe so. This is a key government pledge to reduce the cost of power.

Both companies have also agreed to explore further opportunities for collaboration in other territories where Frontier Power is active, including, but not limited, to Japan, Korea, Vietnam, Malaysia, the USA and the EU.

Frontier Power has executed £5 billion of infrastructure projects across the world working with large corporates, strategic investors, international banks and leading professional advisors. They cover all areas of the deal lifecycle from strategy, origination, lead advisory, debt and equity funding, due diligence, contract negotiations and post investment value delivery.

Frontier Power is looking to participate in a new programme being proposed by UK government and Ofgem to develop long duration energy storage (LDES) using novel energy storage technologies at scale in the UK. As renewable energy’s share in the energy mix increases, the need for long duration energy storage is urgent and current - as part of the 2030 strategy of stabilising the grid - and reducing costs. There is a £3bn a year opportunity to balance power, and to store and sell the power you are balancing - let alone the curtailed power - which the electricity companies have to pay for, and which drives up UK prices.

Almost all UK “BESS” (Battery Energy Storage System) is lithium 1 hour, 1.5 hour or 2 hour facilities. But lithium is not ideal. It has short duration, typically 5,000 charge cycles, fire risk, duration and end of life challenges.

VRFBs cost more upfront but on a levellised cost of energy cost less, have 30,000 cycles including full charge and discharge capability (unlike lithium), are fully recyclable (and the vanadium can be re-electrolysed for another set of cycles) plus are longer duration 4-18 hours, plus are much safer.

IES raised £57.0 million through a placement at 23p per share in May 2024. (This was at a zero discount). It has since dropped to a 12.5p ask - nearly half price. Is that an opportunity?

IES’ next-generation Mistral - now called Endurium (will that name last?) - was jointly developed with Gamesa Electric and launched in 2H24. Mistral aims to provide grid-scale, longer-duration energy storage (LDES) as renewable energy generation increases globally.

Mistral boasts 81 granted or pending patents and over 6 GWh of commercial interest. Building upon an existing base of 75 MWh deployed or contracted across 82 projects in 15 countries, Mistral is positioned for success. IES has a strengthened balance sheet, backing from UK, German and Korean strategic investors, an existing order book and this funding round will accelerate Mistral’s commercialisation.

Mistral is a game changer where storage costs reduce from $111/Mwh to $60/Mwh as efficiency rises from 67% in its Gen3 vs Mistral at 78%. The build out of renewables means producers can get paid (via the CfD system) to throw power in the bin. But electricity consumers pay, and that’s one of the reasons the UK has such expensive electricity. If you threw nothing in the bin would you save money is a rhetorical question but part of the plan for 2030.

Other times the opposite can occur. The grid is desperate for power. Facilities like a gas peaker plant is $151-$198/MWH so $0.15-$20 per KWH over twice the price of the circa $0.06 storage cost of BESS. Both Solar and Wind combined with Endurium are competitive across a LCOE + LCOS basis to baseload gas. Of course an energy provider might price gouge a desperate energy operator - and they do. If you were never price gouged would you save money is another rhetorical question but part of the plan for 2030.

There are those who get angry at the thought that renewables + storage can beat fossil fuels. Not always, because as they enjoy pointing out renewables are variable, and storage doesn’t exist in sufficient volume (yet). But once it does, a lot of the “hidden” LCOE disappears. And that’s why the UK are moving ahead with storage as the answer to bring down the cost of waste.

This study from Lazard illustrates that IES doesn’t need special subsidies to be competitive, although it gets them in the USA via the US IRA (30% investment tax credit) and REPowerEU’s EUR80bn programme and investment from the UK Infrastructure Bank plus the Cap & Floor scheme announced at the start of 2025.

LDES is a scheme where the UK government are conducting a “Review of Electricity Marketing Arrangements” (REMA) for UK electricical power. New arrangements the government are considering include a cap and floor mechanism to encourage new long duration storage and a LDES subsidy - particularly to address the high upfront investment of storage.

Growth

IES’ international growth strategy outside the UK/US, involves a capital-light model, such as with their partnership with Taiwanese industrial company Everdura. Everdura has already placed a 14.4 MWh order with IES and will manufacture Mistral VFBs under licence and has a further 500 MWh per year capacity. They will purchase cell stacks directly from IES, assemble the battery systems, and pay royalties on end sales. This licensing and royalty model supports the Group’s expansion beyond the UK and U.S.

ABB - Energy Services Giant ABB is also now “in bed” with IES. IES developed its Fourth-Generation Endurium battery with Siemens Gamesa. Gamesa will become part of ABB in the next few months.

A P/E of 23 with 13% EPS growth and $32bn sales Swiss based ABB says “We help industries outrun – leaner and cleaner”. It is a leader in electrification, metallurgy and automation. A perfect partner for Invinity.

