TIDMGRID
RNS Number : 7870W
Gresham House Energy Storage Fund
28 April 2021
28 April 2021
Gresham House Energy Storage Fund plc
(the "Company" or the "Fund")
Full Year Results to 31 December 2020 and Q1 2021 Update
Gresham House Energy Storage Fund plc (LSE: GRID) (the "Fund" or
"GRID"), the UK's largest utility-scale battery energy storage
fund, is pleased to announce its second set of annual results since
the IPO in November 2018. This covers the 12 months ended 31
December 2020 together with an update for the quarter ended 31
March 2021.
Performance highlights during the FY20 period
-- Net Asset Value (NAV) up 74% to GBP358.9m (FY19: GBP205.9m)
-- NAV per share up 2.2% to 102.96p (FY19: 100.79p) and NAV total return of +8.4%
-- Share price total return of +10.8% versus FTSE All-Share Index total return of -9.8%
-- Underlying portfolio revenues up 89% to GBP19.0m (FY19:
GBP10.1m), driven by Frequency Response services, Trading and
Triads
-- Underlying portfolio EBITDA up 135% to GBP15.8m (FY19: GBP6.7m)
-- Total dividends of 7.0p per share paid for the year, as targeted and reaffirmed for 2021
-- Total equity funds of GBP151.2m raised and GBP14.9m of bonds issued
-- Portfolio weighted average discount rate of 10.8% (FY19: 11.2%)
Deployment
-- Total operational capacity increased to 315MW (FY19: 174MW)
-- GBP85.3m invested and 141MW of operational capacity added:
o 41MW Bloxwich (July 2020)
o 50MW Thurcroft (October 2020)
o 50MW Wickham Market (November 2020)
-- Cash position of GBP111m at year-end
Post-period end highlights, to 31 March 2021
-- NAV per share up 3.5% to 106.66p
-- Share price total return of +27.3% since IPO versus FTSE
All-Share index total return of +7.9%
-- GBP49.0m invested into 110MW of operational capacity taking
total to 425MW (including the 30MW Byers Brae acquisition announced
on 22 April 2021)
-- Updated Pipeline of 802MW, of which 275MW due to start construction shortly
o Investment into 275MW fully commits equity funds raised in
November 2020, expected to take operational capacity to 700MW by Q1
2022
o Additional exclusive pipeline of 527MW to be built subject to
further debt and/or equity fundraising
Operational Performance
-- COVID-19 impact on operations was modest. Commissioning dates
on two projects experienced delays during the year, for which
compensation was received in the form of liquidated damages
-- GRID remains market leader, with market share around 30%, and
largest operator by at least 2x
-- First and only operator to enter all new National Grid services in 2020
-- Operational uptime of 98.8% achieved for Firm Frequency Response
-- Battery duration is longer than most competitors, with over 1
hour average duration, reducing battery cycles and degradation
-- Investment and asset management teams expanded and well
positioned to scale portfolio and deliver operational
efficiencies
Environmental, Social and Governance
-- Battery Energy Storage Systems are playing a key role in pathway to net zero carbon
-- Supply chain policy developed for contractor evaluation
-- Batteries owned by GRID could discharge enough energy for over 47,000 homes in 2020
-- GRID awarded LSE Green Economy Mark and investment manager
awarded Principles for Reponsible Investing A+ rating
Commenting on the Fund's results, John Leggate CBE, Chair of
Gresham House Energy Storage Fund plc said:
"2020 was a milestone year for GRID, with the need for battery
storage highlighted by the sharp mismatch in power supply and
demand during the first UK lockdown, and the Government
accelerating decarbonisation targets.
"We have a substantial project pipeline and access to the
necessary resources to deliver on our ambitious plans to maintain
the growth momentum of our battery storage portfolio. This is
fundamental to delivering a stable, cost effective, and carbon-free
power generation infrastructure."
Ben Guest, Fund Manager of Gresham House Energy Storage Fund plc
& Managing Director of Gresham House New Energy said:
"The UK's global leadership in renewable generation and in its
setting of ambitious decarbonisation targets, continues to make it
one of the world's most attractive markets for deployment of
utility-scale battery storage technology. We are encouraged by the
system operator, National Grid, continuing to test and facilitate
new ways for battery storage to contribute to system balancing.
"More renewable energy on the system will inevitably lead to
more intraday power price volatility, driving the improved revenues
and profit from trading which GRID is best positioned to capture.
We are intent on driving shareholder value by maximising project
returns through our portfolio scale as well as operational and cost
leadership, while striving to reduce our cost of capital, including
through a potential new debt facility."
Annual Report and Webinar
An online webinar and Q&A session, to discuss the results
and provide an update on performance in Q1 2021, will be held at
9am today, Wednesday 28 April 2021. This will be an opportunity to
hear GRID's fund manager, Ben Guest, provide an update on the
Fund's operational and financial performance and to ask questions.
Registration is available via https://bit.ly/3nbEnx0
A copy of the Annual Report is also available on the Company's
website at
https://greshamhouse.com/real-assets/new-energy/gresham-house-energy-storage-fund-plc/
and here
http://www.rns-pdf.londonstockexchange.com/rns/7870W_1-2021-4-27.pdf
where further information on the Company can also be found. The
Annual Report has also been submitted to the National Storage
Mechanism and will shortly be available at
https://data.fca.org.uk/#/nsm/nationalstoragemechanism .
For further information, please contact:
Gresham House New Energy
Ben Guest +44 (0)20 3837 6270
Jefferies International Limited
Stuart Klein
Gaudi Le Roux +44 (0)20 7029 8000
KL Communications
Charles Gorman
Camilla Esmund
Saurav Karia +44 (0)20 3995 6673
JTC (UK) Limited as Company Secretary
Christopher Gibbons +44 (0)203 846 9774
1. HIGHLIGHTS
Company Financial Highlights
NAV per share (pence): 102.96 pence (31 December 2019: 100.79
pence)
(as at 31 December 2020)
Company Profit and total comprehensive income (GBPm): GBP18.7m
(2019: GBP7.7m)
(GBPmillion for the year ended 31 December 2020)
Total Gross equity funds raised: GBP151.2m (2019: GBP206.7m
including GBP100m at IPO) 1
(GBPmillion for the year ended 31 December 2020)
Alternative Performance Measures (3)
Dividend per Ordinary share: 7.0p (2019: 4.5p)
(for the year ended 31 December 2020)
Ordinary Share Price Total Return since IPO: 23.1% (IPO to 31
December 2019: 11.1%)
(for the period from IPO to 31 December 2020)
NAV per Ordinary Share Total Return (unlevered): 8.4% (IPO to 31
December 2019: 6.5%)
(total return for the year to 31 December 2020)
Performance highlights
Net assets at 31 December 2020 were GBP358.9 million.
Total dividend of 7.0 pence for the year, as targeted. This
equates to a 6.2% dividend yield based on the closing price on 31
December 2020.
Ordinary Shares have consistently traded on the London Stock
Exchange at a premium to the reported NAV per Ordinary Share during
2020 except for between 16 March 2020 and 04 May 2020 during the
market turbulence following the announcement of the first COVID-19
related lockdown in the UK (2) .
GBP151.2 million of gross funds raised during the year in the
form of:
- GBP31.2 million share issuance in March 2020
- GBP120 million share issuance in November 2020 following the
publication of a new prospectus
In addition, Gresham House Energy Storage Holdings plc, a wholly
owned intermediate holding company, raised GBP14.9 million through
a Bond issuance in October 2020 which was used for deployment into
new projects in the year.
Underlying portfolio revenues(3) have grown by 90% from GBP10.0
million in 2019 to GBP19.0 million in 2020.
315MW of operational capacity as of 31 December 2020, the UK's
largest battery energy storage portfolio.
Added 141MW of connection capacity to the portfolio through the
acquisition of three battery energy storage projects.
- 41MW Bloxwich project in July 2020
- 50MW Thurcroft project in October 2020
- 50MW Wickham project in November 2020
Operational highlights
New Pipeline of 485MW announced on publication of new prospectus
in November 2020 of which 45MW was acquired in January 2021. A
further 362MW of pipeline has been established since the
publication of the prospectus in the form of Coupar Angus (35MW),
Arbroath (40MW) and a further 287MW of exclusive pipeline split
across three new sites as shown in the Investment Manager's Report
. The current total pipeline stands at 802MW, of which 275MW was
funded, as of 31 December 2020.
1. Unaudited
2. Source: London Stock Exchange
3. Alternative performance measures are defined and calculated
in the Glossary
2. CHAIR'S STATEMENT
Overview
On behalf of the Board, I am delighted to present the audited
Report and Accounts of the Gresham House Energy Storage Fund plc
(the "Company") for the financial period ending 31 December
2020.
We have passed the second anniversary of our IPO and we are
pleased with the progress that we are making at a project and
Company level. We are excited about the prospects for the sector
given the scale of deployment of renewables in the UK, and of
offshore wind in particular.
The Company's UK market share remains at an estimated 30% with
the Company having demonstrated its leadership in the market once
again during 2020, almost doubling operational capacity to 315MW
during the 12-month period, from 174MW at the end of 2019. In the
first four months of 2021 we have completed on a further 110MW,
taking total operational capacity to 425MW as of the date of this
report.
The growth of the portfolio in the financial period came through
the acquisition of three projects as detailed in the Investment
Manager's Report. I am pleased to see the increasing size of
projects as the Company grows, which in turn creates efficiencies
of scale, whilst additional projects facilitate the requirement for
ongoing asset diversification to reduce asset specific risk. The
obvious efficiencies around costs are welcome, so too is the
enhanced productivity of the Investment Management team and the
recognition and materiality of the offering to National Grid. The
Investment Management team has also grown in bench strength,
significantly broadening and deepening its expertise across the
areas of operations, asset management, finance and transaction
capability, as well as ESG expertise.
The drop in share price during the first lockdown in March 2020
was disconcerting but stayed in line with the general market
reaction. The Investment Manager, with the Board's full support,
worked hard to take advantage of opportunities that arose in this
environment and the deals executed, large pipeline assembled, and
subsequent fundraising is a testament to the determination of the
team to maintain momentum, even under such challenging
circumstances. We are delighted to have been able to publish a new
Prospectus in November and issue 114.3 million new Ordinary shares
raising GBP120 million. The fundraising in November is expected to
unlock the commissioning of 275MW, expected to begin construction
by the developers at the start of Q2 2021, and any further
fundraising will increase the construction pipeline further. The
fundraising has also increased the Company's size which should make
it attractive to a wider investor universe and further reduce
ongoing charges. As shown in the Investment Manager's Report, the
new pipeline of 485MW, published in last November's prospectus has
grown to 802MW net of projects coming out of the pipeline. 45MW of
the previous new pipeline has now been acquired post year end. We
thank new and existing investors for the support they have
shown.
In addition to equity funding, the Company restructured its
operational assets under a new holding company, Gresham House
Energy Storage Holdings plc, and this new holding company issued
GBP14.9 million of bonds to fund the acquisition of operational
assets.
The pace of developments in the marketplace has been notable. We
saw significant levels of power generation curtailment in Q2 and Q3
2020 when demand was low during the first lockdown, and the
extensive use of gas-fired generation by National Grid to provide
flexibility. This led to an Ofgem investigation into National
Grid's actions, only to conclude that this was National Grid's only
realistic option as National Grid currently has neither access to
enough batteries nor information about their real-time state of
charge in order to make the most effective use of the batteries.
The realisation that gas-fired generation is getting a head start
on batteries, and the environmental and financial consequences
caused by this was the catalyst for a trial by National Grid of
batteries' potential versus gas-fired generation on three occasions
in 2020. The results were finally published in February 2021
showing that if batteries had been utilised, end-consumers billings
could have been reduced by over GBP100 million.
Perhaps more interesting is that National Grid now need to act
on this information. Inaction would lead to a far worse situation,
with increasing balancing costs being passed on to end consumers.
Research by the Investment Manager shows that the potential for
renewables to oversupply will increase about ten times in the next
24 months, leading to potentially ten times the curtailment and
associated impact on end consumers compared with 2019 levels. This
is a very real problem, not only regarding costs to consumers, but
also regarding the significant negative impact on the UK's
strategic intent to achieve net-zero carbon emissions by 2050.
Fortunately, National Grid seems committed to fixing this problem.
As a leading player in the battery storage market, we are well
positioned to be at the forefront of any new developments.
2. CHAIR'S STATEMENT (continued)
We also saw the launch by National Grid of Dynamic Containment
(DC), which is a new frequency response service freshly designed to
take advantage of the capabilities of batteries rather than using
the parameters used in FFR, which reflected the capabilities of the
legacy coal-fired power plants. The huge increase in renewable
energy generation as a percentage of demand, has displaced large
turbines with intrinsic rotating inertia which previously provided
stability in the system. This loss of available inertia, combined
with the potential operational uncertainties of interconnectors and
other large blocks of power generation, will lead to a significant
demand for this DC service. The procurement of large volumes of DC
by National Grid at launch (500MW) in Q4 2020 and 800MW or more in
2021 reflects the growing need for a service that is at the heart
of our operational expertise.
Net asset value and results
During the period, the NAV per Ordinary Share has risen from
100.79p on 31 December 2019 to 102.96p on 31 December 2020. This
improvement has been driven by cash generated in the portfolio
being above prior expectations, an adjustment in weighted average
discount rate from 11.2% to 10.8% and value created from acquiring
new projects at lower prices. These positives were partly offset by
more conservative assumptions by the independent providers of
revenue forecasts, especially in Q2 2020 when collapsing gas prices
set expectations for both power prices and volatility at a lower
level.
Dividends
The Company has committed to paying 7 pence per share in
dividends relating to 2020 and is maintaining its dividend policy
with 7 pence per share targeted again in 2021. The Investment
Manager forecasts full coverage of the dividend in 2021 based on
the number of shares currently in issue.
Outlook
The Board and the Investment Manager's view is that 2021 will
bring a number of positives. Firstly, we expect to benefit from
lower acquisition costs due to a lower cost of construction
(following shareholder approval in November for an amendment to the
Investment Policy permitting the Company to invest in projects
which are under construction). Secondly, the increasing portfolio
scale should also drive further operational efficiencies. Thirdly,
we expect to benefit from a lower cost of capital should a process
currently underway lead to a successful debt fundraising. A debt
raise would also assist with more efficient capital deployment,
allowing new assets to be funded in advance of equity fund raising,
thus avoiding cash drag. This combination of drivers should enhance
shareholder value in 2021 and beyond as we seek to reduce the
revenues per MW at which we can cover our target 7 pence dividend
per share. Finally, the current relative strength in UK Sterling
versus the US Dollar may allow the Company to benefit from a
reduction in the price on acquisitions as projects go into
construction procuring US Dollar-priced batteries and systems.
We look forward to our continued strong and leading
participation in this sector. Today, there is still only c.1GW of
operational battery systems in the UK, while there are c.50GW of
available renewable generation. The increasing scale of
intermittent oversupply and supply disruptions caused by renewables
as their share of generation rises, justifies a projected 10x
growth of battery systems by 2025, in our view. Beyond, there is
clearly a significant further need for investment in battery energy
storage as the renewables market continues to commission at least
2GW a year into the foreseeable future. Battery systems at scale
comprise a strategic cornerstone of the transition to a zero-carbon
world and it is encouraging to observe increasing support from the
Regulator (Ofgem) and National Grid.
John S. Leggate CBE, FREng
Chair
Date: 27 April 2021
3. INVESTMENT MANAGER'S REPORT
Gresham House Asset Management Limited (GHAM) is wholly owned by
Gresham House plc (GH), an AIM-quoted specialist alternative asset
manager with a market capitalisation of GBP265 million as at 12
April 2021. GH provides funds, direct investments and tailored
investment solutions, including co-investment across a range of
highly differentiated alternative strategies. GHAM's expertise
includes strategic public equity, private equity, forestry,
housing, new energy and infrastructure.
Headline information
Portfolio
As at 31 December 2020, the Company owned 315MW of operational
battery storage assets, which represents the UK's largest battery
energy storage portfolio.
During the financial period the Company added 141MW of
operational battery energy storage project capacity through the
acquisition of three battery energy storage projects:
- 41MW Bloxwich project acquired on 3 July 2020
- 50MW Thurcroft project acquired on 2 November 2020
- 50MW Wickham project acquired on 30 November 2020
Financial results
Total income in the Company was GBP23.4 million for the
financial period. Total income is made up of GBP13.1 million (56%
of the total) of income received from operational projects and
loans to parties affiliated to the Investment Manager and GBP10.1
million (43% of the total) of capital income relating to the
revaluation of the portfolio during the period and GBP0.2 million
(1%) from cash deposits.
Total Company costs for the financial period to 31 December 2020
were GBP4.6 million (2019: GBP4.4 million). The largest cost in the
period was the Investment Management fee of GBP2.4 million (2019:
GBP1.57 million) whilst legal and advisory fees relating to
acquisitions and fundraisings amounted to GBP1.7 million. In
addition to this, Director fees (including National Insurance
contributions) for the period were GBP216,073 (2019:
GBP265,000).
The Ongoing Charges Figure (OCF)(1) for the Company for the
period to 31 December 2020 was 1.26% based on the weighted average
NAV for 2020 (2019: 1.43%). The OCF has fallen year on year as a
result of the increasing size of the Company. Any further share
issuance would result in a further reduction of this figure.
The resulting profit and total other comprehensive income for
the Company for the year to 31 December 2020 was up 143% to GBP18.7
million , compared with GBP7.7 million for the period ending 31
December 2019.
For the performance of the underlying portfolio and a
description of underlying market conditions, please refer to the
Underlying Portfolio Performance sections of this report from page
10.
Dividends
The Company met its 2020 dividend target of 7 pence per Ordinary
Share with a final dividend of 1.75p for Q4 2020 paid on 26 March
2021. The Company continues to target a dividend policy totalling 7
pence per Ordinary Share in the 2021 calendar year.
For the full year to 31 December 2020 the Company and its
investments generated cash flow from operating activities
(including compensation paid to the projects due to construction
delays and lost revenues) after Company costs which resulted in a
0.78x dividend cover(1) of the 7 pence per Ordinary Share
dividend.
In the final quarter of 2020 the Company achieved dividend cover
of 1.11x as income from frequency response services improved
sharply (see: Underlying Portfolio Operations and Performance
Summary for details).
(1) Alternative performance measures are defined and calculated in the Glossary
3. INVESTMENT MANAGER'S REPORT (continued)
Continued strong market conditions in 2021 are expected to
enable the Company to deliver full dividend cover while funds from
the recent equity raise are deployed through 2021. The Investment
Manager therefore currently expects the dividend to be covered in
2021 subject to any further fundraising.
Fundraising
The Company continued to raise funds during the year with
GBP151.2 million of gross funds raised as follows:
- GBP31.2 million share issuance in March 2020; and
- GBP120 million share issuance in November 2020 following the
publication of a new prospectus.
In addition, Gresham House Energy Storage Holdings plc, a wholly
owned, intermediate holding company raised GBP14.9 million through
a Bond issuance in October 2020 which was used for deployment into
new projects in the year.
Financial Outlook
Cash flows from investments are expected to grow in 2021 as a
result of:
- Full year effect of owning recent project acquisitions for a full 12 months;
- Continued deployment of capital into new projects (see below);
- An improv ing revenue outlook from trading and frequency response service;
- A full year of 60MW of Capacity Market contracts which came into force in October 2020; and
- An additional 45MW of Capacity Market contracts taking effect
from October 2021. Note: the 80MW of projects announced in January
2021 also have Capacity Market contracts for 77MW of capacity ,
taking total active Capacity Market contracts to 202MW by the end
of 2021.
Net Asset Value (NAV)
The Net Asset Value per Ordinary Share as of 31 December 2020
was 102.96 pence. The acquisition of Wickham, in November, is
currently valued at cost due to the acquisition taking place close
to the year end.
Acquisitions during 2020
Note: further details on acquisitions are contained in Note 12
on page 84 of this report.
The Company made its first acquisition of the year on 3 July
2020 with the purchase of the Bloxwich project from Arenko Group
for an investment value of GBP20.1 million.
In November, the Company acquired the Thurcroft and Wickham
projects from the exclusivity pipeline from Gresham House Devco
Limited and Noriker Power Limited for a total investment value of
GBP30.1 million and GBP37.8 million respectively. These projects
were commissioned later than originally planned, largely due to
COVID-19 related delays. However, the sale and purchase agreements
were structured such that the SPVs were compensated for delays in
cash flow generation from 1 April 2020.
The total investment value of the acquisitions made in the
period was in excess of GBP85 million.
