UK battery storage market faces key test as 395-MW sale nears

One of the UK's largest battery storage funds is making headway in its attempts to sell its nearly 400-MW operating portfolio in a process that industry observers said will serve as a crucial barometer for future transactions in the space.

London-listed Harmony Energy Income Trust (HEIT) said Nov. 29 that a process to offload all or part of its 395.4-MW/790.8-MWh operating battery fleet "continues to progress well."

The process, run by financial advisory firm JLL, has yielded a number of nonbinding offers relating to both individual assets as well as the full portfolio, HEIT said in a trading update.

Several potential buyers have progressed to a due diligence stage and some have requested more time, with HEIT extending the transaction timetable by one month as a result.

The company now intends to enter exclusivity with a preferred bidder in December and aims to sign binding agreements in January 2025.

The process is seen as something of a litmus test for the UK's battery storage market, which has seen limited transaction activity to date for operating assets, either in public or private markets.

"As such this portfolio transaction (whether completed in part or in full) will represent an important mark-to-market for the sector with read across to our [battery storage] coverage," analysts at RBC Capital Markets said Nov. 29, pointing to London-listed peers Gresham House Energy Storage Fund and Gore Street Energy Storage Fund.

Still, some in the market see the asset sale as a possible cause for concern.

Analysts at Peel Hunt cited recent research by Modo Energy, which estimated upfront capital expenditure costs for a 50-MW/100-MWh grid-scale battery to be about GBP550,000/MW ($695,000/MW). Adding a "modest developer premium" would give a total project cost of GBP625,000/MW, the analysts said in a Nov. 27 report.

For comparison, HEIT's implied gross asset value, adding its net assets of GBP201.04 million to GBP130 million of debt drawn, amounts to about GBP331 million, or roughly GBP837,000/MW across its entire operating portfolio.

"Crucially, we are interested in whether a willing buyer would be able to justify paying the significant premium that HEIT appears to be valuing its portfolio at, relative to the cost of constructing new projects," Peel Hunt analysts said. "Unfortunately, we do not see a significant gap in revenue outperformance that would justify such a mark-up."

The analysts added that in a market where revenues are still running below target, HEIT is "not necessarily in the strongest bargaining position."

"Indeed, the argument could be made the portfolio premium should be a discount (e.g. the buyer gets a benefit for having deep pockets), and the time cost of money should be negative whilst market revenue levels are below forecast/target levels, and/or project capex is expected to fall further," the analysts said.

Improving picture

The environment for UK battery assets has improved in the second half of 2024 after a period of difficulty due to the oversaturation of certain revenue markets.

Modo Energy estimated annual battery revenues for a two-hour system to be between GBP57,000/MW and GBP68,000/MW in August to October, up from lows of GBP46,000/MW in the first three months of the year.

The recovery is down to windy conditions and higher gas prices, according to George Hilton, batteries and energy storage research manager at S&P Global Commodity Insights. Revenues in the UK "remain lower than many other European markets which is where most energy storage development activity is taking place today," Hilton said.

In its trading update, HEIT said average UK revenues in August rebounded to GBP72,000/MW/year and hit GBP70,000/MW/year in October, boosted by what it described as the widest wholesale price spreads observed since December 2023. Day-ahead power price spreads averaged GBP83/MWh, with daily spreads exceeding GBP100/MWh on 10 occasions during the month, HEIT said.

High levels of dispatch in the Balancing Mechanism, the market used to balance supply and demand in the UK, further enhanced revenue performance, with battery assets used to provide flexibility during periods of wind curtailment, the company added.

HEIT's experience is consistent with that of Gresham House Energy Storage Fund, known by its ticker GRID, which on Nov. 18 reported average portfolio revenues of GBP71,000/MW in October.

GRID pointed to the UK's last remaining coal-fired power station, which closed for good on Sept. 30, as having created "significant excess supply" during the previous winter, suppressing revenues for batteries.

"We are now starting to see a return of scarcity pricing on days of low renewable generation," the company said, with the UK issuing its first capacity market notice in almost two years on Oct. 14.

"As with previous notices, this was later canceled once additional more expensive generation was brought online but did lead to significantly higher peak electricity prices," GRID said in its trading statement.

Merchant revenues were likely to remain volatile while the National Energy System Operator carried out improvements in the Balancing Mechanism, "and it is encouraging to see volatility of supply begin to translate to volatility in system prices and hence improved trading spreads," it said.

GRID presented a three-year strategic plan on Nov. 27, aiming to grow its battery fleet to about 3 GWh by 2027 while more than tripling its annual earnings to GBP150 million.