ABB’s strategic priorities are these:

1. Electricity demand is growing >10x faster than other energy sources in 2022-2030, resulting in ~50% higher average annual investment into electricity networks.

2. Higher energy-efficiency ~45% of the world’s electricity is converted into motion by electric motors yet only ~23% of the world’s electric motors are optimised through the control of drives

3. New energy sources Share of low-carbon sources in global energy mix are forecast to increase +50% from ~20% today to ~70% in 2050

4. Shrinking labor force Global number of working age people (15 to 64 years) per Retiree (65+ years) will fall by ~20% over the next 10 years.

ABB works across a wide range of verticals, geographies and via a variety of channels.

Electrification is a key area of focus generating $14.6bn revenues with a 20.1% EBITA margin in 2023 (but reached 24% in 3Q24). Electrity demand is growing 10X faster than other energy sources through continued urbanisation and population growth and the energy transition. Smart Power is a growth area along with Smart Buildings.

Motion is $7.8bn revenues, with an 18.9% EBITA margin and focuses on industrial processes, drives, electric motors and generators.

Process Automation is $6.3bn revenues with a 14.5% EBITA margin and focused particularly on O&G, mining and process industries, chemicals and marine.

Finally Robotics is $3.6bn revenues with a 14.7% EBITA margin and focused on automotive, food & beverage, packaging and printing.

Valuation

IES is a 12p bid/12.5p ask today.

Longspur’s valuation is 86p, VSA’s is 110p and CG have a 40p target. The latter base this on a 7X 2027E EV/EBITDA. The others base it on who knows what.

IES has partnerships via Gamesa (ABB), Everdura, Hyosung and Frontier Power.

For manufacturing under licence I assume a 10% royalty equating to £60k per MWh. I assume 50MWh in 2026 and 150MWh in 2027 noting that their partner in Taiwan have a 255MWh pipeline.

What’s the sell price?

What’s the buy price?

Canaccord Genuity (CG), interestingly, believe the sell price was £952k/MWh in 2024, falling to £783k/MWh in 2025 and will be just £632k/MWh in 2026.

They believe the cost of production was £1.26m per MWh in 2024, falling to £727k/MWh in 2025 and £503k/MWh in 2026.

So was unprofitable last year, this year barely profitable even at gross profit, and next year makes a decent gross profit. How do they arrive at these numbers and are they accurate? We simply don’t know, and there’s no detail of how these numbers are obtained.

What we do know is that 1 hour lithium batteries are now $140k/MWh and falling. We also know through Harmony Energy Income Trust (HEIT) that a 2 hour battery has a much higher $320k/MWh valuation (since their NAV is £201m and they have 790k/MWh of BESS). Some of that valuation are the land rights and other aspects but the fact is a 2-hour battery is more valuable than a 1 hour.

Why would this be? The answer, reader, is that a 1 hour battery delivers about 1/4 less income per hour, bearing in mind that Lithium cannot deep discharge (to 0%) without damaging the battery. So a 1 hour battery offers 42 minutes and a 2 hour 84 minutes.

A lot can happen in that extra 42 minutes.

Endurium meanwhile would provide a much longer 4-18 hour response and the full 240-1080 minutes. Deep discharge? Not a problem. If you consider that a 2 hour battery earns vastly more Reserve charges (and more balancing charges), a true 18 hour BESS would provide much more still. Why is that important? Well, it would also provide a larger opportunity to soak up excess power which can get wasted because there’s nowhere to store it. The UK government’s LDES scheme will be designed precisely to promote storage (and to exclude Lithium) for exactly this reason.

This article from Montel tells you why the UK can have some of the most expensive electricity - the last man standing can charge eye watering amounts for their power. It’s costing the UK about £3bn-£4bn per year (and growing). There’s a lot of price gouging.

A Cap and Floor system gives a minimum lower limit - giving certainty to the seller - and a maximum upper - giving certainty to the buyer, but provides an incentive since the Floor de-risks while the Cap provides a sufficient incentive.

Past incentives used to support the build out of interconnectors were £140/MWh or £1.22m per MWh per year. Assuming 50% utilisation (twice per day or £0.61m/year) that’s at least 3X the current remuneration given to BESS providers. So 3X the rate of revenue is attractive and a lifespan 4X that of Lithium suggests VRFBs can deliver a 12X return to its customers (ignoring the deep discharge benefit and safety benefit of a VRFB) compared with returns from Lithium BESS …. at least using them in the UK once the LDES scheme is in place.

That’s precisely why I believe the FrontierPower folks have reserved 4 years worth of output from the IES factory (2,000 MWh), and intend to move first to claim a lucrative gap that’s costing the UK billions each year, while more is spent on CfD paying for curtailed power. Paying £140/MWh via a Cap and Floor scheme is a small fraction of EUR5750/MWh isn’t it? So at least sometimes such a scheme would save money rather than cost energy buyers even more.