3. INVESTMENT MANAGER'S REPORT (continued)
Portfolio as of 31 December 2020
Map Ref. Existing assets Location Capacity (MW) Battery Size Site type Commissioning
(MWh) status
Battery and
generators,
1 Staunch Staffordshire 20 2.9 0.5MW import Operational
---------------- ----------------- -------------- ----------------- ---------------- ----------------
Battery and
generators,
2 Rufford Nottinghamshire 7 9.5 symmetrical Operational
---------------- ----------------- -------------- ----------------- ---------------- ----------------
Battery,
3 Lockleaze Bristol 15 22.1 symmetrical Operational
---------------- ----------------- -------------- ----------------- ---------------- ----------------
Battery,
4 Littlebrook Kent 8 6.3 symmetrical Operational
---------------- ----------------- -------------- ----------------- ---------------- ----------------
Battery and
generators,
5 Roundponds Wiltshire 20 25.8 16MW import Operational
---------------- ----------------- -------------- ----------------- ---------------- ----------------
Battery,
6 Wolverhampton West Midlands 5 7.8 symmetrical Operational
---------------- ----------------- -------------- ----------------- ---------------- ----------------
Battery,
7 Glassenbury Kent 40 28.2 symmetrical Operational
---------------- ----------------- -------------- ----------------- ---------------- ----------------
Battery,
8 Cleator Cumbria 10 7.1 symmetrical Operational
---------------- ----------------- -------------- ----------------- ---------------- ----------------
Battery,
9 Red Scar Lancashire 49 74.3 symmetrical Operational
---------------- ----------------- -------------- ----------------- ---------------- ----------------
Battery,
10 Bloxwich West Midlands 41 46.6 symmetrical Operational
---------------- ----------------- -------------- ----------------- ---------------- ----------------
Battery,
11 Thurcroft South Yorkshire 50 75.0 symmetrical Operational
---------------- ----------------- -------------- ----------------- ---------------- ----------------
Battery, 40MW
12 Wickham Suffolk 50 74.0 import Operational
---------------- ----------------- -------------- ----------------- ---------------- ----------------
Total 315 379.6
---------------- ----------------- -------------- ----------------- ---------------- ----------------
During the period, the Company extended secured loans to the
project companies which own Thurcroft and Wickham to support
equipment funding, as permitted under the Investment Policy,
earning an 8% rate of interest. Thurcroft and Wickham were
purchased by the Company (via its holding company) in the year and
these loans converted to unsecured loans. Loans to such pipeline
companies are shown as "Other Investments" in the AUM Composition
chart below.
Acquisitions since 1 January 2021
The Company has recently completed and announced the acquisition
of a further 110MW across five projects as follows:
- Tynemouth (25MW) acquired on 11 January 2021
- Port of Tyne (35MW) and Nevendon (10MW) both acquired on 29 January 2021
- Expansion of the Glassenbury site (10MW) on 11 January 2021
- Byers Brae project (30MW) from the exclusivity pipeline on 21 April 2021
Full commissioning of the Glassenbury B extension is anticipated
in Q2 2021. All other acquisitions were fully operational ahead of
the transactions completing.
New Pipeline
The Company announced an exclusive pipeline (the New Pipeline)
of 485MW on publication of its latest prospectus on 10 November
2020. Of this, 45MW has been acquired since financial year end in
the form of the operational projects Port of Tyne and Nevendon.
The Company has since secured a further 362MW of additional,
exclusive pipeline:
- 75MW of additional pipeline projects in the form of Coupar
Angus (35MW) and Arbroath (40MW), which we expect to commence
construction in Q2 2021
- 287MW additional pipeline in the form of Projects E2, B and Y
The Company also expects construction to begin on Projects M, E
and D from the new pipeline in Q2 2021.
The significantly larger new pipeline of 802MW is shown below
alongside the recently acquired assets and previous pipeline.
Delivery of this pipeline would result in a portfolio of over 1.2GW
of capacity.
Map
ref.
(see Battery
below) Capacity size Commissioning/ Completion
Pipeline projects Location (MW) (MWh) Site type status
Tyne and Battery, Acquired: 11 January
13 Tynemouth Wear 25 12.5 symmetrical 2021
------------------ ---------------- --------- -------- ------------- --------------------------
Glassenbury Battery, Completed: 11 January
14 Extension Kent 10 10.1 symmetrical 2021
------------------ ---------------- --------- -------- ------------- --------------------------
Battery, Acquired: 29 January
15 Nevendon Basildon 10 5.7 symmetrical 2021
------------------ ---------------- --------- -------- ------------- --------------------------
Tyne and Battery, Acquired: 29 January
16 Port of Tyne Wear 35 22.6 symmetrical 2021
------------------ ---------------- --------- -------- ------------- --------------------------
Battery,
17 Byers Brae West Lothian 30 30 symmetrical Acquired: 21 April 2021
------------------ ---------------- --------- -------- ------------- --------------------------
18 Battery,
Couper Angus Scotland c.35 c.35 symmetrical Q1 2021*
------------------ ---------------- --------- -------- ------------- --------------------------
19 Battery,
Arbroath Scotland c.40 c.40 symmetrical Q1 2021*
------------------ ---------------- --------- -------- ------------- --------------------------
20 Republic Battery,
Project Emerald of Ireland c.40 c.40 symmetrical Operational, Q1 2021
------------------ ---------------- --------- -------- ------------- --------------------------
21 Battery,
Project M Swindon c.100 c.100 symmetrical Q1 2022*
------------------ ---------------- --------- -------- ------------- --------------------------
22 Battery,
Project D Manchester c.50 c.50 symmetrical Q1 2022*
------------------ ---------------- --------- -------- ------------- --------------------------
23 Battery,
Project E Leicester c.50 c.50 symmetrical Q1 2022*
------------------ ---------------- --------- -------- ------------- --------------------------
24 Battery,
Monet's Garden North Yorkshire c.50 c.50 symmetrical Q2 2022*
------------------ ---------------- --------- -------- ------------- --------------------------
25 Battery,
Lister Drive Merseyside c.50 c.50 symmetrical Q2 2022*
------------------ ---------------- --------- -------- ------------- --------------------------
26 Battery,
Project G Northampton c.50 c.50 symmetrical Q2 2022*
------------------ ---------------- --------- -------- ------------- --------------------------
Battery,
27 Project P Preston c.50 c.50 symmetrical Q2 2022*
------------------ ---------------- --------- -------- ------------- --------------------------
28 Battery,
Project E2 West Yorkshire c.150 c.150 symmetrical 2022*
------------------ ---------------- --------- -------- ------------- --------------------------
29 Battery,
Project B West Yorkshire c.87 c.87 symmetrical 2022*
------------------ ---------------- --------- -------- ------------- --------------------------
Battery,
30 Project Y York c.50 c.50 symmetrical 2022*
------------------ ---------------- --------- -------- ------------- --------------------------
Total c.912 c.883
------------------ ---------------- --------- -------- ------------- --------------------------
*Note: Provisional completion dates. The Company will acquire the projects
at the start of construction
3. INVESTMENT MANAGER'S REPORT (continued)
During 2020, shareholders approved an amendment to the Company's
Investment Policy to allow it to take construction risk. As the
Company was already permitted to make loans to projects for the
purpose of making equipment purchases, the effect of the new
amendment was to allow the Company to make investments into
projects in construction equivalent to 25% of Gross Asset Value.
This creates the opportunity for the Company to grow more
cost-effectively by removing the cost of financing through
construction and increasing competition among contractors, as,
previously, contractors that did not offer construction finance
were not able to bid for contracts. Further, the Company can now
also earn income through the construction phase as it makes
interest-bearing loans to the project companies going through
construction.
The map to the right shows the current projects in the portfolio
and pipeline projects.
Further descriptions of each operational project in the
portfolio can be found at the end of this report.
Following the recently announced acquisitions the Company owns
425MW in operational projects. All projects are wholly owned.
At the present time, it is expected that the Company will have
c.700MW in operational projects once the near-term pipeline
projects have been commissioned. Any further fundraising would
allow the Company to make investments into additional projects.
Debt funding
The Investment Manager has recently begun a process to evaluate
a possible debt fundraising by the Company. A successful debt raise
would be expected to significantly reduce the Company's cost of
capital. The Company has a 50% upper limit on borrowing, as a
percentage of Gross Asset Value (GAV) and would seek a level of
debt materially below this cap. The catalyst for this exercise is
favourable market conditions and lenders' deeper understanding of
the need for battery storage and increased confidence in the
sustainability of their business models. This has translated into a
potential willingness to offer terms that are sufficiently
attractive for the Company to consider.
Another positive of this process, in addition to a lower cost of
capital, would be the ability for the Manager to significantly
reduce 'drag' from uninvested cash on the balance sheet.
A key focus for the Investment Manager is to progressively
reduce the revenue per MW required by the Company to achieve the
Company target of 7.0p dividend per Ordinary share. This
improvement will be driven by a combination of lower operating
costs, a lower cost of capital and a significantly lower total
acquisition cost per MW over time.
Valuation
The Company has continued to see the cost per Megawatt (MW) for
the construction of new projects fall since the Seed Assets were
acquired. This is in part due to falling battery and equipment
costs as well as targeting larger capacity sites which are cheaper
to build on a per MW basis. This has led to a fall in the price
paid per MW for new acquisitions and this trend is expected to
continue for additional pipeline projects, particularly given the
Company is now able to take some construction risk within its
investments. This provides the potential for a valuation uplift for
recent and future acquisitions, which also demonstrates a further
benefit of scaling up the MW capacity of the portfolio.
The weighted average discount rate on projects has fallen over
the financial period from 11.2% as of 31 December 2019 to 10.8% as
of 31 December 2020. Capacity Market contract related cash flows
are valued using a 5% discount rate reflecting their long term
contracted nature while trading and frequency response are classed
as Merchant and are valued using an 11.1% discount rate. Valuations
are reviewed by Grant Thornton who provide a Fairness Opinion twice
a year.
The increase in valuation in the year has been largely driven by
the additional investments made at cost followed by an uplift from
their acquisition cost to fair valuation. GBP14.94 million of the
investments were funded through Bonds issued by Gresham House
Energy Storage Holdings plc.
Changes in the present value of future cash flows through
modelling assumption changes (including revenue forecasts from
third parties) reduced valuations by a total of GBP8.56
million.
The working capital of SPVs increased by GBP12.14 million as a
net result of earnings and capital expenditure in the underlying
SPVs, GBP5.75 million of which was distributed up to the Company
through repayment of loans and interest and hence growing the cash
balance of the Company. GBP0.49 million of working capital changes
at Gresham House Energy Storage Holdings plc includes some legal
and transactions costs along with interest accrued on the bonds
raised in the year. The GBP4.0 million of loans reflect the balance
of equipment loans extended to the Byers Brae and Biggerbrook (the
extension to Littlebrook) projects. For more information on
underlying portfolio valuations please refer to Note 12 to the
Financial Statements.
NAV per Ordinary Share bridge - 31 December 2019 to 31 December
2020
The NAV per Ordinary Share has risen from 100.79 pence on 31
December 2019 to 102.96 pence on 31 December 2020. The bridge
between the two valuations is broken down in the chart below. The
largest contributions to growth have been the revaluation of new
projects acquired and cash performance in the underlying portfolio.
Further information on the valuation process and sensitivities can
be found in Note 19 on page 88.
Outperformance of the Company's underlying investments versus
modelled earnings have benefited the NAV. The performance of the
underlying investments is important not only for the continued
growth in NAV of the Company but also for generating cash for
paying dividends to shareholders. The underlying portfolio
performance and market conditions impacting the portfolio are
considered in subsequent sections below.
Forecasts
While the Investment Manager develops its own views on the
market, revenue forecasts for the Company's projects are provided
by an independent consultant. The revenue forecasts are driven from
the independent consultant's view on the future volatility in the
market and are not directly correlated with power prices. These
revenue forecasts can have a meaningful impact on the valuations of
the Company's investments and therefore the NAV. More conservative
assumptions have the impact of reducing the overall valuation of
investments due to reducing future cash generation expectations of
the investments. The forecasts used as at 31 December 2020 are more
conservative than the forecasts used at 31 December 2019 which has
resulted in a reduction in valuations over the year as shown in the
bridge chart above.
COVID-19:The Manager's response
The Investment Manager responded quickly to the lockdown
restrictions enforced in the UK since March 2020 as a result of the
COVID-19 pandemic and all employees were able to continue to work
remotely from their homes in a largely uninterrupted manner. The
Manager continues to support staff working remotely and would like
to thank all staff for their efforts during the pandemic.
The Investment Manager has experienced very few operational
disruptions since restrictions were put in place and is pleased
with the professional response shown by both O&M contractors on
the ground and by the Company's chosen trading partners. The
commissioning of Thurcroft and Wickham were both delayed during the
year. However, the Company's investments were able to recoup lost
revenues as a result of the delays through the use of compensation
payments known as liquidated damages.
COVID-19:Market response
After the first lockdown was announced on 23 March 2020 National
Grid faced unprecedented changes in demand levels. During the
summer months National Grid had to manage significantly lower
demand whilst also having greater generation from renewables versus
prior years. Their response was to launch Optional Downward
Flexibility Management (ODFM) to incentivise renewable and battery
energy storage plants connected to local (distribution) networks to
offer themselves to be curtailed or to import power, respectively.
This is because National Grid previously could not operate these
plants directly due to their connection into distribution (i.e.
local) networks. In the event, the Company's projects were able to
enter and participate competitively in ODFM. Our projects were also
able to support National Grid by offering frequency response
services.
3. INVESTMENT MANAGER'S REPORT (continued)
The Investment Manager, directly and indirectly through its
trading partners, has also been liaising with National Grid to
facilitate further solutions for balancing the system in future.
The successful trialling of batteries in the BM Reserve service is
a particular highlight. This offered batteries an opportunity to
compete head-to-head with gas-fired generation, which are currently
favoured by National Grid due to the historical design of the BM
Reserve service, which never envisaged batteries being available.
The trials ran in May, July, and September. Bloxwich, Lockleaze,
Roundponds and Thurcroft entered the trial while there were no
competing projects involved. The initial findings from the trial
shows that at least GBP100 million can be saved by end-consumers
through this service and we are hopeful this should lead to changes
in the utilisation of batteries in the Balancing Mechanism in
future. A report regarding this trial was released by National Grid
on 10 February 2021 and is expected to translate into an enduring
solution at some stage in 2022, following a restructuring of all
Reserve services procured by National Grid. The Company's projects
generated c.GBP15/MWh during the trials.
Underlying portfolio operations and performance summary
This and subsequent sections of the report pertain to the
performance and activities of the underlying investments and the
market environments in which they operate. The figures given in
these sections are therefore not reflected in the financial
statements of the Company, except through the impact they have on
valuations as noted in the Valuations and NAV sections above.
Further descriptions of market terms and relevant measures are
provided in the Glossary. The underlying performance of the
investments is routinely monitored to ensure they are meeting the
optimisation strategic framework and maximising EBITDA and
supporting the fair values recognised.
Total EBITDA for the underlying portfolio investments was
GBP15.8 million for the full year to 31 December 2020, an increase
of 135% versus GBP6.7 million of EBITDA in 2019. The growing EBITDA
is evidence of the underlying profitability of the Company's
investments and the benefits of scale in the portfolio when it
comes to cost efficiencies.
After challenging market conditions in the spring and summer
related to the COVID-19 pandemic, the underlying performance of the
Company's investments recovered and performed above expectations in
Q4 2020, largely due to attractive revenues earned by the majority
of the portfolio following the launch of National Grid's Dynamic
Containment service on 2 October 2020.
Unprecedented low demand through the spring and summer months of
2020 was caused by a significant change in the patterns of power
consumption across the UK as restrictions were put in place from
March to combat the COVID-19 global pandemic. Coupled with
extremely low natural gas prices (a fall also triggered by the
pandemic), the significant use of gas plant by National Grid to
provide flexibility to the system, and high renewable generation
resulted in consistently low prices and low volatility. This led to
limited trading opportunities during 2020 and led the Investment
Manager to focus on providing frequency response services to
National Grid during this period.
However, electricity demand, gas prices and volatility all
recovered strongly in Q4 2020, and particularly in December. This
presented exciting trading opportunities towards the end of the
year, with peak prices reaching levels rarely seen in the history
of the electricity market in Great Britain. Please refer to the
Outlook section of this report for more information on the
encouraging market trends we are observing. The launch of Dynamic
Containment (a new frequency response service) in October also saw
much higher prices achievable from frequency response and therefore
the portfolio has remained focused on maximising revenues through
Dynamic Containment and FFR services, while it has also taken
advantage of trading opportunities as they have arisen, allowing it
to capture additional value above the levels available from trading
or Dynamic Containment alone.
The ability to consistently capitalise on the highest value
markets is testament to the quality of our assets and control
systems, the work performed by our team and effectiveness of our
trading partners.
Underlying portfolio revenue and cost mix
2020 Portfolio Assets Revenue Revenue % of total
(GBPm) Operating
Revenue
Firm Frequency Response FFR 3.18 20%
------- ----------
Enhanced Frequency Response EFR 3.59 22%
------- ----------
Dynamic Containment DC 5.35 33%
------- ----------
Optional Downward Flexibility Management 0.02 <1%
ODFM
------- ----------
Frequency Response Total 12.14 76%
------- ----------
Trading 1.59 10%
------------------------------------------ ------- ----------
TRIADs 1.52 9%
------------------------------------------ ------- ----------
Capacity Market 0.82 5%
------------------------------------------ ------- ----------
Operating Revenues from Assets owned 16.07
-------
Liquidated Damages compensating
for lost revenues on delayed project
completions 2.97
-------
Total Revenues from the portfolio
for the year 19.04
-------
Total revenues for the underlying portfolio investments were
GBP19.0 million including Liquidated Damages (LD) paid as
compensation (directly to the SPV's) for lost revenues due to
delays on completion of Wickham and Thurcroft in the period to 31
December 2020. This represents an overall increase of 89% versus
2019 (GBP10.08 million). These are monitored as they are a key
underlying performance measure of asset performance and the ability
of the Company to realise the fair value increases.
Operating revenues in the investment portfolio of GBP16.1
million in the period came mostly from frequency response via
mainly EFR, FFR and Dynamic Containment (together 76% of the total)
with trading and TRIAD income at 19% and Capacity Market revenues
at 5%. Full details on each revenue stream are presented later in
this report. Underlying operating revenue per MW was over GBP75k/MW
for the year which is above the hurdle for covering dividends on a
fully deployed basis. For Q4 2020 operating revenue per MW was over
GBP100k/MW on an annualised basis, as a result of improved revenues
from Dynamic Containment.
In fact, Dynamic Containment, despite only starting in October,
was the largest individual contributor to revenues making up 33% of
the total. This reflects the very high prices achieved in Dynamic
Containment compared with other revenues which also launched just
before the commissioning of Thurcroft and Wickham and which both
immediately joined this service.
TRIAD income, covering Winter 2019/20, represented 9% of
revenues compared with 24% for the period to 31 December 2019 was
in line with the Investment Manager's expectations as TRIAD prices
stepped down for a third and final time this winter as part of the
restructuring of the Transmission Network Use of Systems (TNUoS)
residual payment by Ofgem three years ago. From Winter 2020/21, we
expect TRIAD income to represent an even smaller percentage of
revenues.
The revenue generating ability of the portfolio over the last
two years can be seen in the chart below which plots revenues per
operational MW over time. There have been two low periods to date
since IPO, the first being self-imposed to carry out upgrades on
the Seed Portfolio with sites ramping back up in Q1 2020, followed
by a second low period as the effects of the 2020 lockdown impacted
trading opportunities in the market. Nevertheless, the portfolio
has remained profitable throughout. Then, from September 2020,
revenues started to benefit from pricing levels last seen in 2019
first in the BM reserve three week trial, then, in October, from
Dynamic Containment into which the Company's assets were the first
entrants. Revenues have remained high since then and have continued
to grow as more of the portfolio enters the service.
Due to the exceptional revenues being earned in Dynamic
Containment during Q4 2020 the portfolio has spent most of the time
contracted in frequency response rather than trading. We do expect
market volatility to continue increasing as the UK transitions
towards more renewable energy generation. At the start of 2021 the
portfolio has been able to capture some of the significant
volatility in the market resulting in revenues above that of
Dynamic Containment alone.
Frequency response (76% of FY2020 portfolio revenue)
The portfolio was predominantly focused on frequency services
through the year. Until the launch of Dynamic Containment in
October 2020 the portfolio typically targeted the monthly Firm
Frequency Response (FFR) contracts contributing to 20% of
underlying portfolio revenue for 2020.
Monthly FFR contract prices troughed in September 2020 but have
recovered well since the launch of Dynamic Containment which saw a
significant overall increase in demand for frequency response by
National Grid.
33% of FY2020 portfolio revenues came from Dynamic Containment
in 2020. The service is currently in a 'soft launch' phase as the
mechanics of the service are fine-tuned. In 2020 the service only
required response to low frequency events (which require a battery
to export power) but a high service is currently expected in Q4
2021.
Being in frequency response requires light use of the batteries
which are therefore degrading very slowly.
Dynamic Containment has much stricter performance requirements
than FFR. In particular, batteries have to respond within a
narrower performance range during, ramp up and operation and
performance needs to be measured and reported 20 times per second.
These tougher requirements versus FFR have been a challenge for a
lot of battery operators and as such this service commands a much
higher fee than FFR and it is of higher value to National Grid.
The Investment Manager is pleased to confirm that the portfolio
had the only assets able to perform the service at launch in
October and has continued to be the market leader in the service
with additional capacity added during Q4 2020. On 31 December 2020,
the Company had 219MW contracted in the service representing 63% of
the total MW procured.
The Dynamic Containment service represents the first of three
anticipated frequency response services with the other two being
Dynamic Modulation (DM) and Dynamic Regulation (DR). These
additional services will emerge out of an internal process at
National Grid named Response Reform. These additional services are
likely to be introduced towards the end of H2 2021 or early
2022.
Glassenbury and Cleator continued to perform well under their
EFR service in 2020. Both sites are contracted in EFR until January
2022. The 50MW contract that these two sites share represents a
quarter of National Grid's EFR capacity. The Company acquired a
further 70MW of EFR projects in the form of Tynemouth (25MW), Port
of Tyne (35MW) and Nevendon (10MW) after the year end.
Trading (10% of FY2020 portfolio revenue)
Trading of the battery energy storage portfolio is intrinsically
linked to power price volatility in the electricity market and the
factors that affect it. Please refer to the market update for the
changes in the market through 2020.
Revenues from trading had been expected to contribute more
significantly in 2020 but that did not actually occur due to the
pricing available in frequency response. Similarly, while the
Investment Manager expects to remain mainly contracted in frequency
response services for much of 2021 as prices are expected to remain
high, important changes in the Balancing Mechanism which will see
National Grid utilise batteries more combined with higher
anticipated power price volatility may result in more income from
trading later in 2021. Trading remains the long term area of focus
for the Company due to increased volatility caused by higher
renewable electricity generation.
Despite the limited time spent trading during 2020, the
Investment Manager is encouraged by the evidence to date in the
portfolio's ability to capture value during system pricing events.
On 4 March 2020 the system price spiked to GBP2,242/MWh, the
highest price in 19 years, catalysed by a wind forecasting error.
Each of our available sites was able to capture significant value
from this event representing our best single day of trading
performance to date. This event was then surpassed by a system
price of GBP4,000/MWh on 8 January 2021.
The Company's trading partners are:
-- EDF in respect of Littlebrook, Rufford and Wickham
-- Flexitricity in respect of Staunch and Thurcroft
-- Habitat Energy in respect of Roundponds, Wolverhampton, Lockleaze and Red Scar
-- Arenko in respect of Bloxwich and Byers Brae
There is an ongoing effort from the Investment Manager to open
new markets and improve uptake of batteries. The trial of reserve
from battery energy storage in the BM in Q3 2020 for example was
performed solely by assets now owned by the Company.
The Investment Manager continues to push for the improved uptake
of batteries in the BM as a longer term source of trading
opportunity, services such as the BM reserve trial offer value to
National Grid, consumers, and battery owners as a more cost
effective and environmental form of reserve than currently
used.
TRIADs (9% of FY2020 portfolio revenues)
The period under review spans the entire 2019/20 TRIAD season
and half of the 2020/21 TRIAD season. All Seed Assets and
Glassenbury and Cleator sought to hit TRIADs in the 2019/20 season
and were successful in hitting two of the three possible TRIADs in
line with expectations. Unusually all three TRIADS occurred between
November
and December. All revenue associated with the 2019/20 season are reflected in 2020 revenue.
For the 2020/21 season, TRIAD prices have reduced with sites in
the North of England unable to earn any TRIAD income. Further
south, sites such as Staunch, Roundponds, Lockleaze and Glassenbury
which still have TRIAD income potential have been run successfully
and it is currently estimated that sites operated during all three
possible TRIADs events. A TRIAD is set when electricity flowing
over the National Grid hits one of three peaks between November and
February, inclusive, so long as the peaks are at least ten days
apart.
The reducing benefit of TRIADs means this will become a lower
proportion of revenues in future years and become a less important
focus for the portfolio.
Capacity market (5% of FY2020 portfolio revenues)
The Capacity Market contracts provide income to generators to
ensure generation capacity is available to meet shortfalls in the
system. They are awarded by the UK Government via an auction system
run annually by National Grid. All multi-year contracts are
index-linked to CPI.
During the period, Capacity Market revenues were earned by the
Staunch, Glassenbury, Cleator and Roundponds (10MW out of 20MW)
projects.
The Staunch contract is for 15 years, starting in October 2019.
15-year Capacity Market contracts for Glassenbury, Cleator and
Roundponds (10MW) totalling 60MW also come into force in October
2020 resulting in a total of 80MW of high-value Capacity Market
contracts for the portfolio as at the year end.
A short term Capacity Market arrangement has also been agreed in
the secondary market with capacity linked to uncontracted capacity
at Rufford, Littlebrook, Lockleaze, Wolverhampton and Red Scar to
provide additional revenue of up to GBP0.2 million for nine months
through to the end of September 2021.
An additional 45MW of Capacity Market contracts will commence in
October 2021 at Littlebrook, Rufford, Lockleaze, Roundponds (the
second 10MW) and Wolverhampton. Further Capacity Market contracts
will commence in October 2023 (with no new contracts starting in
2022 at this time) for the majority of the rest of the current
portfolio with additional contracts possible for future pipeline
with later start years. Although Capacity Market contract values
for batteries have tended to fall over successive auctions, the
combination of all Capacity Market contracts provides long term
visibility over a portion of the portfolio's revenues, sufficient
to cover more than half of the operating expenses of the current
portfolio.
It is noteworthy that, participation in the Capacity Market does
not preclude other revenue activities.
Portfolio cost performance
The Investment Manager sees ongoing cost reduction potential as
a result of scale in the portfolio. 2020 has seen a decrease in
O&M costs (excluding EFR sites on longer term contracts) by
over 30% versus 2019 rates on an average GBP/MW per annum basis.
The Investment Manager believes further reductions in O&M costs
will be seen in future as the Company scales up.
In recent months we have seen insurance premia increasing across
the portfolio. The market is still relatively new with few insurers
providing cover. The Investment Manager is encouraged by the
improving safety standards being adopted and is also pursuing
further safety improvements and procedures across the portfolio
wherever possible. We are therefore optimistic that cost reductions
are possible through the increasing scale and maturing of both the
market and the portfolio. We expect these benefits of scale to come
through from 2022.
Grid connection related fixed charges were, as expected, a
significant part of the operating cost base of the projects for the
period at c.GBP1.4 million (43% of operating costs). This was
consistent with 2019 levels on a cost per MW per annum basis.
Encouragingly, recent changes in regulations, pursuant to the
Target Charging Review (TCR) conducted by Ofgem have exempted
battery projects from the "residual" element of these fixed
charges. We expect to see a c.30% reduction in these charges split
between a first step in April 2021 and a second in April 2022.
Rent on a GBP per MW per annum basis has broadly remained
consistent with 2019 and is expected to remain at current levels
with each site holding long term leases. The Investment Manager
remains focused on maximising the use of each site over time by
increasing grid connection capacity and/or battery duration where
possible.
3. INVESTMENT MANAGER'S REPORT (continued)
Site uptime
While performing under frequency response contracts, which
require continuous performance, whether FFR or Dynamic Containment,
uptime has averaged 98.8% as shown in the table below. Greyed out
cells represent months where a site was not contracted to provide
frequency response services. In more detail, specifically in
September, Roundponds, Red Scar and Bloxwich were all involved in
the BM reserve trial whilst the remainder of the portfolio was in
FFR. In late October Staunch was removed from service to undergo
safety improvements and to reorganise the site for more effective
revenue optimisation. The site delivered some TRIAD runs during
this time and returned to service in Q1 2021.
Dynamic Containment (DC) availability:
Dynamic Containment has higher performance requirements than FFR
and comes with more severe penalties which can extend beyond just
the hours unavailable. Through to December 2020 the Company's
investments were able to achieve 99.7% of achievable contract
revenues in this service highlighting strong performance to
date.
Battery State of Health (SoH)
The state of health of the battery systems at each project is
shown in the table above. The relatively small drop in state of
health reflects the generally benign usage profile of the
portfolio's comparatively large batteries, associated with
performing mostly frequency services so far. Dynamic Containment,
in particular, has involved less than one cycle per day.
The Investment Manager has used relatively conservative
degradation assumptions indicated in the warranty agreements in our
forecasting; these assumptions may be revised as further
information is gained from a longer usage period.
3. INVESTMENT MANAGER'S REPORT (continued)
Review of the Electricity Market Backdrop for Battery Energy
Storage
2020 has been an extraordinary period for electricity markets
and may, in retrospect represent an inflection point for meaningful
changes in favour of the battery energy storage sector. We have
included this analysis to provide an overview of the current
electricity market as the electricity markets and volatility in
pricing is the key driver of the investment value. How this evolves
over time will impact this value. During the year, the market was
impacted by several key factors detailed below which demonstrate
the future revenue opportunity from trading as well as the need for
more batteries in the system:
i) Lower electricity demand from the initial lockdown followed
by higher peak demand in the winter.
After a brief uptick in demand at the start of March as cold
weather created stronger demand, at the start of lockdown demand
collapsed by up to 20% year on year. The fall in demand through to
May 2020 represented a multi-decade low in electricity demand.
Average demand each month has remained lower year on year until
January 2021; however, since November 2020 we have seen year over
year growth in peak demand, breaking a decade-long downtrend.
ii) Increase in extreme pricing (high and low) and growing
Balancing Services Use of System (BSUoS) costs.
In terms of high prices, given TRIAD payments are predictably
less valuable this winter due to regulatory changes implemented
over the last three years, peaking generation has been less likely
to run to meet peak demand. Thus, any elevated demand combined with
low renewable generation has led to an increase in occurrences of
very high power prices, creating much anticipated 'upside'
volatility (see chart below - note that prices above GBP1,000/MWh
are truncated while actual prices reached up to GBP4,000/MWh this
winter).
3. INVESTMENT MANAGER'S REPORT (continued)
It has been integral to our thesis that as the gas fleet is
gradually decommissioned (as it loses market share to renewables),
it would not be able to step up to meet demand when renewables
can't deliver enough power, resulting in more upside volatility as
more expensive flexible generation is despatched to meet demand.
This is finally happened in the winter of 2020/21 and is expected
to spread to other times of the year in due course.
To put recent events in context, there were very few instances
of system prices moving above even GBP200/MWh in 2018 and 2019.
The increased reliance on renewables is also having a clear
impact on intraday low prices, with zero or negative prices
becoming very common since late 2019 and particularly during the
lockdowns in 2020. The exceptionally low demand levels seen since
March resulted in regular negative pricing, also shown in the chart
above. This typically happens any time National Grid need to pay to
curtail subsidised renewable generation.
During this extraordinary period of low demand, National Grid
needed to curtail more renewable generation than ever before as
shown in the chart below.
The national bill for balancing the system during the lockdown
was c.GBP2 billion for 2020, up 34% on 2019, and shows up in
electricity bills. The chart above shows the increasing cost of
curtailment for wind but reflects the growing cost for curtailment
of renewables more generally. As renewables' share of the
generation mix grows, the amount of energy needing to be curtailed
is growing, resulting in escalating costs. However, crucially,
batteries offer a cost-effective balancing alternative to
curtailment, validating the need for significant battery energy
storage capacity on the grid. This increased demand should drive
greater revenue opportunities for the portfolio and hence increase
investment valuations and income from investments for the
Company.
iii) Low gas prices in the summer, Combined Cycle Gas Turbine
(CCGT) overcapacity and the impact on spreads.
Gas prices fell sharply in the first half of 2020. Combined with
lower demand during the lockdown it resulted in peak daily power
prices falling below typical levels. Therefore, despite the lower
intraday low power prices the net effect was lower intraday
volatility reducing potential trading revenues in the short
term.
We have since seen both higher demand and a return of gas prices
to levels seen prior to 2020.
3. INVESTMENT MANAGER'S REPORT (continued)
Outlook
Reinforcing our positive view on the prospects for the battery
energy storage sector is National Grid's clear effort in three
areas to greater and/or better use of batteries.
At the core of these efforts is the recognition that batteries
emit no CO(2) at the point of use while also being a more
cost-effective source of flexible generation than any other
alternative. Further information on ESG considerations is provided
in the Sustainability Report.
First is National Grid's increasing demand for frequency
response . In December 2020, they announced increased procurement
of Dynamic Containment from January 2021, growing to up to 1.4GW by
May 2021 versus 500MW in December 2020. Further, since 27 January
2021, assets have been permitted to trade in a limited way while
delivering a Dynamic Containment service, thus allowing sites to
earn additional income.
Second is the use of batteries for 'Reserve' services. There was
a four-week trial in September 2020 involving Bloxwich, Red Scar,
Roundponds and Thurcroft (prior to fully commissioning and
acquisition by the Company) for varying lengths of time which
followed two smaller trials earlier in the year. The trials used
batteries for 'Reserve' in the same way that gas turbines are used
to balance the market, for which they receive payments. Unlike gas
turbines batteries do not need to be exporting power in order to
provide flexibility as they can import, which therefore reduces
curtailment of renewables. This trial showed batteries to be
financially and environmentally attractive to National Grid. If
this turns into a permanent service, it is likely to lead to a
significant revenue opportunity for the portfolio.
The third initiative is to drive better use of batteries in the
Balancing Mechanism. A challenge for National Grid has been too few
batteries meaning that, even using all batteries together, it has
still required larger alternative sources, resulting in batteries
being side-lined. Recognising this issue, National Grid have taken
the decision to operate batteries even if they lead to over
procurement in the Balancing Mechanism, taking the view that doing
this will lead to a lower cost system over time, as batteries are
fundamentally more competitive.
We are optimistic that, combined with the above, the increasing
presence of renewable energy generation on the system will lead to
significant and more frequent higher intraday power pricing,
bringing with it improved trading revenue and profit potential
leading to improved cash flows and an increase in the valuation of
the Company's investments.
3. INVESTMENT MANAGER'S REPORT (continued)
Portfolio project descriptions
Staunch
Staunch, which is situated in Newcastle-Under-Lyme,
Staffordshire, was commissioned in March 2017 and has an asymmetric
grid connection capacity of 20MW export, 0.5MW import.
This project is located within a secure compound on the Holditch
House Industrial Estate, a brownfield site previously used for
waste collection and sorting. The industrial activity in the
surrounding area is of a significant size; the neighbouring foundry
has 24-hour operation. The site itself is approximately 200 metres
from the nearest residential area which is well screened by
industrial buildings and the acoustic fence surrounding the
compound.
Staunch, following its upgrade in Q4 2019 consists of
utility-scale batteries plus generators with a capacity currently
split as follows: 16MW gas reciprocating generators and 4MW of
diesel engine capacity (in place to meet Capacity Market contract
requirements and TRIAD operations but are not used day-to-day) and
a battery system which comprises 4MW (3MWh) of batteries.
Littlebrook
Littlebrook is an 8MW import and export battery-only
project.
This project is located near the site of the old Littlebrook
power station near the Dartford river crossing on the south side of
the Thames on less than 0.5 acres of land. It is located within the
existing Littlebrook Industrial Estate. The site was formerly an
isolated patch of scrub vegetation. This project was commissioned
in December 2017.
Lockleaze
Lockleaze is a 15MW import and export battery-only project
located in the Lockleaze area of Bristol beside a railway line and
a substantial Western Power Distribution (WPD) substation, on
approximately 0.5 acres of land leased from WPD. The site battery
capacity was increased from 11.4MWh to 22.1MWh in 2019.
The Lockleaze project was commissioned in July 2017.
Rufford
Rufford is a 7MW import and export battery (and reciprocating
generator) project located on land previously used for coal
stocking within the former Rufford Colliery in Nottinghamshire.
The former colliery site is currently undergoing remediation.
The project sits adjacent to an existing electrical substation and
is positioned within its own secure compound built on approximately
0.5 acres of land. The nearest residential premises are
approximately 1.3 kilometres south of the site.
The site battery capacity was increased from 3.25MWh to 9.5MWh
in 2019. As a result of this, the generators are no longer expected
to be used for the vast majority of the time but are necessary to
meet the requirements of the site's Capacity Market contract and
will therefore remain installed.
The Rufford project was commissioned in July 2017.
Roundponds
Roundponds, which is situated in Melksham, Wiltshire, has an
asymmetric grid-connection capacity of 20MW export, 16MW import.
The import grid connection was increased in Q1 2020 from 10MW to
16MW increasing revenue opportunities. The site is made up of
batteries and generators although commercially only the batteries
are used today.
The project is on approximately 0.5 acres of land located by
farm buildings at Roundponds Farm, which is off the Bath Road, 1.3
kilometres north west of Melksham. The site borders open
countryside on its far side and is approximately 150 metres from
the nearest residential building.
The project was commissioned and started commercial operations
in April 2018. During the upgrade work in 2019 the battery size was
increased from 12.7MWh to 25.8MWh. The 10MW of generators remain in
place to meet the requirements of one of the two 10MW Capacity
Market contracts belonging to this project.
Wolverhampton
Wolverhampton was the first project acquired following the
Company's IPO. The project has a symmetrical 5MW grid connection
and 7.7MWh of battery capacity. It was acquired by the Company in
August 2019. The site is situated in an urban environment c.1
kilometre from the centre of Wolverhampton. The site is surrounded
by a mix of major roads, commercial, industrial activity, and
several residential dwellings to the north west. The project was
commissioned in April 2019.
3. INVESTMENT MANAGER'S REPORT (continued)
Glassenbury
Glassenbury is a symmetrical 40MW battery-only project, it has a
50MW grid connection, with the further 10MW connection to be used
by the Glassenbury B extension completed in January 2021. This
project was acquired by the Company along with Cleator in December
2019.
The Glassenbury site is in a greenfield location near Cranbrook
in Kent. This project benefits from a long term EFR (Energy
Frequency Response) contract running until January 2022 at an
enhanced rate compared to standard month ahead frequency response
contracts. EFR is a service under which storage assets are able to
provide frequency response within one second. Glassenbury and
Cleator combined represent a quarter of National Grid's EFR
capacity. EFR, and FFR which is more common, are similar services
provided to the National Grid.
This project was constructed by NEC Energy Solutions and
commissioned in September 2017.
In 2022, the project may be further upgraded to maximise
revenues, which includes electricity trading .
Cleator
Cleator is a symmetrical 10MW battery-only project acquired by
the Company in December 2019. The site is situated in a greenfield
location along the river Ehen near to Cleator Moor in Cumbria. This
project also benefits from a long term EFR contract running until
January 2022.
This project was constructed by NEC Energy Solutions and
commissioned in October 2017.
This project is also expected to undergo a battery capacity
increase prior to the EFR contract terminating to maximise revenues
thereafter.
Red Scar
Red Scar is a symmetric al 49MW project with a 73MWh battery.
The project is located near Preston on an area of waste land
located to the south of the Red Scar Industrial Estate which
accommodates a variety of industrial and commercial enterprises.
The wider site was formerly a large manufacturing facility and
included its own on-site power station, now demolished.
Red Scar was constructed by Metka-EGN Limited and was
commissioned in December 2019.
Bloxwich:
Bloxwich is a symmetrical 41MW project with a 41MWh battery
constructed indoors.
The project is near Walsall in the West Midlands in one of a row
of large warehouses.
Bloxwich was constructed by GE and was commissioned in February
2019. It was acquired by the Company in July 2020.
Thurcroft
Thurcroft is a symmetric al 50MW project with a 75MWh battery
and is the Company's largest project to date. The project is
located near Thurcroft, to the east of Rotherham, on an area of
grazing land adjacent to a trading estate.
Thurcroft was constructed by Metka-EGN Limited and was
commission ed in October 2020.
Wickham
Wickham is a battery project with an asymmetric grid-connection
capacity of 50MW/40MW export/import and a 74MWh battery.
The project is situated in a rural location approximately 500
metres north west of the village of Hacheston. The nearest town is
Wickham Market in Suffolk. The site is adjacent to an existing
132kV substation owned and operated by UK Power Networks.
Wickham was constructed by Metka-EGN Limited and was commission
ed in November 2020.
4. GRID 2020 Annual Report - Sustainability Report
The Investment Manager's Sustainable Investment Approach
Sustainable Investment Framework and ESG Decision Tool
The Investment Manager's Sustainable Investment Framework (SIF)
consists of ten core themes and is used to structure analysis,
monitor and report on a broad range of ESG risks which may
materially impact proposed transactions, as well as directing focus
towards more sustainable outcomes.
The Investment Manager has developed an ESG Decision Tool (the
Tool) to support the identification of potential, material ESG
risks that need to be managed and mitigated and which helps shape
the due diligence process prior to investment into a new battery
site. The Tool aims to provide a rational and replicable assessment
of key ESG risks which should be considered prior to an investment
decision being made.
The Tool is based on the ten themes in the SIF and several
sub-factors are considered under each broader theme. It is split
across the various stages of the investment and management process:
pre-acquisition, pre-construction, construction and operation.
The Framework and Tool have been developed as a result of the
significant investment the Investment Manager made in this area
through the recruitment of key staff. Rebecca Craddock-Taylor, an
ESG and Sustainable Investment specialist, joined the Investment
Manager as Director, Sustainable Investment in July 2020. At the
same time the Investment Manager was awarded top ratings of A+ by
the PRI (Principles for Responsible Investment) and was awarded the
Green Economy Mark
The Investment Manager has identified five ESG factors across
the SIF that are most material to the Company's operations and
investments. These are Carbon emissions and pollution, Natural
resource management, Waste management, Employment, health, safety
and well-being, and Governance and ethics. These areas are covered
in more detail on page 24.
4. GRID 2020 Annual Report - Sustainability Report
(continued)
Overview of ESG integration into the investment process
The Investment Manager's investment process incorporates both
the SIF and the Tool as follows:
1. Preliminary due diligence
Using the Sustainable Investment Framework, the Investment
Manager will identify material ESG matters requiring further
investigation during the Due Diligence stage. If certain risks are
unlikely to be manageable or mitigated, then we may choose not to
proceed at this stage.
2. Due diligence
Our internally developed ESG Decision Tool is used to uncover
material ESG risks that need to be mitigated and monitored and to
identify ESG opportunities that have the potential to drive value,
now or in the future. Where necessary, specialist consultants are
engaged to support the diligence process. A summary of the ESG
analysis is discussed with the Board when the Board's final
approval for a transaction is sought.