So assuming Lithium BESS costs in 2025 are now at around a £100k/MWh price tag then were the UK gov’t to introduce a scheme which would justify a cost of £1.2m/MWh of capacity for Invinity VRFBs under a Cap and Floor scheme then this would be attractive to a BESS operator, attractive to HM Govt, attractive to electricity consumers - and attractive to IES.

Let’s assume a lower £0.9m/MWh to incentivise it further. The cost would be 25% less than current Lithium BESS system prices. Perhaps with some form of rental model too?

Assuming a cost of manufacturing for IES of -£0.8m/MWh falling to -£0.6m/MWh as scale increases then £0.3m/MWh gross margin drives breakeven at around 240/MWh or later at 80/MWh…. assuming, as CG do, that Overheads will grow to around £24m per year.

A business capable of generating something like £100m a year under long-term inflation-linked contracts is worth a good few multiples of itself. 10X earnings is not unreasonable, and if this were growing you need to factor in the value of that too. Let’s assume zero growth and just 0.5GWh of production - that makes this a 20X bagger at a £1bn possible future valuation. Or put another way there’s potential for upside from today’s £51m market cap - if I’m right about the government’s continued commitment to LDES.

Because under any kind of scenario where there is government support that allows IES to scale and drive its cost of production to around £600,000 per MWh produced while maintaining a £900,000 floor (which I estimate is 25% less than Lithium over their relative lives) would be profitable for IES, while delivering on the government’s cornerstone pledge for cheaper energy by 2030.

1.5GW of BESS were added to the UK in 2024 and 2GW added in 2023 so IES would be under the above scenario of 0.05GW → 0.2GW → 0.5GW be capturing 2.5% → 10% → 25% of the 2023 market size each year between 2025-2027 although the 2030 scenario is for 22GW vs 4.5GW today so the market size for BESS for the UK alone will be at least double that of 2023.

And that’s just the UK. Will we see other countries introduce similar incentives? Germany and Ireland both have similar balancing costs, as do others like Spain and Italy. We know Texas is building out its BESS fleet very rapidly. It has the mother of all price gouges because GSF - Gore Street Energy were one of the gougers.

From a cash flow perspective IES raised £56m last year so has a warchest of over £60m which should be enough to absorb anticipated losses in 2025 and 2026 with cashflow turning positive in 2027.

From a cashflow perspective IES has over £20m forecast headroom of cash in a warchest to expedite whatever else needs to be done. This may include, I suspect, rapidly trying to grow to meet demand.

IES have been pretty quiet about its pipeline so maybe all of this has dissolved to nothing or perhaps it remains in play.

Conclusion

Invinity’s Endurium is expensive but not when you consider the cost of not using it. Energy security, energy cost are political hot potatoes and Miliband knows he must deliver lower costs or Labour will face anhihilation at the next election. He’s not changing course. Of course he’s not the first politician to speak of Britain being an energy superpower. Boris said the same.

Did Miliband say it to be a Zealot? That he will pursue Net Zero at all costs? Or is it because there is no alternative? If we instead drilled baby drilled, for gas the North Sea has 5-8 years gas left at varying prices. Perhaps more that’s undiscovered, more that is contingent - but at what cost? Is pinning hopes on the north sea an energy strategy? Fracking might add some more reserves but at least some fracking has proven to be non economic or not practical (remember the UK is far more densely populated than the US). We could import lots of LNG. We do that now. It isn’t cheap. The cost of transportation alone adds $36/BOE to get it to the UK. We could apologise to Russia and beg for the restoration of gas supplies. Reinstate coal perhaps?

…..Or we could invest in an energy system that at least according to this NESO report will deliver a net £10/MWh of savings by 2030 compared to today. NESO is a non-political body remember, an offshoot of National Grid. I tend to think their report credible but have no axe to grind on this. Facts are facts.

According to NESO the governments 2030 plan reduces costs overall by £10/MWh but comes with some increased costs as shown above. A large part of those increased costs are directly beneficial to IES.

The NESO report also explains the urgency that the government feels.

Meanwhile more broadly European energy security is an enormous investment theme, as is energy transition and Net Zero. Leaving aside accusations of Zealotry or even the need for Net Zero Europe needs energy. Asia is no different. China, South Korea, Taiwan and Japan are all energy poor, and energy hungry.

VRFBs can play a key role, as might Hydrogen, and focus on technologies like VRFBs will drive their adoption and increase their use. Nuclear? Sure, but nothing happens quickly with nuclear. In the five years to 2030 there’s no way you could build out a nuclear fleet.

So due to necessity, political, economic, take your pick. Even if you vehemently disagree with the politics should you disagree with the implication? Because it feels like IES might be shooting a fish in a barrel.

Regards

The Oak Bloke

Disclaimers:

This is not advice

Micro cap and Nano cap holdings might have a higher risk and higher volatility than companies that are traditionally defined as "blue chip"