3. Investment Appraisal and acquisition
A summary of the ESG analysis and sustainability assessments is
included in Board submissions. Appropriate risk mitigation
approaches are referenced, and action plans are in place to either
mitigate or capitalise on these ESG factors.
4. Asset Operation
We aim to construct and operate our projects with minimal
disruption to local communities and the environment. Construction
and operational contractors are subject to ongoing review.
Compliance with planning conditions is stringently adhered to and
monitored.
Achievements in 2020
Capacity
-- Increased operational capacity by 151MW, to 315MW as at 31 December 2020
Process
-- Integrated the SIF (see page 24) and the ESG Decision Tool
into the opportunity screening and acquisition process
-- Developed a supply chain policy for contractor and supplier relationships
Engagement
-- Engaged with National Grid to establish Battery Energy
Storage Systems (BESS) as a key contributor to the stability of
GB's electricity system
-- Increased levels of engagement with key battery suppliers in
relation to their environmental and social practices and
standards
-- Initiated collaboration with other owners and developers of
BESS to achieve a common, high standard for suppliers and
contractors
-- Initiated dialogue with key investors and brokers in this
area to understand their sustainability requirements
4. GRID 2020 Annual Report - Sustainability Report
(continued)
Objectives for 2021
1. Strategic Contribution
a. Continue to increase capacity under management to increase
GRID's contribution to the decarbonisation of the GB electricity
system
2. Supply Chain
a. Complete a review of key contractors and suppliers to assess
their ESG practices and alignment to their ESG policy commitments
in order to identify gaps in application and highlight key
risks
b. Carry out, where possible and appropriate, third-party,
external assessments of our battery supply chain to identify
material risks and mitigation actions that could be incorporated
into our investment process
3. GHESF Asset Review
a. Assess current operating assets against our SIF and establish
plans to rectify any material risks or create value for
shareholders
b. Review the carbon footprint of current operations and set an action plan to reduce emissions
4. Engagement
a. Continue engagement with key counterparties such as National
Grid, Ofgem, the Department for Business, Energy and Industrial
Strategy and others, communicating how the deployment of BESS is
needed to achieve decarbonisation goals
a. Increase active engagement with suppliers to positively
influence sustainability practices and policies
b. Increase community engagement, where applicable, continuing
to educate the public on the role of BESS in the UK's
decarbonisation ambitions
c. Solicit, where practical, feedback from key stakeholders who are in a position to contribute
Positive outcomes of BESS and GRID
The Investment Manager has identified two material positive
outcomes of GRID:
1. BESS will play a key role in the pathway to net zero
BESS will reduce carbon emissions from the UK's electricity grid
by supporting the increasing production of renewable energy and
reducing the need for carbon intensive energy generators, such as
coal and gas.
2. BESS helps stabilise the energy network that now relies more
than ever on intermittent renewable power, making it more efficient
and cheaper to run
The imbalances in supply and demand of electricity are currently
expensive for National Grid to manage. For example, they must pay
the owners of wind and solar farms to stop generating. These
additional costs are then passed on to consumers, increasing their
energy bills, and in some cases contributing to the problem of fuel
poverty, hence the use of BESS in the electricity grid may help
reduce consumer energy costs.
4. GRID 2020 Annual Report - Sustainability Report
(continued)
BESS will play a key role in the pathway to net zero
The introduction of BESS into the UK's electricity grid is
fundamental to the UK's ambition of achieving net zero carbon by
2050 and combating climate change.
Whilst the falling costs of renewable power generation have led
to rapid deployment over the past few years, Chart 1 shows that we
still rely heavily on carbon intensive energy generation from coal
and gas.
Electricity generation mix in the UK
To achieve the UK's net zero ambitions, renewables will need to
become a much larger part of the UK energy mix and generation will
need to increase to meet growing energy demands as more industries
move towards electrification (e.g. transportation and heating).
Generating energy from solar and wind relies on the sun shining
and the wind blowing. This means renewable energy generation is
unpredictable and intermittent, varying from one day to the next.
This is the opposite of what is required by National Grid, who need
to carefully balance electricity supply and demand all the time,
and in near real time, without exception.
Introducing BESS into the electricity grid can support the use
of renewable energy generation and help balance the unpredictable
and intermittent electricity supply from renewable sources. They
can store energy at times of oversupply and release it back to the
grid when there is increased demand, stabilising the network and
enabling further renewable deployment.
The tables below summarise the actions that National Grid take
to meet energy supply and demand with and without BESS.
4. GRID 2020 Annual Report - Sustainability Report
(continued)
Without BESS
Energy National Grid action Outcome
balance
Renewables Over supply Pay renewable energy Renewable energy that
produce too power plant owners could have replaced other
much energy to 'switch-off' carbon intensive energy
generation (known sources is lost and additional
as curtailment) costs passed to consumers
------------ ---------------------- --------------------------------
Renewables Shortfall 'Switch-on' gas Increased emissions as
produce too turbines to increase the electricity grid
little energy supply needs to use a carbon
intensive energy source
------------ ---------------------- --------------------------------
With BESS
Energy National Grid action Outcome
balance
Renewables Over supply Request BESS providers Renewable energy producers
produce too store the excess do not need to 'switch
much energy energy available off' their wind or solar
in the electricity farms and the renewable
grid for use at energy can then be used
another time later, avoiding carbon
intensive energy generation
------------ ----------------------- -----------------------------
Renewables Shortfall Call on BESS providers No need to 'switch on'
produce too to discharge energy carbon intensive energy
little energy they have stored generation, therefore
directly avoiding emissions
------------ ----------------------- -----------------------------
The batteries owned by Gresham House Energy Storage Fund plc
could discharge enough energy for over 47,000 homes each year.
Measuring the environmental benefits of including BESS in the
electricity grid
BESS do not typically operate on a continuous basis or whenever
the renewable resource is available and needs to be stored.
Instead, they are available as a tool that can be called on by
National Grid to deploy at short notice when needed to balance
supply or demand (via the Balancing Mechanism), or to be deployed
at the choice of the Investment Manager when the short term
expected pattern of power prices and volatility generate profitable
trading opportunities (via the Wholesale Market). It is possible
that in a time period as short as a day, BESS may switch between
these different modes of operation.
Measured on a short term basis, the amount of activity in terms
of energy distributed by the batteries does not necessarily
correlate completely with the contribution to the environment they
are making. Relatively short transfers of energy to and from
batteries can have a bigger impact on grid stability than a large
transfer of energy depending on the underlying reason the grid
became temporarily unstable. Intensive trading of power, over
multiple cycles throughout the day would distribute a lot of energy
but may not have the same beneficial effect on the stability of the
grid as a rapid, short burst of power delivered when the frequency
of the grid exhibits a major variation to the normal level of 50Hz
as a result of a heavy supply and demand imbalance, for
example.
However, it is undeniable that without batteries, a stable grid
could only be achieved through maintaining more fossil-fuel powered
generation as baseload or peaking power and/or dramatically
increasing the interconnector capacity between the UK and
continental Europe.
4. GRID 2020 Annual Report - Sustainability Report
(continued)
Thus, BESS systems need to be considered as part of an entire
electricity generation and balancing infrastructure, rather than on
a standalone basis, for a meaningful assessment of their
impact.
Quantifying the environmental contribution of BESS in a
consistent manner is therefore not straightforward requiring
assumptions to make one period of time comparable to another.
One method is to focus on carbon emissions avoided by using the
energy stored in BESS instead of turning on fossil fuel powered
generators.
In order to calculate the CO(2) emissions avoided through the
use of batteries, we have assumed that our batteries are being
operated in a continuous trading mode throughout the year as the
positive impact of grid stabilisation through frequency response
services is not directly correlated to electrical energy moved by
the batteries.
Assuming the charge and discharge cycles of the BESS owned by
the Company is 2.3 times per day, which is the number the
Investment Manager expects over the long term in its financial
projections, it is estimated that the total energy discharged by
the BESS owned by the Company in 2020 would have avoided over
60,000 tonnes of CO(2) by preventing gas-fired power from being
turned on.
BESS capacity under management and emissions impact
2018 2019 2020
Cumulative capacity of BESS fleet (MW) -
end of year 70 174 315
------- ------- --------
Cumulative capacity of BESS fleet (MW) -
time weighted average 58 74 207
------- ------- --------
Cumulative capacity of BESS fleet (MWh)
- end of year 35 179 380
------- ------- --------
Cumulative capacity of BESS fleet (MWh)
- time weighted average 29 42 225
------- ------- --------
Estimate of long term number of charge and
discharge cycles per day 2.3 2.3 2.3
------- ------- --------
Change in capacity per cycle 90% 90% 90%
------- ------- --------
Total energy discharged (MWh) 21,832 31,767 170,000
------- ------- --------
CO(2) emissions avoided (tonnes of CO(2)
)
Assuming gas-fired power emits 371 tonnes/GWh 8,100 11,785 63,000
------- ------- --------
Number of homes that could be served with
the energy discharged 6,102 8,878 47,000
------- ------- --------
Source: Gresham House plc data and research, and BEIS
4. GRID 2020 Annual Report - Sustainability Report
(continued)
3. BESS helps stabilise the energy network that now relies more
than ever on intermittent renewable power, making it more efficient
and cheaper to run
BESS supports the production of renewable energy on a large
scale by stabilising and balancing the electricity grid. The
services provided by BESS systems include;
-- Supporting National Grid's ability to balance the electricity
grid and harmonise electricity supply and demand.
-- Helping to regulate supply and demand through "Merchant"
activities whereby power is drawn and stored when there is a
surplus of it on the system with the purpose of discharging it into
the electricity grid when there is a shortage.
UK wind energy generation was curtailed on 275 days in 2020,
losing energy which could have powered over a million homes for a
whole year. The National Grid must pay renewable energy generators
to 'switch-off' their generation. Without the increasing use of
BESS, increasing deployment of wind power will likely result in a
higher bill for curtailment.
ESG considerations of battery production
While BESS support the decarbonisation of the electricity grid,
the Investment Manager recognises that their production,
transportation, use, and end of life treatment have environmental
and social implications.
The Investment Manager is aware of the need to carefully monitor
suppliers of the Lithium-Ion batteries used in BESS against
sustainable factors due to the long and complex supply chains and
manufacturing processes. The supply chains for our batteries have a
global footprint and include resources from parts of the world
where there is a heightened risk of standards not being met or
fully adhered to, particularly in relation to labour practices,
environmental sustainability and corruption.
Therefore, one of the focus areas for the Investment Manager's
sustainability work over the next few years is on Stakeholder and
Supply Chain Engagement.
The Investment Manager is currently developing an appropriate
supply chain policy for BESS to ensure it works with suppliers and
contractors who aim to reduce the environmental and social impacts
of their battery production processes and operations.
In addition, it is developing an engagement framework for the
Investment Manager's interactions with suppliers and contractors,
as well as agreeing reporting protocols so it can monitor
appropriate metrics on a regular basis. The Investment Manager
knows there is more to do and is committed to demonstrating best
sustainability practice in the deployment and operation of BESS
projects.
4. GRID 2020 Annual Report - Sustainability Report
(continued)
Key Features of the Supply Chain Policy
1. Framework. Ensuring that the policies and practices to
address risks in this area are properly defined and up-to-date, and
the right questions are asked.
2. Screening. Prior to contract agreement, suppliers of a
component or service are carefully assessed against various
sustainability factors using public sources, research reports,
interviews with supplier staff and site visits, where possible.
3. Risk Assessment. Suppliers with a strong reputation and clean
track record of compliance in all areas covered in the supply chain
policy will be favoured in our purchasing decisions.
4. Optimisation and Market Awareness. Continuous learning is
required to assess the latest technological developments and to
source equipment that makes the most efficient use of materials,
especially those such as Cobalt, the sourcing of which is
challenging, and generally equipment that will need to be replaced
as infrequently as possible. This will be analysed using financial
models calculating the return profile of BESS projects and
technical studies on the characteristics of the equipment focusing
on trade-offs between different technical variables.
5. Appraisal. Potential suppliers are assessed against their
compliance with various risk areas. The Investment Manager will
interview key staff, visit sites where possible, research
suppliers' record of compliance by speaking to other customers, and
carefully scrutinising the documentation provided. Various tools
that have been developed by external parties to monitor compliance
of suppliers are currently being evaluated and will increasingly be
used in the future.
6. Communication. Standards and requirements suppliers are
expected to meet at the outset and on an ongoing basis, are set and
clearly communicated and explained to the suppliers. Where
possible, supply contracts are designed to disincentivise
non-compliance with the requirements.
7. Monitoring of Compliance. Compliance with the requirements is
carried out on a regular basis through interviews, research and due
diligence.
8. Feedback. Learnings from activities in the battery energy
storage sector as well as across the Investment Manager's business
is fed back into the process and changes are made where
appropriate.
9. Quality Control. Regular reviews of policies will be carried
out, engaging external consultants where necessary for quality
assessment.
Material ESG considerations for BESS projects
The Investment Manager has identified the material ESG factors
associated with the manufacturing process, use and recycling of
BESS. These factors can be categorised into five themes across the
Investment Manager's Sustainable Investment Framework (see page
24):
E: Carbon emissions and pollution
Considerations
-- Carbon emissions from end-to-end manufacturing, transport and
installation process of BESS, with potentially long "breakeven"
times
-- Environmental pollution from end-to-end manufacturing,
transport and installation process of BESS
-- Environmental pollution from site operations (including those of counterparties)
-- Environmental impact of recycling process
Investment Manager's mitigation strategy
-- Implementing a supply chain policy that ensures we work with
suppliers who aim to reduce the environmental impacts of their
battery production processes
-- Carefully designed BESS and business model to maximise life
and yield of BESS reducing the environmental "cost" of each
kilowatt hour of storage capacity
-- New project acquisition checklist covering history of
environmental pollution and susceptibility of the site in this
regard
-- Adherence to post construction requirements of planning
process covering pollution of all forms
-- Incorporating recycling obligations into supplier contracts
and EPC contracts as much as possible.
4. GRID 2020 Annual Report - Sustainability Report
(continued)
E&S: Natural resource management and Supply chain
sustainability
Considerations
-- Inefficient use of resources, such as the metals and minerals used in BESS manufacturing
-- Water and land use in mining and extraction processes
Investment Manager's mitigation strategy
-- Considering design life as a key driver of resource
efficiency, particularly when it comes to materials such as cobalt
that have a strong environmental and social footprint. Focus on
robust designs that can stand the increase the lifetime of a
battery
-- Incorporating recycling obligations into supplier contracts
and EPC contracts as much as possible
-- Implementing a supply chain policy that ensures we work with
suppliers who aim to reduce the environmental impacts of their
battery production processes
E: Waste management
Considerations
-- Mining and extraction of materials required can produce waste
that could cause pollution to local areas, e.g. tailings
-- Waste created by end-to-end manufacturing process of BESS,
including components is harmful to the environment
-- End of life treatment of batteries
Investment Manager's mitigation strategy
-- Rigorous supply chain policy places obligations on suppliers
and contractors to report breaches
-- New project acquisition checklist incorporating waste management policies and compliance
-- Incorporating recycling obligations into suppliers and EPC Contractors as much as possible
S: Employment, health, safety and well-being
Considerations
-- Labour practices in some parts of the battery chain companies
are not of the same standards expected in the UK
-- Health and safety of the Investment Manager's and
Contractors' staff must be regularly reviewed and monitored
-- The COVID-19 pandemic that commenced in 2020 brought about
additional requirements to ensure the safety of workers on BESS
project construction sites
-- Risks to the health and safety of residents and workers
living and working near our BESS installations.
Investment Manager's mitigation strategy
-- Supply chain policy that places strict obligations on
suppliers to provide transparency on breaches of labour laws,
anti-slavery measures and universal standards for labour
welfare
-- Engage with our suppliers to monitor risks across the supply
chain and understand how they are working to reduce labour law
breaches and encourage best practice
-- Committed to coordinate action with other owners of BESS to
set standards, monitoring and enforcement for all battery
suppliers
-- Externally audited, and continuously updated Health and Safety Policy
-- Health and Safety monitoring extended to cover safety from
COVID-19, and incorporated into regular assessment and reporting
for BESS projects in construction
-- Planning process for new BESS installations covers
environmental and health and safety compliance
G: Governance and ethics
Considerations
-- Certain parts of the battery supply chain are at greater risk of bribery, corruption and money-laundering
-- Conflicts of interest, if not scrupulously managed, may lead
to sub-optimal outcomes in relation to sustainability and
price/quality for BESS projects
4. GRID 2020 Annual Report - Sustainability Report
(continued)
Investment Manager's mitigation strategy
-- Supply Chain and Contracting policies include terms on bribery and money laundering
-- Engage with our suppliers to monitor risks across the supply
chain and understand how they are working to encourage best
practice
-- Anti-Money Laundering and Anti-Bribery policies are in place
and staff must complete training on these topics
-- Registering and managing conflicts of interest. Procedures
have been put in place to ensure completed BESS projects that the
Company sources from related parties, such as affiliates of the
Investment Manager, are sourced in a fully transparent manner, and
on an arms-length basis
-- New project acquisition checklist to include
Know-Your-Customer (KYC) verification and records of how decisions
were made on sourcing
A discussion of climate change risks is included in principal
risks and uncertainties in this report.
5. STRATEGIC REPORT
The Directors present their Strategic Report for the period
ended 31 December 2020. Details of the Directors who held office
during the period and as at the date of this report are given on
page 47 of the Annual Report and Accounts. This Strategic Report
has been prepared in accordance with the requirements of Section
414 of the Companies Act 2006 and best practice. Its purpose is to
inform the members of the Company and help them to assess how the
Directors have performed their duty to promote the success of the
Company, in accordance with Section 172 of the Companies Act
2006.
Business Review and Future Outlook
A detailed discussion of individual asset performance and a
review of the business in the period together with future outlook
are covered in the Investment Manager's Report on pages 5 to 18 of
the Annual Report and Accounts.
The Directors are of the view the investment strategy,
incorporating both additional acquisitions and the asset upgrade
programme for the Seed Assets has performed well, especially
considering the acquisitions during the year and after the
Company's year-end. The Company has a strong portfolio of
investments which are well positioned to take advantage of a
growing opportunity. The equity fund raising at the end of 2020
demonstrates strong investor support for the Company's growth
strategy and the resilience of the Company's income. One of the
Board's key objectives for 2021 is to ensure an effective and
efficient deployment of the capital raised at the end of 2020 into
a portfolio of accretive assets that are in line with the Company's
Investment Policy. In addition, the Company is undertaking a debt
review process to further improve cost of capital and efficiency of
capital deployment.
Key Performance Indicators
The Board believes that the key performance indicators detailed
in the Highlights section on page 2 and the Investment Managers
Report, which include profit, project revenues, dividend, NAV,
total return, project capacities and battery sizes, provide
Shareholders with balanced information to assess how the Company is
performing against its investment objectives. The Board monitors
these key metrics on an ongoing basis and is pleased by performance
in the year: the capacity of the batteries has increased in the
year, the pipeline of new batteries is substantial and the revenue
earning opportunities for these batteries are continually
developing in line with our expectations, further discussion of the
KPI's and results are included in the Chair's Statement on page 3
and the Investment Manager Report.
The Company has generated GBP18,688,958 of profit in the year
ended 31 December 2020, including interest receivable from
subsidiaries. Total dividends which relate to 2020, were
GBP18,398,944 (including the dividend paid on 26 March 2021). The
Board keeps a close focus on operating profit and dividend cover to
ensure underlying profits from the Company's investments are
available to cover dividends. As the capital raised is fully
deployed and underlying assets upgraded the Board will ensure this
is monitored closely.
The capacity of the grid connection (in MW) and the capacity of
the batteries (in MWh) are also crucial to ensure the underlying
investments are able to operate at full capacity: the Investment
Manager has ensured grid capacities (both import and export) are
continually optimised and symmetrical wherever possible. Finally,
as the Company has undertaken several fundraisings following IPO
the Board monitors the project pipeline to ensure quality projects
are available to meet investor demand to ensure funds raised are
deployed in a reasonable timeframe.
Streamlined Energy and Carbon Reporting: Quantification and
Reporting Methodology
We have followed the 2013 UK Government environmental reporting
guidance: associated greenhouse gases have been calculated using
the 2020 conversion factors published by the Department for
Business, Energy & Industrial Strategy.
The reporting period is 1 January 2020 to 31 December 2020
5. STRATEGIC REPORT (continued)
Boundaries
We have used the equity share approach.
The Company itself is not an emitter of Greenhouse Gas. However,
the underlying assets within the Company's portfolio companies
import and export electricity which are sourced from either the
grid or from gas or diesel generators at each site, these have been
included in our emissions disclosures. The energy used and produced
by the companies is fully metered and carefully monitored.
UK energy use covers the battery storage activities across all
the portfolio companies owned directly or indirectly by the Company
from the date of ownership. It does not cover energy use of assets
under construction where construction is being carried out by third
parties. All operations are in the UK.
Energy used:
2020
Scope 1: Emissions in metric tonnes C0(2) e
-------
Gas consumption 2,541
-------
Diesel consumption 73
-------
Total Scope 1 2,614
-------
Scope 2: Emissions in metric tonnes CO(2) e
-------
Consumption of electricity(1) 2,412
-------
Total Scope 2 2,412
-------
UK energy consumption used to calculate emissions (MWh) (1)
-------
Gas 13,821
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Diesel 266
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Electricity (1) 9,525
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Total UK energy consumption 23,612
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Intensity ratio
CO(2) emissions per weighted average battery capacity (Tonnes per MW) 24.2
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(1) The figures shown are the net import / (export) of electricity from the grid
Scope 3 Emissions
We have identified the following are Scope 3 Emissions which
have not been quantified:
- Carbon emissions from end-to-end manufacturing, transport and installation of BESS
- Investment Manager emissions (i.e. offices).
Intensity measurement
The chosen intensity measurement ratio is gross emissions in
metric tonnes CO2e per weighted average MW capacity. This is
considered a more appropriate ratio than MWh due to variability in
operation of assets and difference service types.
5. STRATEGIC REPORT (continued)
Measures taken to improve energy efficiency
The usage of diesel generators within the operational portfolio
has been significantly reduced. Sites which have diesel generators
no longer use the generators day-to-day, but they are in place to
meet Capacity Market contract requirements and TRIAD operations on
three of the sites. The Company is not currently making new
investments in projects which require diesel generators.
Amendments to Investment Policy
During the first half of 2020, the Manager reviewed investment
opportunities in Ireland (both the Republic of Ireland and Northern
Ireland). The Manager considered that, given the attractiveness of
the risk and return profile of potential investment opportunities
in Ireland, it would be beneficial for the Company to have the
flexibility to invest a portion of its assets in projects located
there. The Republic of Ireland and Northern Ireland have a similar
regulatory framework and share a common high voltage transmission
system. The Board proposed, and shareholders approved, at the
Company's 2020 Annual General Meeting a resolution that the
Company's investment policy be amended to enable the Company to
invest up to 10% (calculated at the time of investment) of the
value of the gross assets of the Company in utility scale battery
energy storage systems in Ireland. Enabling the Company to invest
in Ireland will increase the number of investment opportunities
available to the Company, providing it with additional
opportunities to add to its yield and NAV per Ordinary Share.
Further and since IPO, the Company's investment policy has
prevented the Company from investing in BESS (Battery Energy
Storage Systems) Projects where construction is not substantially
complete or from lending funds to BESS Project companies other than
for purchases of equipment. During the second half of 2020, the
Manager advised the Board that in the Manager's view, it would be
beneficial to the Company to amend its investment policy to allow
the Company to acquire BESS Projects or rights to acquire BESS
Projects which are ready to build that as a minimum have in place a
completed lease, lease option or agreement for lease, on
satisfactory terms in relation to the land where that BESS Project
is situated, full planning permission enabling the construction of
a suitable BESS Project on that land, a grid connection offer, and
an agreed form EPC contract or EPC management contract suite
("Ready to Build Projects").
A resolution was therefore put to shareholders that the Company
should be allowed to acquire such Ready to Build Projects for a
nominal upfront consideration provided that (i) any remaining
consideration is paid by the Company only where construction is
substantially complete and where such BESS Projects are capable of
commercial operations, and (ii) the Company has a put option to
transfer back the Ready to Build Projects to the seller in certain
circumstances. These amendments also allow the Company to provide
loan finance to Ready to Build Projects for payments under the EPC
contract or EPC management contract suite which cannot be classed
as being for equipment, provided that no more than 10%. of Gross
Asset Value (calculated at the time that finance is provided based
on the latest available valuations) may be exposed in aggregate to
any such loans.
These amendments, which were approved by the Company's
shareholders at the General Meeting in November 2020, allow the
Company to benefit from a greater selection of projects and
contractors, lower costs and less drag on income:
-- Greater selection of projects - As the Company was unable to
finance construction risk, it was required to work with EPC
contracts that were prepared to provide construction finance. This
substantially limited the number of EPC contractors that could be
used by the Company prior to the amendment to the Investment
Policy.
-- Lower costs - Following the change in Investment Policy, the
Company is able to contract directly with EPC contractors and avoid
construction financing costs being incurred by the BESS Project
Companies.
5. STRATEGIC REPORT (continued)
-- Less drag on income - During construction, the Company can
earn income through interest-bearing loans provided to Ready to
Build Projects.
Although this new policy permits construction risk within the
portfolio, the Company is still bound by the requirement to only
accept projects at PAC. Therefore, there is an increasing role for
Gresham House Devco Limited to warehouse and put capital at risk to
bridge the gap between the development and construction phase of a
project. Gresham House Devco Limited earns a premium on the
acquisition price of assets for de-risking these projects on behalf
of the Company.
The ability to make milestone payments during construction also
leads to greater selection of project rights as some project in the
pipeline are offered for sale with pre-agreed construction
contracts in place.
In order to mitigate the potential additional risks associated
with the greater flexibility of the updated Investment Policy, The
Board and the Manager have adopted enhanced due diligence and
approval processes and requirements to manage and mitigate the
incremental risks arising as a result of the change in the
Investment Policy through the following:
-- Detailed due diligence on the engineering contractor covering
its track record in development, construction and operation of BESS
Projects, with a focus on project management, health and safety,
its staff and its financial strength.
-- Reviewing the clauses EPC or EPCm contracts relating to the
sharing of information and risk, including delays and safety, in
the construction phase. Mechanisms bringing significant
disincentives to delay and inadequate quality of design,
construction, installation and commissioning will be
implemented.
-- Underlying contracts with individual suppliers and
subcontractors to ensure that the quality of the equipment
supplied, and the quality of the installation and commissioning
process is high, and that payment terms align with the market and
the progress of the work.
-- Detailed due diligence on the project rights identifying
risks to the construction phase such as limitations on road access,
environmental requirements including noise and other pollution, and
planning requirements and working practices designed to minimise or
eliminate impact on local residents and businesses.
The Company's Investment Policy (as amended)
The Company invests in a diversified portfolio of utility scale
battery energy storage systems, which utilise batteries and may
also utilise generators. The BESS Projects comprising the Portfolio
will be located in diverse locations across Great Britain, the
Republic of Ireland and Northern Ireland.
Individual projects will be held within special purpose vehicles
into which the Company invests through equity and/or debt
instruments. It is intended that each BESS Project Company will
hold one BESS Project but an BESS Project Company may own more than
one BESS Project. The Company will typically seek legal and
operational control through direct or indirect stakes of up to 100%
in such BESS Project Companies, but may participate in joint
ventures or co-investments, including, without limitation with
other investors or entities managed, operated or advised by the
Gresham House Group, where this approach enables the Company to
gain exposure to assets within the Company's Investment Policy, the
like of which the Company would not otherwise be able to acquire on
a wholly owned basis. In such circumstances the Company will seek
to secure its shareholder rights through protective provisions in
shareholders' agreements, co-investment agreements and other
transactional documents.
5. STRATEGIC REPORT (continued)
Asset type and diversification
The Company invests primarily in BESS Projects using lithium-ion
battery technology as such technology is considered by the Company
to offer the best risk/return profile. However, the Company is
adaptable as to which specific battery energy storage technology is
used by the projects in which it invests and will monitor projects
and may invest in projects with alternative battery technologies
such as sodium and zinc derived technologies, or other forms of
energy storage technology (such as flow batteries/machines and
compressed air technologies), and will consider such investments
(including combinations thereof), where they meet the Company's
investment objective and policy.
The Company intends to invest with a view to holding assets
until the end of their useful life. BESS Projects may also be
disposed of, or otherwise realised, where the Manager determines in
its discretion that such realisation is in the interests of the
Company. Such circumstances may include (without limitation)
disposals for the purposes of realising or preserving value,
portfolio management or of realising cash resources for
reinvestment or otherwise.
The Company intends that the BESS Projects in which it invests
will primarily generate revenue from in-front-of meter services but
may also provide behind-the-meter services.
BESS Projects will be selected with a view to achieving
appropriate diversification in respect of the Portfolio.
First, diversification will be sought by geographical location
of the BESS Projects in which the Company invests across Great
Britain, the Republic of Ireland and Northern Ireland, provided
that no more than 10% of Gross Asset Value (calculated at the time
of investment) may be invested in the Republic of Ireland and
Northern Ireland.
Second, it is the Company's intention that at the point at which
any new investment is made, no single project (or interest in any
project) will have an acquisition price (or, if an additional
interest in an existing investment is being acquired, the combined
value of the Company's existing investment and the additional
interest acquired shall not be) greater than 20% of Gross Asset
Value (calculated at the time of investment).
However, in order to retain flexibility, the Company will be
permitted to invest in a single project (or interest in a project)
that has an acquisition price of up to a maximum of 30% of Gross
Asset Value (calculated at the time of acquisition). The Company
targets a diversified exposure with the aim of holding interests in
not less than five separate projects at any one time.
Third, the Company intends to achieve diversification by
securing multiple and varied revenue sources throughout the
Portfolio by investing in BESS Projects which benefit from a number
of different income streams with different contract lengths and
return profiles through individual BESS Projects, as well as by
enabling the BESS Projects in which the Company invests to take
advantage of a number of different revenue sources. It is intended
that the main revenue sources will be:
In Great Britain:
-- Firm Frequency Response - the Company invests in BESS
Projects that generate firm frequency response revenues including
from FFR contracts through which the Company and/or its
subsidiaries will provide, on a firm basis, dynamic or non-dynamic
response services to changes in frequency, to help balance the grid
and avoid power outages. Noriker or third parties provide
electricity trading services to project companies on a commercial
basis for an arm's-length fee.
-- Asset optimisation - the Company invests in BESS Projects
that generate revenues from importing and exporting or generating
and exporting in the case of BESS Projects including generators,
power in the wholesale market and the National Grid-administered
Balancing Mechanism.
-- Capacity Market - the Company invests in BESS Projects that
generate revenues by access to the benefit of contracts, or through
entering into new contracts, to provide back-up capacity power to
the Electricity Market Reform delivery body via 1- year and 15-year
Capacity Market Contracts.
5. STRATEGIC REPORT (continued)
-- TRIADS and other National Grid related income - the Company
invests in BESS Projects that generate revenues from the three
half-hour periods of highest system demand on Great Britain's
electricity transmission system between November and February each
year, separated by at least ten clear days and other National Grid
related income including Generator Distribution Use of System,
through which benefits are paid by DNOs to suppliers, which are
passed through to electricity generators in their power purchase
agreements and the National Grid's Balancing Use of System (BSUoS),
which recovers costs through charges levied on electricity
generators and suppliers. In addition, the balancing system
produces small half-hourly residual cash flows that are generally
negative (a disbenefit to distributed generators) but can be
positive (a benefit) and are allocated to suppliers in the same way
as BSUoS charges.
In the Republic of Ireland and Northern Ireland, the key source
of revenue for storage is through DS3 System Services contracts -
both volume uncapped, and volume capped. If successful in a
procurement exercise for a volume uncapped contract, a service
provider is paid a regulated tariff approved by the relevant
regulatory authorities. Some fast-responding battery energy storage
projects were awarded volume capped contracts (with a fixed term of
six years) in the 2019 auction. Revenue may also be possible
through the Capacity Payment Mechanism (which involves an auction
for capacity revenues) or wholesale trading revenues.
ESS Projects in which the Company invests may diversify their
revenue sources further by collaborating with renewable generators
or large users of power in close proximity to an BESS Project or
providing availability-based services to restore electric power
stations or parts of electric grids to operation.
In such circumstances, the proportion of revenues coming from
electricity sales may materially increase from that indicated
above. BESS Projects in which the Company may invest in Great
Britain may also be able to enter into FFR contracts with
Distribution System Operators (DSO) and provide reactive power
services to National Grid, the timing of which is according to the
current evolving DSO model.
Fourth, the Company aims to achieve diversification within the
Portfolio through the use of a range of third-party providers,
insofar as appropriate, in respect of each battery energy storage
project such as developers, EPC contractors, battery manufacturers
and landlords.
Finally, each BESS Project internally mitigates operational risk
because each BESS Project will contain a battery system with a
number of battery modules in each stack, each of which is
independent and can be replaced separately, thereby reducing the
impact on the project, as a whole, of the failure of one or more
battery modules. This includes appropriate systems to suppress fire
risk and other operational risks.
Other investment restrictions
The Company will generally acquire BESS Projects where within
special purpose vehicles, construction is substantially complete
and where BESS Projects are capable of commercial operations
(Operational Projects). Operational Projects will need to have in
place a completed lease on satisfactory terms in relation to the
land where that BESS Project is situated, an executed grid
connection agreement and completion of relevant commissioning tests
(in Great Britain, a G99 Certificate confirming commissioning
completion). Once an Operational Project is acquired, the Company
may invest in upgrades by providing loan or equity financing to the
special purpose vehicle. The special purpose vehicle may enter into
new lease arrangements to increase the size of the site, new
planning permissions enabling construction of an increased capacity
BESS Project on that land, a new and/or amended grid connection
agreement which provides for increased capacity, and/or an EPC
contract or EPCm contract suite to undertake construction of the
relevant upgrades.
The Company may also acquire BESS Projects or rights to acquire
BESS Projects which are ready to build that as a minimum have in
place a completed lease, lease option, or agreement for lease, on
satisfactory terms in relation to the land where that BESS Project
is situated, full planning permission enabling the construction of
a suitable BESS Project on that land, a grid connection offer, and
an agreed form EPC contract or EPCm contract suite (Ready to Build
Projects). The Company may acquire such Ready to Build Projects for
a nominal upfront consideration provided that (i) any remaining
consideration is paid by the Company only where construction is
substantially complete and where such BESS Projects are capable of
commercial operations and (ii) the Company has a put option to
transfer back the Ready to Build Project to the seller in certain
circumstances.
5. STRATEGIC REPORT (continued)
The Company may provide loan finance to BESS Project Companies
so that the BESS Project Companies can acquire equipment prior to
construction, provided that no more than 15% of Gross Asset Value
(calculated at the time that finance is provided based on the
latest available valuations) may be exposed in aggregate to any
such loans. The Company may also provide loan finance to Ready to
Build Projects for payments under the EPC contract or EPCm contract
suite which cannot be classed as being for equipment, provided that
no more than 10% of Gross Asset Value (calculated at the time that
finance is provided based on the latest available valuations) may
be exposed in aggregate to any such loans.
The Company does not intend to invest in listed closed-ended
investment funds or in any other investment fund (other than,
potentially, in money market funds as cash equivalents) and in any
event shall not invest any more than 15% of its total assets in
listed closed-ended investment funds or in any other investment
fund.
Investment in Developers
The Company may invest in one or more Developers of BESS
Projects through equity issued by the relevant Developer, provided
that investment in Developers (calculated at the time of
investment) shall be capped at GBP1 million in aggregate.
Cash management
Uninvested cash or surplus capital may be invested on a
temporary basis in:
-- cash or cash equivalents, money market instruments, money
market funds, bonds, commercial paper or other debt obligations
with banks or other counterparties having a "single A" or higher
credit rating as determined by any internationally recognised
rating agency selected by the Board which, may or may not be
registered in the EU; and
-- any UK "government and public securities" as defined for the purposes of the FCA Rules.
Leverage and derivatives
The Company is currently assessing its ability to raise debt and
is expected to introduce leverage (at the Company level and/or the
level of one or more of its subsidiaries, such leverage to be
introduced directly or through one or more subsidiaries) once
sufficient assets have been acquired and to the extent funding is
available on acceptable terms. In addition, it may from
time-to-time use borrowing for short term liquidity purposes which
could be achieved through a loan facility or other types of
collateralised borrowing instruments. The Company is permitted to
provide security to lenders in order to borrow money, which may be
by way of mortgages, charges or other security interests or by way
of outright transfer of title to the Company's assets.
The Directors will restrict borrowing to an amount not exceeding
50% of the Company's Net Asset Value at the time of drawdown. There
will be no cross collateralisation between the BESS Projects.
Derivatives may be used for currency, interest rate or hedging
purposes as set out below and for efficient portfolio management.
However, the Directors do not anticipate that extensive use of
derivatives will be necessary.
Efficient portfolio management
Efficient portfolio management techniques may be employed by the
Company, and this may include (as relevant) currency hedging,
interest rate hedging and power price hedging.
5. STRATEGIC REPORT (continued)
Dividend policy
The Board expects that dividends will constitute the principal
element of the return to the holders of Ordinary Shares. On the
basis of market conditions as at the date of this Registration
Document the Company will target dividend payments of 7p per
Ordinary Share in the financial year ending 31 December 2020 and in
financial periods thereafter.
It is intended that dividends on the shares will be payable
quarterly for the quarters ending in March, June, September and
December, all in the form of interim dividends (the Company does
not intend to pay any final dividends). The Board reserves the
right to retain within a revenue reserve a proportion of the
Company's net income in any financial year, such reserve then being
available at the Board's absolute discretion for subsequent
distribution to shareholders, subject to the requirements of the IT
Regulations.
The dividend policy will be subject to an annual vote at each
AGM. The Company may, at the discretion of the Board, and to the
extent possible, pay all or part of any future dividend out of
capital.
On 11 May 2020 the Board declared an interim dividend of 1.75p
per Ordinary Share which was paid on 10 June 2020 to those
shareholders on the register of members at close of business on 22
May 2020. On 1 September 2020 the Board declared an interim
dividend of 1.75p per Ordinary Share which was paid on 25 September
2020 to those Shareholders on the register of members at close of
business on 11 September 2020. On 27 October 2020 the Board
declared an interim dividend of 1.75p per Ordinary Share which was
paid on 11 December 2020 to those shareholders on the register of
members at close of business on 6 November 2020.
On 19 February 2021, the Company announced its interim dividend
for Q4 2020 of 1.75p per Ordinary Share successfully meeting its
dividend target for the 2020 financial year of 7p per Ordinary
Share (4.5p per Ordinary Share was paid in 2019). Further, the
Board confirmed its commitment to targeting a 7.0p per Ordinary
share dividend for 2021.
Discount management
Share buybacks
The Company may purchase Ordinary Shares in the market at prices
which represent a discount to the prevailing NAV per Ordinary Share
of that class so as to enhance the NAV per Ordinary Share for the
remaining holders of Ordinary Shares of the same class. The Company
is authorised to make market purchases of up to 35,117,170 Ordinary
Shares. The Board intends to seek shareholder approval to renew its
authority to make market purchases of its own issued Ordinary
Shares once its existing authority has expired or at subsequent
AGMs.
Purchases of shares will be made within guidelines established
from time to time by the Board and only in accordance with the
Statutes and the Disclosure Guidance and Transparency Rules. Any
purchase of Shares may be satisfied by the available cash or cash
equivalent resources of the Company, from borrowings, the
realisation of the Company's assets or any combination of these
sources of liquidity, at the Directors' discretion.
5. STRATEGIC REPORT (continued)
Ordinary Shares bought back by the Company may be held in
treasury or cancelled. Such shares may (subject to there being in
force a resolution of Shareholders to disapply the rights of
pre-emption that would otherwise apply) be resold by the Company. C
Shares bought back by the Company will be cancelled.
At the date of this Annual Report, the Company does not hold any
shares in treasury.
Continuation Votes
Shareholders will have the opportunity to vote on an ordinary
resolution on the continuation of the Company at the AGM of the
Company to be held in 2023, and every fifth AGM thereafter. If any
such ordinary resolution is not passed, the Directors shall draw up
proposals for the voluntary liquidation, unitisation,
reorganisation or reconstruction of the Company for consideration
by the shareholders at a general meeting to be convened by the
Directors for a date not more than six months after the date of the
meeting at which such ordinary resolution was not passed.
Going Concern Statement
The Directors confirm they have a reasonable expectation that
the Company has adequate resources to continue its operations for
at least 12 months from the date of signing these financial
statements.
As at 31 December 2020, the Company had net current assets of
GBP110 million and had cash balances of GBP111 million (excluding
cash balances within investee companies), which are sufficient to
meet current obligations and commitments as they fall due. The
major cash outflows of the Company are the costs relating to the
acquisition of new assets and payment of dividends, both of which
are discretionary. All committed acquisitions at the end of the
year and subsequent to year end are sufficiently covered through
current cash reserves. The Company had no outstanding debt owing as
at 31 December 2020. The Company has no financial guarantees to
support the Bond held by the Midco.
As such, the Directors have adopted the going concern basis in
preparing the Annual Report and Financial Statements.
Viability Statement
The Board is responsible for financial reporting and controls,
including the approval of the Annual Report and Accounts, the
dividend policy, any significant changes in accounting policies or
practices, and treasury policies including the use of derivative
financial instruments. The Board of the Company is also required to
assess the long term prospects of the Company according to the
Association of Investment Companies (AIC) Code.
For the purposes of the Viability test the Board has assessed
the prospects of the Company over a 3-year period to December 2023.
The Board considers a 3-year timeframe to be reasonable on the
basis that the Company is in the initial stage of acquiring assets
and the focus is on increasing the size and scale of the
portfolio.
The key risks facing the Company include, but are not limited
to, the risks mentioned on pages 31 to 37 have been individually
assessed by the Board. The Board note that it is difficult to
foresee the viability of any business over the long term given the
inherent uncertainty involved and that the risks associated with
investments within the infrastructure sector could result in a
material adverse effect on the Company's performance.
Financial models have been prepared for the period under review
which take into account liquidity at the start of the period and
key financial assumptions at the Company level as well as at the
operational project level. These financial assumptions include
expected cash generated and distributed by the portfolio companies
available to be distributed to the Company, expected external debt
and interest payments, availability of new external debt
facilities, committed expenditure for investments and expected
dividends as well as the ongoing administrative costs of the
Company. The Board have applied two scenarios to their viability
assessment:
5. STRATEGIC REPORT (continued)
1. A base case assessment to consider the Company's ability to
continue in operation under the current planned strategy to fund
and acquire the currently committed Exclusivity Pipeline; and
2. A severe stress test scenario which assumes no cash is
distributed by the portfolio: this scenario is a worst case and
would assume there were significant changes at the SPV's levels
either in terms of regulatory changes, changes to revenue
optimisation strategies and a flattening of volatility of prices in
the energy market in the medium term.
The Directors believe that the Company is well placed to manage
its business risks successfully over both the short and medium term
and accordingly, the Board has a reasonable expectation that the
Company will be able to continue in operation and to meet its
liabilities as they fall due for a period of at least three
years.
Based on the assessment of the Company's financial position,
after assessing the risks and significant assumptions together with
the existing high level of cash held by the Company and the
forecasts of the Company's future performance under the various
scenarios, the Board has a reasonable expectation that the Company
is well positioned to continue to operate and meet its liabilities
as they fall due over the period to December 2023.
Principal and Emerging Risks and Uncertainties
The Board operates a regular risk review process to identify
both current and emerging risks and operates a Risk Register as a
"live document" to ensure Board discussions are focused on key
areas of risk and appropriate mitigations. The Investment Manager
reports progress on mitigation actions and new and emerging risks
regularly at Board meetings.
The Company has developed a leading position in an exciting
sector: the electricity grid in the UK is in a process of
transition from centralised generation based on large fossil fuel
plants to a distributed system based on intermittent
non-dispatchable low carbon sources of electricity. This has
created challenges to many areas of the electricity system in the
UK. The Company is in an excellent position to create commercial
solutions to these challenges.
However, the process of transition and building a new business
model creates risks for the Company via its investments in either
operational SPVs or SPVs in construction. The key risks can be
summarised in several main areas:
1. Emerging business model for the electricity sector;
2. Regulation and potential changes to National Grid procurement for services;
3. COVID-19 pandemic;
4. Environmental, social and governance (ESG);
5. Operational, Technical and Commercial performance; and
6. Other risks, including borrowing, construction risk and new technologies.
Emerging Business Model for the electricity sector
The Company's investment model is reliant on the underlying
performance of the project companies (SPVs) in which the Company
invests. If the performance of these SPVs does not meet
expectations, then the investment income from the SPVs will be
insufficient for the Company to meet its dividend targets and may
adversely affect the valuation of the Company's investments.
Therefore, it is important that the Company and Investment Manager
look through the Investment Company share price to ensure the
underlying assets generate income to meet the Investment Objectives
of the Company.
These SPVs, rely on several sources of income: National Grid
based Firm Frequency Response, CM payments and TRIAD income and
Merchant trading income or "Asset Optimisation" outside of the
relationship with National Grid.
5. STRATEGIC REPORT (continued)
The National Grid income streams have been important to support
initial investments in battery energy storage and to enable short
term cash flow and these income streams have contributed a large
portion of the income to the underlying operating assets invested
in by the Company in the period ended 31 December 2020. However,
the future business model for the Company's investments may seek
less reliance on these income streams in future as historic
National Grid contract structures expire and are replaced with
other non-contractual income streams. The Company's investments
could therefore become more reliant on Asset Optimisation over time
and the Investment Manager will seek to ensure the underlying asset
portfolio is fully enabled to ensure remote access and import and
export of electricity to support trading activity within the
SPVs.
A Net Asset Optimisation within the SPVs is not reliant on
absolute power prices but is based on volatility within the power
market: this creates arbitrage opportunities within which trading
opportunities emerge and can be rapidly exploited. In consequence,
the investment returns received by the Company do not depend upon
high wholesale power prices. In the later part of 2020 in
particular, the SPVs saw very high volatility and peak power prices
despite wholesale prices not being high.
The emerging market for the electricity sector will change the
balance of contracted and non-contracted revenues at SPV level with
a consequential change in risk to these SPVs.
As the SPVs' business models evolve, it is important that the
asset portfolio is configured to enable successful trading / Asset
Optimisation to capture trading profits and cash flows are
available to the Company to cover the level of dividends targeted
to shareholders. This risk is in relation to configuration of the
asset portfolio (i.e. it is set up correctly to exploit the income
earning opportunity) and not whether or not the asset portfolio
performs to expected technical standards: this technical
performance risk is dealt with later.
The Investment Manager has undertaken in 2020 and will continue
to undertake many activities to mitigate the asset configuration
risk both over the period and in the future. These include:
-- Further investment in the existing portfolio assets to ensure
grid connection capacity and battery capacity are upgraded in both
absolute levels and import / export symmetry where possible to
maximise opportunities. This has largely been completed and has
included replacement of diesel generation sets with further
expansion of battery capacity and gas engines;
-- Improvement of remote supervisory and control systems and
despatch technologies to "iron-out" and test before full scale
asset optimisation is launched; and
-- Testing of relationships with several asset optimisation
partners and models to enhance Asset Optimisation - the Company has
tested these models in 2020 and believes the model is performing in
line with expectations in difficult trading circumstances.
The aim of the Company is to lead in this field. As the business
continues to develop other entrants will seek to participate and
the Company will continually seek to optimise the business model of
its investments to gain competitive advantage.
Changes to Energy Market Codes and Regulations
The revenue generated by each of the Project Companies and its
associated costs will be dependent on various energy market codes
and regulations. The Gas and Electricity Markets Authority within
the Office of Gas and Electricity Markets (Ofgem) regulates Great
Britain's energy markets through licensing certain activities such
as generation (with batteries being a proposed sub-set of
generation), supply, and distribution/transmission network
operation. A series of industry codes and agreements sit alongside
these licences, which include more detailed rules and market
processes. These include the Connection and Use of System Code, the
Balancing and Settlement Code, the Grid Code, the Distribution Use
of System Agreement and the Distribution Code. Ofgem must consult
with industry before implementing any changes to the codes;
industry representatives are provided with an opportunity to help
develop and propose changes to the codes, with Ofgem carrying the
deciding vote on any changes.
A future change in UK Government or Ofgem's direction regarding
the design of the energy market, network charges, access to
networks or a change in industry consensus around detailed market
rules could lead to unfavourable energy or grid policies which may
negatively affect the future availability of attractive battery
energy storage systems for the Company to invest in, as well as
those BESS Projects already acquired by the Company under current
electricity market/grid regulations. These may also result in
changes to procurement from National Grid
5. STRATEGIC REPORT (continued)
.
Changes in procurement of balancing services by National
Grid
The procurement details and contract designs that National Grid
uses for different balancing services currently vary. For example,
FFR contracts are tendered monthly and alternate between procuring
for the short term requirement (month ahead only) and for both the
short and long term requirement (from month ahead to 30 months
out), with a maximum contract award of 24 months. FFR contracts are
settled on a pay-as-bid basis. These contracts were previously
awarded for longer durations of up to 24 months before changes were
implemented in 2018. National Grid are now running trials of weekly
FFR auctions, as set out in more detail below. To the extent the
Portfolio includes sites with enhanced frequency response contracts
covering 4-year durations, the implication of this is that they are
not expected to be replaced with similar long term contracts at
expiry. These sites would then tender for shorter duration
contracts through the services offerings available at that
time.
National Grid began a phase two trial of dynamic low high
frequency and low frequency static services in October 2020 with
contracts tendered weekly for individual four hour blocks each day.
The weekly auction originally had a maximum tendered capacity of
20MW per unit and an overall cap of 100MW per service. However
after releasing the Project Evaluation Report in September 2020,
National Grid decided to remove the individual unit cap allowing
larger units to enter. The weekly auctions are settled on a
pay-as-clear basis whereby the largest accepted price is awarded to
all successful tenders. In October 2020, National Grid launched a
new service for a fast-acting post-fault service to contain
frequency within a statutory range (49.5Hz - 50.5Hz) called Dynamic
Containment. National Grid are continuing to work on the design of
two further end-state products: Dynamic Moderation and Dynamic
Regulation.
National Grid's work has an ongoing programme of change to its
procurement approach, and the above are some select examples which
are particularly relevant to battery storage projects. National
Grid plan for the weekly and monthly tenders for frequency services
to be taken over by the three dynamic end-state products in 2021 at
which point all tenders are expected to move to a daily auction.
Changes that shorten the standard duration of contracts could force
the Project Companies to re-contract more frequently in the future,
which may create higher administrative costs for the Project
Companies and expose them to more frequent occurrences of failing
to secure contracts immediately after expiry of a previous contract
and increases in the variability of revenues. Changes in the
specification of services (for example, response time or duration
of delivery) may require the operating Projects Companies to incur
additional investment and set-up costs which may adversely affect
the Company's NAV and revenues and returns to Shareholders. This
leads to an increased emphasis on value derived from a competent
and smart optimiser, who can manage the ongoing bidding/pricing,
and weigh which short term revenue stream(s) to pursue at various
times, rather than relying on BESS Projects having longer term
contracted revenue upfront.
Embedded benefits - Transmission Network Use of System (TNUoS)
charges and Distribution Use of System (DUoS) charges
An element of the revenue expected to be generated by the
Portfolio will be dependent on the savings of TNUoS and DUoS
charges that the Company's battery energy storage systems can offer
to its industrial and commercial customers through the deployment
of behind-the-meter batteries. Ofgem is currently implementing its
reviews of network charging arrangements (each a Significant Code
Review or SCR):
-- a Targeted Charging Review; and
-- a Reform of Electricity Network Access and Forward-Looking Charges.
5. STRATEGIC REPORT (continued)
The purpose of these work streams is to review how network
costs, including TNUoS and DUoS charges, are levied directly or
indirectly on electricity suppliers and (ultimately) on consumers.
As one part of the Targeted Charging Review, Ofgem published in
March 2020 a consent to withdraw CUSC Modification Proposal CMP332
"Transmission Demand Residual bandings and allocation (TCR)" and
direction to raise a new modification proposal to enable new
Transmission Demand Residual charges to be effective as of 1 April
2022. The code modification will be implemented in two stages, with
some of the changes (notably the BSUoS embedded benefit removal)
coming into effect from April 2021, and the remainder (notably
changes to the TNUoS and DUoS demand residual charges) from April
2022.
The result of this review should be a reduction in residual
charges incurred by battery sites, and reduced opportunity for
embedded benefit revenue creation, although the quantum is still
unclear.
Initial working papers were published in December 2019 for the
Reform of Electricity Network Access and Forward-Looking Charges
and information requested in July 2020. Ofgem plan to release a
Minded-to-Decision and final impact assessment in 2021 with reforms
planned to take effect from April 2023. It is not clear yet whether
this review will result in significant changes, nor the timeline
for implementation if so. The changes (if any) from this SCR
primarily relate to how connection charges are calculated, both at
the initial connection phase and during the life of the connection
(e.g. through DUoS and TNUoS).
A further decline in the TNUoS tariff levels for standalone
assets, or further change in charging mechanism, or an adoption of
a similar approach to the above for behind-the-meter storage
projects, potentially combined with further reductions and changes
in the charging mechanism, could materially adversely affect the
Company's revenues and financial condition. Similarly, a decline in
DUoS tariff or charging mechanism (for instance, switching to fixed
charges or gross demand charging) could materially adversely affect
the Company's NAV and revenues and returns to shareholders. In
addition, if new charges are introduced under which a battery
energy storage system could increase the charges payable by the
on-site customer, then this may create an exposure for the
Company's investments.
On 2 October 2020, Ofgem published the outcomes of its June 2019
consultation into proposed changes to the electricity generation
licence, to clarify the current regulatory framework for
electricity storage and it confirms the view that electricity
storage provides services equivalent to generation and therefore
for licensing purposes, should be considered as such. In
particular, the decision outlines two major changes which would be
made to clarify the regulatory framework in relation to electricity
storage. This would be done by adding two definitions into the
electricity generation licence standard conditions: "Electricity
Storage" and "Electricity Storage Facility" and by adding an
additional licence condition (E1) which will be applicable to
battery energy storage providers.
The new E1 condition will require energy generation licensees to
provide information in relation to the electricity storage
facilities they own to their relevant supplier. The main reason for
the addition of this condition is to ensure suppliers' compliance
for reporting purposes and facilitate the correct calculation of
final consumption levies. Not all electricity storage providers
will require a licence and the electricity generation licence
exemptions will apply in the same way to storage as to traditional
forms of generation. However, there may be some benefits to being
licensed in order to be exempt from payment of final consumption
levies when the electricity is imported and used only for storage.
Any changes could favourably but also adversely impact returns from
Project Companies and therefore could have an adverse effect on the
Company's NAV and revenues and returns to shareholders.
Risks of investing in BESS Projects with DS3 standard contracts
in the ROI and Northern Ireland and risks of significant changes
within procurement
An element of revenue for BESS Projects in the ROI and Northern
Ireland is the volume uncapped under the DS3 standard contract.
Under the volume uncapped procurement route, the Transmission
System Operators (TSOs), EirGrid and SONI, contract for system
services with eligible providers following conclusion of a
procurement exercise, and these service providers are paid a
regulated tariff approved by the regulatory authorities. The annual
budget cap for DS3 spend is EUR235 million. Under the standard
contract, the service providers have the flexibility to tailor the
service specification to suit the asset's capability. Additionally,
the standard contract is a five-year contract expiring in April
2023; and the TSOs retain a right to terminate the contract for
convenience on 12 months' notice or extend it for up to 36 months.
Estimated financial returns for BESS Projects targeting the DS3
standard contract procurement in the ROI and Northern Ireland are
dependent on, among other factors, its commercial operation date
(including grid connection date), the uncapped market tariffs and
market conditions. Investment decisions in relation to
opportunities in the ROI and Northern Ireland will be based on
price forecast and market expectations for the uncapped market, but
the Company cannot guarantee that the uncapped market conditions
and price will remain at levels which will allow the Company to
maintain projected revenue levels or rates of return on the battery
energy storage systems within the Portfolio if the Company was to
invest in BESS Projects in these territories.
Risks related to the volume capped outcome in the ROI and
Northern Ireland
The Company intends to invest in BESS Projects in the ROI and
Northern Ireland that have secured volume capped contracts.
However, even if the Company invests in an BESS Project which has
secured such a contract, it may not be able to secure attractive
terms at the time of renewal of such contracts and consequently may
not be able to use the battery energy storage systems at their
maximum capacity and capabilities, including between contracts.
BESS Projects in the ROI and Northern Ireland may also rely on
revenues from the "Delivery Secure Sustainable Electricity System"
programme as well as the Irish Capacity Remuneration Mechanism and
wholesale revenues.
COVID-19 pandemic
The ongoing COVID-19 pandemic could still adversely impact the
operations of Project Companies, and therefore could adversely
affect the ability of the Company to deliver income and capital
returns to shareholders in the following ways:
-- The Project Companies operate with supply chain partners with
strong business continuity arrangements and the BESS Projects are
operated by remote monitoring and despatching. However, there is a
residual risk that suitable specialist personnel are unable to
attend sites when required to ensure the BESS Projects are
operating to their full potential. The Manager carefully monitors
the operational arrangements of the supply chain partners in order
to minimise this risk of operational failure.
-- The ability to construct or commission BESS Projects within
the pipeline may be adversely impacted.
-- Global and/or regional travel restrictions may delay the
commissioning of BESS Projects and may constrain supply chains.
However, as BESS Projects that are in the process of construction
represent important infrastructure for the electricity system in
the UK and the ROI, the Manager expects that suitable arrangements
will be continuing to be put in place in order to overcome any such
restrictions.
-- The energy markets into which BESS Projects are operating saw
some disruption due to the COVID-19 pandemic in the first half of
2020 although the situation normalised later in 2020. Dysfunctional
markets could adversely impact the trading operations of the
Project Companies and the returns to the Company. The Manager
monitors these markets and trading performance to maximise overall
performance. The BESS Projects are able to switch between revenue
streams to maximise value when price volatility is reduced.
-- Energy supply was a key industry during the pandemic and was
able to continue to operate and required personnel were able to
access the sites as required. The BESS Projects are remotely
operated reducing the impact of travel restrictions.
Environmental, Social and Governance
The Company seeks to ensure that the activities of the Project
Companies are beneficial to society and the planet as a whole. The
Company will continue to review supply chain governance, focusing
on the source materials such as cobalt and rare earth elements, as
well as the recycling of battery materials and other components and
will build these issues into the Company's risk management
programme. Section 4 of this Report includes a full review of
ESG.
Environmental liabilities, particularly on "brownfield"
sites
It is anticipated that a significant proportion of the battery
energy storage systems to be acquired by the Company will be
located on agricultural, commercial and industrial properties. Such
sites can have a greater likelihood of Project Companies suffering
environmental liability and/or requiring a higher degree of due
diligence in the permitting steps.
To the extent that there are environmental liabilities arising
in the future in relation to any sites owned or used by a Project
Company including, but not limited to, clean-up and remediation
obligations, such operating company may, subject to its contractual
arrangements, be required to contribute financially towards any
such liabilities, and the level of such contribution may not be
restricted by the value of the sites or by the value of the total
investment in the relevant battery energy storage system.
5. STRATEGIC REPORT (continued)
The battery suppliers or EPC contractors may offer the Project
Companies end of life battery disposal options where the supplier
or EPC contractor shall be responsible for the removal, collection,
recycling and disposal service for batteries but it is not
guaranteed that all the battery suppliers from whom the Project
Companies purchase batteries or EPC contractors for the Project
Companies will offer or be able to deliver such options and the
Project Companies may incur battery disposal costs at the end of
the battery life.
In addition, while the Company structures its investments to
ensure statutory recycling obligations at law remain with its
suppliers and/or EPC contractors, it remains a risk that the
Company's investments could attract such liabilities.
In addition, there can be no guarantee that environmental costs
and liabilities will not be incurred in the future. Environmental
regulators may seek to impose injunctions or other sanctions that
affect the Company's investments operations that may have a
material adverse effect on the Company's results of operations,
financial conditions or impose compliance costs such as data
collection or reporting obligations.
Operational, Technical and Commercial Performance
The financial model for the Company and its investments will
make assumptions about the future costs and increases or reductions
over time. The Investment Manager seeks to ensure that these are
sensible and appropriate but sudden changes in (say) insurance
markets may have an impact on such costs.
Health and safety risks
The physical location, maintenance and operation of a battery
energy storage asset may pose health and safety risks to site
workers, other local buildings or nearby residents. The operation
of a battery energy storage plant may result in bodily injury or
industrial accidents (including fires). If an accident were to
occur in relation to one or more of the Company's battery energy
storage plants, the Company, Holdings and/or the relevant Project
Company could be liable for damages or compensation to the extent
such loss is not covered under existing insurance policies.
Liability for health and safety could have a material adverse
effect on the NAV and revenues and returns to Shareholders.
Balancing services contracts and pricing (including frequency
response) and failure to secure new contracts on expiry and
relationship with National Grid
The revenues generated will depend, in part, on the price each
Project Company is able to obtain for providing various balancing
services to National Grid (including, in particular, frequency
response) in respect of the battery energy storage systems.
The current UK frequency response service is procured by
National Grid via both monthly and weekly tender processes;
however, this tender process is currently undergoing a significant
transition, in particular with new services being procured such as
Dynamic Containment since October 2020. The Company may acquire a
BESS Project without a frequency response contract and/or it may
have a short term frequency response contract where there is
uncertainty over the value of any replacement frequency
contracts.
The UK's frequency response market currently offers short term
contracts of significantly shorter duration than the expected life
of the BESS Projects that the Company holds or expects to acquire.
When such contracts expire, the Project Companies may not be able
to secure replacement contracts (or sufficiently attractive terms
for replacement contracts) in the competitive allocation process,
and consequently may not be able to use the battery energy storage
systems at their maximum capacity and capabilities, including
between contracts. The Manager mitigates this risk by assuming the
asset optimiser will spend a greater time trading and in the
Balancing Mechanism in the future and so assesses forecasted
revenues based on alternate opportunities in respect of each of the
sites.
5. STRATEGIC REPORT (continued)
The Manager makes investment decisions based on price forecasts
and so a lower than expected market price of balancing services
could materially adversely affect the Company's revenues and
ability to meet targeted returns. Furthermore, the Company cannot
guarantee that market prices of balancing services will remain at
levels which will allow the Company to maintain target dividend
distributions or rates of return on the battery energy storage
systems within the Portfolio. A significant drop in market prices
for balancing services would have a material adverse effect on the
Company's NAV and revenues and returns to shareholders. The Manager
has assumed a low exposure to FFR contracts throughout 2020,
limiting the impact to a loss of business in this area. The pricing
assumptions set in the BESS Projects acquired have been reviewed by
a third-party consultant and forecasts are below current pricing
levels. Any information or event which justifies the forecasting of
factoring lower prices than those currently assumed prior to the
commissioning of any BESS Project would justify a lower purchase
price being paid for such BESS Project by the Company.
NGET is a subsidiary of National Grid plc and is the owner and
operator of the electricity transmission network in England and
Wales, and the system operator (responsible for amongst other
things balancing the system) for Great Britain is National Grid
Electricity System Operator Limited ("National Grid ESO" or "NG
ESO"). National Grid is one of the largest companies in the UK (it
is capitalised at approximately GBP30 billion and in the top 20 UK
listed companies). NGET has a Moody's credit rating of A3. The UK
Government does not guarantee the solvency of NGET. If either of
these companies were to collapse or if their financial strength
were to materially deteriorate, their respective obligations as a
counterparty in respect of each of the Project Companies may be
seriously impacted or become worthless, which could materially
affect the Company's NAV and revenues and returns to
Shareholders.
While BESS Projects may secure contracts with Distribution
System Operators (DSOs) in relation to the DSOs own electricity
distribution systems, and there is a nascent market developing for
such services, there is no certainty that DSOs will continue to
emerge as entities requiring frequency response services or other
material services for BESS Projects and, if they are, it may not be
at the levels projected. Therefore, a loss of an FFR contract or
breakdown in relations with National Grid would have material
adverse impact on BESS Projects' ability to obtain frequency
response revenues, either temporarily or permanently, which could
have an adverse effect on the Company's NAV.
Volatility of electricity prices affecting asset optimisation
opportunities
One of the other major sources of revenue for the Portfolio is
from trading activity, also described as energy trading or price
arbitrage (often a key part of asset optimisation). This is
dependent on the spread of the price at which electricity can be
imported (for charging) and exported (upon discharging). A lower
than expected volatility in the market price of electricity, or a
smaller spread between buy and sell prices, could adversely affect
the Company's revenues and financial condition. The Company cannot
guarantee that electricity market price volatility and/or a Project
Company's ability to capture spreads will be at levels or frequency
which will allow the Company to generate projected revenue levels
or rates of return on the battery energy storage systems within its
Portfolio. The Company's investments have contracted with third
party service providers to undertake asset optimisation for the
Project Companies, which include energy trading optimisation
services.
There are no minimum revenue requirements or guarantees in the
asset optimisation arrangements and the Company's protection
against underperformance is limited primarily to exercising
termination rights under the optimisation services contracts and
then seeking a replacement asset optimiser. In line with current
market standards, there can be evidential hurdles in proving such
underperformance such as to trigger these break rights, which could
lead to disputes unless underperformance is so serious and
pronounced as to be beyond doubt.
In certain circumstances, the asset optimiser holds revenues in
their accounts before passing them through to the Project Companies
and in such cases the Project Companies are subject to the credit
risk of the asset optimiser.
5. STRATEGIC REPORT (continued)
Batteries are subject to degradation and the risk of equipment
failure
Battery systems degrade gradually with reduced capacity and
cycle life due to chemical changes to the electrodes over their
lifetime. The degradation effect can be separated into calendar
loss and cycling loss. Calendar loss results from the passage of
time and cycling loss is due to usage and depends on both the
maximum state of charge and the depth of discharge. Although the
battery manufacturers provide certain warranties on a battery
degradation schedule based on certain operating conditions and the
lifespan of the battery, the operation of the battery may fall
outside of the warranty conditions due to unexpected events. Also,
the Project Companies may continue to operate the battery beyond
the period covered by the degradation warranty of the battery
manufacturers, and these may result in unexpectedly lower
performance of battery assets. The Company's investment will take
into account the realistic degradation profile of the batteries and
the need to augment capacity from time to time, based on the
Company's assessment of the supplier's battery technology. However,
this can be higher than the warranted degradation profile and the
asset may not meet its expected performance at the time of
acquisition or over its operational life, even if the use of the
battery is within the warranted period and conditions.
As a result, and to the extent not covered by the warranties,
any such excess battery degradation may necessitate greater than
expected repair and maintenance expenses or the requirement for
replacement of some or all of the battery modules or components
earlier than anticipated.
There is also a risk of equipment failure due to wear and tear,
design error or operational errors in connection with the battery
energy storage system and this failure, among other things, could
adversely affect the returns to the Company.
Balance-of-plant equipment is subject to degradation and the
risk of equipment failure
Battery energy storage plants contain a multitude of technical,
electrical, electronic, mounting structures and other components,
commonly referred to as "balance-of-plant". Balance-of-plant
components are subject to degradation, technical deterioration,
possible theft of components and other loss of efficiency and
effectiveness over a battery energy storage plant's lifespan. There
is a risk of unexpected equipment failure or decline in performance
over the life cycle of the plant which would adversely affect the
plant's technical and financial performance.
Capacity market contracts and pricing
Some revenues generated by the Portfolio will be dependent on
the price the Project Companies are able to secure for providing
capacity through Capacity Market auctions. The Company will
generally seek to acquire Project Companies with long term Capacity
Market contracts in place. If such contracts are not in place there
will be uncertainty on the amount of revenue that will be generated
under such Capacity Market contracts, which will be subject to
change on an annual basis.
Other risks, including borrowing, construction risk and new
technologies
Borrowing risk
The Company's wholly owned subsidiary, Gresham House Energy
Storage Holdings plc (Holdings), has issued five-year fixed term
secured bonds (the "GRID Power Bonds") to certain investors (the
"Bond Offering") and a bond on similar terms with a maturity date
of 30 November 2021 to BSIF Infrastructure (the "BSIF Bond") in an
aggregate principal amount of GBP15 million. Under the terms of the
Bond Offering, Holdings may raise up to GBP40 million in aggregate
by issuances of bonds in series from time to time on or before 14
October 2021. Finance raised under the Bond Offering and by the
BSIF Bond has been used for investment purposes and to refinance
existing loans in the Company.
Under the terms of the Bond Offering and the BSIF Bond, the bank
account of Holdings has been charged to BSIF Infrastructure and the
shares of two BESS Project Companies have been pledged to BSIF
Infrastructure and the Security Trustee, respectively. Should
Holdings default on the terms of the Bond Offering or the BSIF
Bond, security may be enforced over the bank accounts of Holdings
or the shares of HC ESS4 Limited or HC ESS7 Limited respectively.
Any enforcement of security is likely to have a material adverse
effect on the Company's business, revenues and financial
condition.
5. STRATEGIC REPORT (continued)
In addition to the Bond Offering and the BSIF Bond, the Company
intends to assess its ability to raise debt and is expected to
introduce leverage (at the Company level, Holdings level and/or the
Project Company level) in the future to the extent funding is
available on acceptable terms. In addition, it may, where the Board
deems it appropriate, use short term leverage to acquire assets,
which could be achieved through a loan facility or other types of
collateralised borrowing instruments. Such leverage will not exceed
50% (at the time of borrowing) of Net Asset Value.
While the use of borrowings can enhance the total return on the
shares where the return on the Company's underlying assets is
rising and exceeds the cost of borrowing, it will have the opposite
effect where the return on the Company's underlying assets is
rising at a lower rate than the cost of borrowing or falling,
further reducing the total return on the shares. As a result, the
use of borrowings by the Company may increase the volatility of the
NAV per share.
Any reduction in the value of the Company's investments may lead
to a correspondingly greater percentage reduction in its NAV (which
is likely to adversely affect the price of shares). Any reduction
in the number of shares in issue (for example, as a result of buy
backs) will, in the absence of a corresponding reduction in
borrowings, result in an increase in the Company's level of
gearing. To the extent that a fall in the value of the Company's
investments causes gearing to rise to a level that is not
consistent with the Company's gearing policy or borrowing limits,
the Company may have to sell investments in order to reduce
borrowings, which may give rise to a significant loss of value
compared to the book value of the investments, as well as a
reduction in income from investments.
Construction risk
Following the changes to the Investment Policy approved at the
November General Meeting, the Company may acquire Ready to Build
Projects or the rights to acquire Ready to Build Projects and may
provide loan finance to such Ready to Build Projects which cannot
be classed as being for equipment. As a result, the Company may be
exposed to certain risks associated with owning or funding a Ready
to Build Project prior to commissioning, such as cost overruns,
construction delay and construction defects which may be outside
the Company's control and which could result in the anticipated
returns of the Company from any loan finance provided to such BESS
Project Companies being adversely affected or the Company being
unable to recover some, or all, of the amounts lent. The Company is
confident that the taking on of a small percentage of construction
risk can be managed on a satisfactory basis using normal commercial
contractual mechanisms. These will include liquidated damages and
EPC contracts with high quality experienced counterparties.
New energy storage technologies
Although the BESS Projects in the Portfolio utilise, or will
most likely utilise, lithium-ion batteries, the Company is
generally adaptable about which technology it utilises in its
battery energy storage systems. The Company does not presently see
any energy storage technology which is a viable alternative to
lithium-ion batteries for the target markets and activities for the
BESS Projects, due to their widespread use in mobile phones,
electric cars and other devices and consequent pricing, safety,
performance track record and established infrastructure benefits.
However, there are a number of technologies being researched which,
if successfully commercialised, could eventually prove more
favourable than lithium-ion. The Company will closely monitor such
developing battery technologies (such as sodium and zinc derived
technologies) and other forms of energy storage technology (such as
flow batteries/machines and compressed air technologies) and will
consider adopting such technologies for new BESS Projects where
appropriate.
However, Project Companies that use existing lithium-ion
batteries may, as a result, prove less economical and therefore
earn lower returns in comparison or be outbid for competitively
procured services (such as frequency response). This could have a
material adverse impact on the financial performance of the
Company.
5. STRATEGIC REPORT (continued)
Prices for battery systems may decline faster than expected
The prices paid for battery systems are a key component of the
total cost of a battery energy storage system. It is expected that
prices of such systems will decline due to the expected growth in
the demand for the lithium-ion batteries; therefore, it will be the
primary technology to be sought by the Company in selecting BESS
Projects to invest in.
The Company has made certain assumptions in its financial
modelling, based upon independent forecast data, relating to the
declines in prices for battery systems for replacement of batteries
over time. However, if prices fall more slowly than expected, the
returns implied by Project Companies may be lower than
expected.
Climate Change Risks
The Company remains committed to combatting climate change: the
ethos of the battery energy storage systems is to facilitate
further expansion of renewable generation onto the electricity
grid. The overall impact of climate change is therefore not
considered to be significant: the assets themselves are not
susceptible to local risks of climate change such as flooding:
these risks are mitigated as part of the planning process and as
well as being well maintained in temperature controlled containers
to avoid overheating.
A by-product of climate change could be a change to the
continuing penetration of new renewable generation assets (i.e.
different electricity generation technologies) which may alter the
need to "balance" the grid by battery storage. If this penetration
is slower than anticipated by industry forecasters and the pricing
curves used by the Company to value its assets, then the underlying
volatility of power pricing might be lower than expected and impact
negatively on valuations.
STAKEHOLDER ENGAGEMENT AND STATEMENT UNDER SECTION 172
The Board recognises that the Company should be run for the
benefit of shareholders, but that the long term success of a
business is dependent on maintaining relationships with
stakeholders and considering the external impact of the company's
activities.
The Company has identified the following key stakeholders:
-- The Company's shareholders;
-- The Company's Investment Manager;
-- The communities in which the Company's assets are located;
-- The Company's business partners and key service providers; and
-- Investment Trading Partners
Engagement with Shareholders
Who they are?
The Company would require further funding to continue the
requirements of the investment strategy and obtain the additional
pipeline investments. As such, existing and prospective equity
investors are vitally important stakeholders.
Why is it important to engage with this group of
stakeholders?
Through our engagement activities, we strive to obtain investor
buy-in into our strategic objectives and how they are executed.
Since IPO the Company has issued a significant number of shares to
allow the Company to meet the investment strategy of the
Company.
5. STRATEGIC REPORT (continued)
How the Company engaged with the equity investors
The Company engaged with the stakeholder group in the period
through the following:
-- Interim accounts;
-- Company's Corporate Brokers and Investment Manager are in
regular communication with shareholders and shareholder views are
reported to the Board on at least a quarterly basis;
-- One-to-one meetings with the Investment Manager; and
-- Regular news and quarterly NAV updates
What came out of the engagement?
Through these engagement activities, the Company has been able
to ensure its investment pipeline and fundraising programme have
been aligned and funds have been available to secure the current
asset portfolio. The Company will continue to engage with
shareholders in future as further expansion becomes necessary.
Furthermore, the two changes to the Company's investment policy
is an example of how the interests of shareholders were considered
by the Board during the year. The Board recognised that by
expanding the scope of the Company's investment policy to include
the ability to make investments in the ROI and Northern Ireland and
to take on Ready to Build Projects would allow the Company to
pursue a greater selection of investment opportunities and to be
more selective in the opportunities which it pursues. This
additional flexibility should support the Company intention to
invest into a diversified portfolio of utility scale battery energy
storage systems that support the Company's dividend cover and
portfolio growth ambitions.
Engagement with the Investment Manager
Who they are?
The Investment Manager oversees the investment strategy of the
Company including acquisition identification and manages the value
enhancement in the underlying SPVs. The Investment Manager is
crucial for the Company to meet dividend expectations.
Why is it important to engage with the Investment Manager?
Constructive engagement with the Investment Manager in order to
ensure that the expectations of the shareholders are being met and
that the Board is aware of challenges being faced by the Investment
Manager.
How the Company engages with the Investment Manager
The Company, supported by its Management Engagement Committee,
conducts both ongoing reviews and an Annual Review of the
Investment Manager's performance and the terms of engagement of the
Investment Manager. The Board and the Investment Manager maintain
an ongoing open dialogue on key issues facing the Company with a
view to ensuring that key decisions such as investment decisions,
trading partner performance in the SPVs and the Company's strategy
are aligned with achieving long term shareholder value.
This open dialogue takes the form of adhoc board meetings and
more informal contact, as appropriate to the subject matter.
What came out of the engagement?
The Company and Investment Manager have aligned interests to
ensure the future success of the Company as the Investment Manager
sees the growth of the Company as both a key element of its
strategy and a Company which fits well with the Environmental
Social Governance Strategy of the Investment Manager.
Furthermore, the Company, supported by its Management Engagement
Committee, conducts an annual review of the Investment Manager's
performance and the terms of engagement of the Investment Manager.
This review is focused on constructive engagement with the
Investment Manager in order to ensure that the expectations of the
shareholders are being met and that the Board is aware of
challenges being faced by the Investment Manager. The Board and the
Investment Manager maintain an ongoing open dialogue on key issues
facing the Company with a view to ensuring that key decisions and
the Company's strategy are aligned with achieving long term
shareholder value.
The interests of Investment Manager and the impact of key
decisions taken during the period are set out in the Chair's
Statement and the Investment Manager's report.
The summary of the Board's review of the performance of the
Investment Manager is set out in the Directors' Report, pages 43 to
45.
Engagement with Communities
The Company remains committed to proactively engaging with the
Communities within which the Company operates. The Investment
Manager is part of the Gresham House plc group and is focused on a
sustainability agenda. For example, the Investment Manager planted
9 million trees in 2020 and its forestry portfolio absorbed 1.5
million tonnes of CO(2) in the year (with 35 million tonnes of
CO(2) absorbed in the forestry portfolio in total). In addition,
the Investment Manager operates 230MW of wind farms and solar
parks: these generated enough electricity to power 136,000 homes
and save 216,000 tonnes of CO(2) per annum.
Engagement with Business Partners and Key Service Providers
Who they are?
The Company has various key service providers who provide
management services.
Why is it important to engage with the key service
providers?
The intention of the Company is to maintain long term and
high-quality business partnerships to ensure stability while the
Company pursues its growth strategy.
How the Company engages with the key service providers
The Company, supported by its Management Engagement Committee,
reviews all key service providers to the Company and the terms of
their engagement. During the period, the Company conducted a review
of the terms of all service provider engagements along with their
fee levels to ensure appropriate levels of support to the Company
during the period. The Company seeks two-way engagement between the
Board and key service providers on service delivery expectations
and feedback on important issues experienced by service providers
during the period. The intention of the Company is to maintain long
term and high-quality business partnerships to ensure stability
while the Company pursues its growth strategy.
What came out of the engagement?
The Company has ensured that the interests of key service
providers are aligned with the Company. This includes completion of
the 5% acquisition of a stake in Noriker Power Limited and long
term pipeline opportunities for future pipeline assets.
Key strategic decisions during 2020
The Company continued its growth phase in the period ended 31
December 2020. This has focused on deployment of funds raised and
the development of one of the market leading battery energy storage
pipelines.
Key strategic decisions included:
-- Investment in future asset pipeline (including in the
investments acquired after the period end);
-- Upgrade of Seed Assets from FFR based assets to ensure they
are ready for Asset Optimisation;
-- Fundraising decisions, including the issue of the current
Prospectus and bond funding in the holding company to align the
investment programme with available funds;
-- Upgrading the "bench strength" of the Investment Manager's
team to match the increasing scale of the portfolio;
-- Payment and level of dividends to meet expectations; and
-- Assessment of Going Concern status.
5. STRATEGIC REPORT (continued)
In relation to these key decisions, stakeholders, such as key
contractors, were involved to ensure asset pipeline was available
to the Company on the timescales required. As noted above,
shareholder discussions were held to ensure clear communication was
made in relation to progress and market interest for expansion of
the Company. Finally, the Company worked with the Investment
Manager to ensure the Company's dividend target of 7.0p per
Ordinary Share for 2020 was delivered.
This Strategic Report is approved on behalf of the Board by
John S Leggate CBE, FREng
Chair
27 April 2021
6. BOARD OF DIRECTORS
The Company has a Board of four Independent Non-Executive
Directors.
John Leggate CBE, FREng (Chair and Independent Non-Executive
Director) - John is highly experienced as an energy sector
executive and is a venture investor in the "clean tech" and digital
technologies. John has significant board experience and is
currently on the board of cyber security rm Global Integrity in
Washington DC and is a senior advisor in the energy sector to a
"blue chip" international consultant. John was appointed to the
Board on 24 August 2018
Significant interests: John is a Director of Flamant
Technologies and Global Integrity, Inc.
Duncan Neale (Audit Committee Chair and Independent
Non-Executive Director) - Duncan is a CFO and Finance Director with
over 20 years of commercial experience working for both publicly
listed and privately-owned companies. Duncan is a Fellow of the
Institute of Chartered Accountants and quali ed with Price
Waterhouse in London. Duncan was appointed to the Board on 24
August 2018.
Significant interests: Duncan is a Trustee of the Cambodian
Children's Fund UK and a Director of DJN Consultancy Limited.
Catherine Pitt (Chair of the Nominations Committee and
Independent Non-Executive Director) - Cathy is a legal adviser who
has specialised in the investment company sector for over 20 years.
Cathy is currently a consultant partner at CMS, a top 10 global law
firm. Cathy was appointed to the Board on 1 March 2019.
Significant interests: Cathy is a Consultant and former Partner
at CMS Cameron McKenna Nabarro Olswang LLP
David Stevenson (Chair of the Remuneration Committee and
Independent Non-Executive Director) - David is a nancial journalist
and commentator for a number of leading publications including The
Financial Times (the Adventurous Investor), Citywire, and
MoneyWeek. He is also Executive Director of the world's leading
alternative nance news and events service www.alt .com, which
focuses on covering major trends in marketplace lending,
crowdfunding and working capital provision for small to medium
sized enterprises as well as www.ETFstream.com . David was
appointed to the Board on 24 August 2018.
Significant interests: David is a Director of Aurora Investment
Trust plc; 321 Publishing and TV Limited; Altfi Limited; Altfi Data
Limited; Bramshaw Holdings Limited; ETF Stream Limited; Planet
Sports Rights Limited; Rocket Media LP; The Secured Income Fund
plc; Stockmarkets Digest Limited; and Windhorse Aerospace
Limited.
The Board has 25% female representation. The Board has also
adopted a formal diversity policy and considers diversity on the
Company's Board as an important supplement to the Boards existing
skills, experience and knowledge.
All appointments to the Board are, and will continue to be,
subject to a formal, rigorous and transparent procedure as required
by the AIC Code. The Board's requirements for vacancies on the
Board are set with reference to objective criteria and promote
diversity of gender, social and ethnic backgrounds, cognitive and
personal strengths.
Further, the Board reviews, at least annually, its effectiveness
and its combination of skills, experience and knowledge. The Board
will conduct an externally facilitated effectiveness evaluation
every three years, with its first such evaluation taking place
during 2021.
The Board has been in situ since the Company's IPO in November
2018. While it is too early to be considering formal succession
planning for existing Directors, the Board will focus on this
matter further as part of its annual Board Evaluation process from
2021 onwards.
The Directors will all stand for re-election at the Annual
General Meeting of the Company.
7. DIRECTORS REPORT
The Directors present the Annual Report and Financial Statements
of the Company for the period ended 31 December 2020.
The Directors during the period, including their appointment
dates, are set out on page 47.
The Corporate Governance Report on page 51 forms part of this
report.
Company Performance
The Directors have reviewed the performance of the Company
throughout the period. Details of the performance of each
investment owned by the Company are included the Investment
Manager's Report.
The Directors and Investment Manager have developed several
tools to review ongoing performance. These include ongoing monthly
and quarterly dashboards detailing the performance of each
investment in relation to the individual income streams expected of
each investment and performance against costs. As the Company
deploys capital raised the Directors have a focus on the underlying
investment model for each new investment to ensure it meets the
Investment Objectives of the Company.
The Directors are satisfied that underlying performance is being
developed in line with expectations: the rollout programme of new
investments and upgrades and extensions of investments acquired at
IPO is progressing well and has ensured an increasing level of
operational performance throughout 2020, which is included within
the Chair's Statement.
Financial Risk Management
The Board believes that the main financial risks of the Company
relate to the requirement to ensure the capital commitments of the
Company are commensurate with the capital available and the ability
of the underlying investments to generate income to the Company to
ensure the targeted dividend payments can be paid to investors. The
Board constantly monitors these financial risks.
At the present time, the Company and its underlying investments
are subject only to the GBP14.9 million bonds as financial
leverage. The Company has the ability to assume up to 50% of
gearing and may increase gearing in future ensuring any covenants
or associated financial instruments are appropriate for the risk
profile of the Company.
Share capital
At the period end, the Company had in issue 348,556,364 Ordinary
Shares. There are no other share classes in issue.
All shares have voting rights; each Ordinary Share has one
vote.
All Ordinary Shares are entitled to receive dividends and
interim dividends have been paid by the Company, as shown in the
table below. No final dividend has been or will be declared, but
the Company's dividend policy of paying four interim dividends will
be tabled for approval at each annual general meeting.
Period in relation Announcement Ex-dividend Payment Amount per Total amount
to which dividend date date date Ordinary
was paid Share
1 January to 31 March 11 May 2020 21 May 2020 10 June 2020 1.75 pence GBP4,099,736
2020
------------- ------------- -------------- ----------- -------------
1 April to 30 June 1 September 10 September 25 September 1.75 pence GBP4,099,736
2020 2020 2020 2020
------------- ------------- -------------- ----------- -------------
1 July to 30 September 27 October 5 November 11 December 1.75 pence GBP4,099,736
2020 2020 2020 2020
------------- ------------- -------------- ----------- -------------
1 October to 31 December 19 February 4 March 2021 26 March 2021 1.75 pence GBP6,099,736
2020 2021
------------- ------------- -------------- ----------- -------------
Dividends are not recognised in the financial statements of the
Company until paid, and therefore the dividend in respect of the
final period, from 1 October to 31 December 2020 is not recognised
in the period to 31 December 2020.
The results of the Company are disclosed in the Investment
Manager's Report on page 5 of this Annual Report.
7. DIRECTORS REPORT (continued)
Substantial interests
As at 31 December 2020, and the date of this report, the Company
had been notified the following beneficial interests exceeding 3%
of the issued share capital, being 348,556,364 Ordinary Shares
Shareholder Number of Percentage Number of Ordinary Percentage
Ordinary of Issued Shares as at of Issued
Shares as Share Capital 31 March 2020 Share Capital
at 31 Dec as at 31 as at 31
2020 Dec 2020 March 2020
Gresham House plc 30,528,218 8.76% 27,164,976 7.79%
----------- --------------- ------------------- ---------------
Sarasin & Partners LLP 23,427,065 6.72% 23,427,065 6.72%
----------- --------------- ------------------- ---------------
CCLA Investment Management
Limited 22,429,297 6.43% 22,429,297 6.43%
----------- --------------- ------------------- ---------------
Benjamin Guest 14,383,826 4.13% 14,383,826 4.13%
----------- --------------- ------------------- ---------------
Schroders plc 12,382,250 3.55% 12,382,250 3.55%
----------- --------------- ------------------- ---------------
Close Asset Management Limited 10,755,932 3.09% 10,755,932 3.09%
----------- --------------- ------------------- ---------------
Annual General Meeting
The Company's first Annual General Meeting (AGM) was held on 20
June 2020. All resolutions proposed to the Company's shareholders
at this AGM were duly passed on a poll vote.
The Company's next AGM is expected to be held in June 2021. The
Notice of the Annual General Meeting and Form of Proxy will be
circulated to all shareholders in advance of this meeting. The
Board is working with all its advisers to ensure that this meeting
can be held safely in light of COVID-19 safety requirements and
anticipated social distancing measures that may be in place at the
time.
Auditor
A resolution proposing the reappointment of BDO LLP will be
submitted at the AGM.
Directors' responsibilities
The Directors are responsible for preparing the Annual Report
and the Financial Statements in accordance with applicable law and
regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
are required to prepare the financial statements and have elected
to prepare the company financial statements in accordance with
international accounting standards in conformity with the
requirements of the Companies Act 2006. Under company law the
Directors must not approve the financial statements unless they are
satisfied that they give a true and fair view of the state of
affairs of the Company and of the profit or loss for the Company
for that period.
In preparing these financial statements, the Directors are
required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and accounting estimates that are reasonable and prudent;
7. DIRECTORS REPORT (continued)
-- state whether they have been prepared in accordance with
international accounting standards in conformity with the
requirements of the Companies Act 2006 subject to any material
departures disclosed and explained in the financial statements;
-- prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business; and
-- prepare a Director's Report, a Strategic Report and
Director's Remuneration Report which comply with the requirements
of the Companies Act 2006.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
the financial statements comply with the Companies Act 2006. They
are also responsible for safeguarding the assets of the Company and
hence for taking reasonable steps for the prevention and detection
of fraud and other irregularities. The Directors are responsible
for ensuring that the annual report and accounts, taken as a whole,
are fair, balanced, and understandable and provide the information
necessary for shareholders to assess the Company's performance,
business model and strategy.
Website publication
The Directors are responsible for ensuring the Annual Report and
the Financial Statements are made available on the Company's
website. Financial statements are published on the Company's
website in accordance with legislation in the United Kingdom
governing the preparation and dissemination of financial
statements, which may vary from legislation in other jurisdictions.
The maintenance and integrity of the Company's website is the
responsibility of the Directors. The Directors' responsibility also
extends to the ongoing integrity of the financial statements
contained therein.
Directors' responsibilities pursuant to DTR4
The Directors confirm to the best of their knowledge:
-- The financial statements have been prepared in accordance
with international accounting standards in conformity with the
requirements of the Companies Act 2006 and give a true and fair
view of the assets, liabilities, financial position and profit and
loss of the Company.
-- The annual report includes a fair review of the development
and performance of the business and the financial position of the
Company, together with a description of the principal risks and
uncertainties that they face.
Insurance cover
Directors' and Officers' liability insurance cover is held by
the Company in respect of the Directors.
Corporate governance
The Company's Corporate Governance statement and compliance
with, and departures from the 2019 AIC Code of Corporate Governance
which has been endorsed by the Financial Reporting Council
(www.frc.org.uk) is shown on page 51.
As such, the Directors have adopted the going concern basis in
preparing the Annual Report and Financial Statements.
7. DIRECTORS REPORT (continued)
Other matters
Information in respect of greenhouse emissions which is normally
disclosed within the Directors' Report has been disclosed within
the Strategic Report on page 26.
The Going Concern Statement is detailed on page 30 of this
Annual Report.
Future Developments
Future developments in the Company are detailed in the Chair's
Statement and the Investment Manager's Report.
Post Balance Sheet Events
Post Balance Sheets are disclosed in Note 27 of the Accounts on
page 98.
Statement as to disclosure of information to the Auditor
The Directors in office at the date of the report have
confirmed, as far as they are aware, that there is no relevant
audit information of which the Auditor is unaware. Each of the
Directors has confirmed that they have taken all the steps that
they ought to have taken as Directors in order to make themselves
aware of any relevant audit information and to establish that it
has been communicated to the Auditor.
This Directors' Report is approved on behalf of the Board by
John Leggate CBE, FREng.
Chair
27 April 2021
8. CORPORATE GOVERNANCE REPORT
The Board of Gresham House Energy Storage Fund plc (the Company)
has considered the Principles and Provisions of the 2019 AIC Code
of Corporate Governance (the "AIC Code"). The AIC Code addresses
the Principles and Provisions set out in the UK Corporate
Governance Code (the UK Code), as well as setting out additional
Provisions on issues that are of specific relevance to the
Company.
The Board considers that reporting against the Principles of the
AIC Code, which has been endorsed by the Financial Reporting
Council, provides more relevant information to shareholders.
The Company has complied with the Principles and Provisions of
the AIC Code save in respect of the appointment of a Senior
Independent Director. The Company has not appointed a Senior
Independent Director as the Board considered this to be unnecessary
as the function of a Senior Independent Director is performed by
all of the Directors in their support for the Chair and their
availability to engage with shareholders on key issues. The Board
will review this requirement during the 2021 board effectiveness
assessment.
The AIC Code is available on the AIC website
(https://www.theaic.co.uk/aic-code-of-corporate-governance). It
includes an explanation of how the AIC Code adapts the Principles
and Provisions set out in the UK Code to make them relevant for
investment companies.
Board Leadership and Purpose
The Board views its purpose as supporting the Investment
Manager, including providing constructive challenge, to achieve the
Company's intended acquisition of a portfolio of BESS Projects to
take advantage of the significant market opportunity for
battery-based energy storage systems. The Board is also committed
to delivering the Company's targeted dividends and Net Asset Value
total return. Further discussion of the Company's strategy has been
set out within the Strategic Report on page 25.
The Board seeks to establish a culture of openness and
engagement. The Board has met frequently with the Investment
Manager throughout the period in an effort to sustain continuous
dialogue on key issues. The Board considers this culture aligned
with the strategic purpose of the Company through its growth
phase.
During the year ended 31 December 2020, the Board supported the
Investment Manager with further deployment of the available funds
and in further fundraising by way or both debt and equity. The
Board and the Investment Manager have also expanded the operational
platform to support the sustainable growth and long terms success
of the Company.
As set out in the section on Stakeholder Engagement and
Statement under Section 172, pages 38 to 39, the Board seeks to
understand the views of the Company's key stakeholders and to
consider these views in board discussions and decision-making.
The Board assesses and monitors its own culture, including its
policies, practices and behaviour to ensure it is aligned with the
Company's purpose, values and strategy.
The Board remains committed to diversity and further detail on
the Company's Diversity Policy and approach to diversity is set out
in the Nomination Committee Report on pages 61 to 62.
Division of Responsibilities
Matters reserved to the Board
Full Board meetings take place quarterly and the Board meets or
communicates more regularly to address specific issues. The Board
has a formal schedule of matters specifically reserved for its
decision which includes, but is not limited to: considering
proposals from the Investment Manager; making decisions concerning
the acquisition or disposal of investments; and reviewing,
annually, the terms of engagement of all third party advisers
(including the Investment Manager) and the appointment and removal
of the Company Secretary.
The Board has also established procedures whereby Directors
wishing to do so in the furtherance of their duties may take
independent professional advice at the Company's expense.
8. CORPORATE GOVERNANCE REPORT (continued)
All Directors have access to the advice and services of the
Company Secretary. The Company Secretary provides the Board with
full information on the Company's assets and liabilities and other
relevant information requested by the Chair, in advance of each
Board meeting.
There is a clear division of responsibilities between the Board
and the Investment Manager. Under the AIFM Agreement, the
Investment Manager acts as discretionary investment manager and
AIFM to the Company within the strategic guidelines set out in the
Investment Policy and subject to the overall supervision of the
Board. The asset management role encompasses the oversight of all
operational and financial management, the placing and managing of
all operational contracts, management of all health and safety
operational risks, advising the Board on the monthly and quarterly
asset/portfolio performance, management of power price/market
exposure, progress with the asset pipeline and reporting to the
Board.
The Company also has a business relationship with Gresham House
Devco Limited, a related party of the Investment Manager,
which:
- Sources, due diligences and acquires pipeline on a speculative
basis exclusively for the Company to ensure the Company's ability
to grow in a burgeoning market with few operational projects;
- Manages these projects through construction (historically with Noriker Power Limited);
- Sells projects to the Company; and
- Takes development risk on behalf of the Company, where the
Company's investment mandate prevents taking this risk.
The Management Engagement Committee, on an annual basis, reviews
the Investment Managers performance during the year along with its
adherence to the terms of the AIFM Agreement. Further details are
contained in the Management Engagement Committee Report on pages 63
to 65.
The capital structure of the Company is disclosed in the
Financial Statements.
Board Committees
The Board has four committees: the Audit Committee, Remuneration
Committee, Nomination Committee and the Management Engagement
Committee (MEC). During the period under review, all the Directors
of the Company were non -- executive Independent Directors and
served on all committees.
Board and Committee meetings
The following table sets out the Directors' attendance at the
Board and Committee meetings during the period:
Quarterly Audit MEC Nomination Remuneration
Board Meetings Committee Committee* Committee*
(4 held) (6 held) (1 held) (1 held) (1 held)
John Leggate 4 6 1 1 1
Duncan Neale 4 6 1 1 1
David Stevenson 4 6 1 1 1
Catherine Pitt 4 6 1 1 1
* The Remuneration Committee and Nomination Committee were
constituted by the Board on 19 November 2020.
During the period the Board held a number of additional ad hoc
board meetings outside of the regular quarterly board meetings.
These board meetings were mainly to discuss the progress of
investments proposed by the Company and completion of such
investments and further fundraising completed by the Company during
the period. Typically, there was attendance by the full Board at
these ad hoc meetings and attendance was in line with the
requirements of the AIC Code.
The primary focus at regular board meetings is a review of
investment performance, asset allocation, marketing and investor
relations, peer group information and industry issues.
8. CORPORATE GOVERNANCE REPORT (continued)
At the Company's quarterly board meetings, the Board typically
considers the following business:
-- Update from the Investment Manager, including:
o Investment portfolio commentary
o Trading data and investment performance, by month
o Analysis of the Company's financial model, including and
updates to key assumptions
o Risk management and risk mitigation
o Review of any recommendations made by the Investment
Manager
-- Update from the Company's Broker; including;
o Market commentary
o Share price performance against the Company's peers
o Sales and Trading commentary
-- Report from the Company's Depositary
-- Report from the Administrator and Company Secretary, including;
o Compliance monitoring
o Regulatory and governance updates
The Board has been focused on developing ongoing and positive
communication with the Investment Manager and regular meetings are
one way the Board seeks to encourage open and constructive
engagement on key issues.
Relations with Shareholders
Shareholders have the opportunity to meet the Board at the AGM.
The Board is also happy to respond to any written queries made by
shareholders during the course of the period, or to meet with major
shareholders if so requested. The Company's first AGM in 2020 was
unable to be held with shareholders in attendance due to the
restrictions imposed by the Company in response to COVID-19 and it
is likely that some restrictions may be in place for the Company's
AGM in 2021. The Company will, however, seek to secure appropriate
shareholder engagement as part of its AGM in 2021.
During the period the Company's shareholders were focused on
further capital deployment and fundraising. The Board ensured that
the Company regularly kept shareholders informed of investment
activities and quarterly financial performance through appropriate
public announcements and the publication of quarterly factsheets by
the Investment Manager that are available on the Company's website.
There were no specific actions arising from the Company's
interactions with shareholders in the period.
In addition to the formal business of the AGM, representatives
of the Investment Manager and the Board are available to answer any
questions a shareholder may have. If shareholders are not able to
attend the AGM in person, shareholders will be given the
opportunity to ask questions in advance of the AGM, with answers to
any questions received published on the Company's website.
Separate resolutions are proposed at the AGM on each
substantially separate issue. The Registrar collates proxy votes,
and the results (together with the proxy forms) are forwarded to
the Company Secretary immediately prior to the AGM. Proxy votes are
announced at the AGM, following each vote on a show of hands,
except in the event of a poll being called. The notice of the AGM
and proxy form will be circulated with this Annual Report.
Remuneration
The Board is committed to implementing remuneration policies and
practices that are designed to support strategy and promote long
term sustainable success. This policy is set out in the
Remuneration Report on pages 47 to 50.
This Corporate Governance Report is approved on behalf of the
Board by
John S. Leggate, CBE, FREng
Chair
27 April 2021
Compliance with the 2019 AIC Code
Board Leadership and company purpose
Principle A -
A successful company is led by an effective Strategic Report, page 25
board, whose role is to promote the Board Leadership and company purpose,
long term sustainable success of the page 41
company, generating value for shareholders
and contributing to wider society.
----------------------------------------
Principle B -
The Board should establish the company's Strategic Report, page 25
purpose, values and strategy, and satisfy Board Leadership and company purpose,
itself that these and its culture are page 41
aligned. All Directors must act with
integrity, lead by example and promote
the desired culture.
----------------------------------------
Principle C -
The Board should ensure that the necessary Principal Risk and Uncertainties,
resources are in place for the company page 31
to meet its objectives and measure Stakeholder Engagement and Statement
performance against them. The board Under Section 172, page 38
should also establish a framework of Audit, Risk and Internal Controls,
prudent and effective controls, which page 57
enable risk to be assessed and managed. Audit Committee Report, page 55
----------------------------------------
Principle D -
In order for the company to meet its Stakeholder Engagement and Statement
responsibilities to shareholders and Under Section 172, page 38
stakeholders, the board should ensure Board Leadership and company purpose,
effective engagement with, and encourage page 41
participation from, these parties.
----------------------------------------
Division of Responsibilities
Principle F -
The chair leads the board and is responsible Chair's Statement, page 3
for its overall effectiveness in directing Board leadership and company purpose,
the company. They should demonstrate page 41
objective judgement throughout their Division of responsibilities, page
tenure and promote a culture of openness 51
and debate. In addition, the chair
facilitates constructive board relations
and the effective contribution of all
Non-Executive Directors, and ensures
that directors receive accurate, timely
and clear information.
----------------------------------------
Principle G -
The board should consist of an appropriate Division of responsibilities, page
combination of Directors (and, in particular, 51
independent Non-Executive Directors) Biographies, page 41
such that no one individual or small
group of individuals dominates the
board's decision making.
----------------------------------------
Principle H -
Non-Executive Directors should have Board leadership and company purpose,
sufficient time to meet their board page 41
responsibilities. They should provide Division of responsibilities, page
constructive challenge, strategic guidance, 51
offer specialist advice and hold third Audit Committee Report, page 55
party service providers to account. Management Engagement Committee
Report, page 63
----------------------------------------
Principle I -
The board, supported by the company Division of responsibilities, page
secretary, should ensure that it has 51
the policies, processes, information,
time and resources it needs in order
to function effectively and efficiently.
----------------------------------------
Composition Succession and Evaluation
Principle J -
Appointments to the board should be Directors' Report, page 43
subject to a formal, rigorous and transparent
procedure, and an effective succession
plan should be maintained. Both appointments
and succession plans should be based
on merit and objective criteria and,
within this context, should promote
diversity of gender, social and ethnic
backgrounds, cognitive and personal
strengths.
----------------------------------------
Principle K -
The board and its committees should Directors' Biographies, page 41
have a combination of skills, experience
and knowledge. Consideration should
be given to the length of service of
the board as a whole and membership
regularly refreshed.
----------------------------------------
Principle L -
Annual evaluation of the board should Directors' Report, page 43
consider its composition, diversity
and how effectively members work together
to achieve objectives. Individual evaluation
should demonstrate whether each Director
continues to contribute effectively.
----------------------------------------
Audit, Risk and Internal Control
Principle M -
The board should establish formal and Audit, risk and internal control,
transparent policies and procedures page 57
to ensure the independence and effectiveness Audit Committee Report, page 55
of external audit functions and satisfy Notes 2 and 3 to the Financial
itself on the integrity of financial Statements, page 76 and 77
and narrative statements.
----------------------------------------
Principle N -
The board should present a fair, balanced Strategic Report, page 25
and understandable assessment of the Audit, risk and internal control,
company's position and prospects. page 57
Audit Committee Report, page 55
Independent Auditor's Report, page
65
Financial Statements, page 71
----------------------------------------
Principle O -
The board should establish procedures Principal risks and uncertainties,
to manage risk, oversee the internal page 31
control framework, and determine the Viability statement, page 31
nature and extent of the principal Audit, risk and internal control,
risks the company is willing to take page 57
in order to achieve its long term strategic Audit Committee Report, page 55
objectives. Directors' Report, page 43
Note 20 to the Financial Statements,
page 91
----------------------------------------
Remuneration
Principle P -
Remuneration policies and practices Strategic Report, page 25
should be designed to support strategy Board leadership and company purpose,
and promote long term sustainable success. page 41
Remuneration Committee Report,
page 59
----------------------------------------
Principle Q -
A formal and transparent procedure Director's Remuneration Report,
for developing policy on remuneration page 47
should be established. No Director
should be involved in deciding their
own remuneration outcome.
----------------------------------------
Principle R -
Directors should exercise independent Director's Remuneration Report,
judgement and discretion when authorising page 47
remuneration outcomes, taking account
of company and individual performance,
and wider circumstances.
----------------------------------------
9. AUDIT COMMITTEE REPORT
Introduction
During the year and since, the Committee has played an integral
role in reviewing and challenging the Company's financial
modelling, financial reporting, key financial controls and other
risk management topics. The Committee was faced with a number of
key challenges, including assessing the financial impact of the
Coronavirus pandemic and ensuring that the Company's Annual Report
and Financial Statements for the year ended 31 December 2020 were
delivered to a high standard under difficult circumstances.
Building on its work during 2019, the Committee continued to
work with the Manager and key service providers to ensure that the
Company can rely on robust internal financial controls and clear
risk management procedures.
Audit Committee Composition
The Audit Committee is chaired by Duncan Neale, who is a
Chartered Accountant, CFO and Finance Director and therefore has
recent and relevant financial experience. Duncan is supported by
the other three independent Non-Executive Directors on this
committee.
The Audit Committee meets at least twice a year and operates
within clearly defined terms of reference. The Committee met six
times during the period. These meetings were also attended by
representatives of the Manager, the Company Secretary (JTC (UK)
Limited) and the auditor (BDO LLP).
Given the size of the Board and the diverse range of experience
and skills possessed by the Directors, the Board has considered it
appropriate to have all Directors serve on this Committee. The
Board has also considered it appropriate for the Chair of the Board
to serve on the Committee due to the current size of the Board.
Terms of reference
The Committee reviewed its terms of reference to ensure that
they remain in alignment with the pro-forma terms of reference
published by ICSA and the latest version of the AIC Code.
Principal Responsibilities
The principal responsibilities which the Board has delegated to
the Audit Committee are:
(i) To monitor the integrity of the Financial Statements of the
Company and any formal announcements relating to the Company's
financial performance;
(ii) reviewing the Company's internal financial controls and
internal control and risk management systems, unless expressly
addressed by a separate board risk committee composed of
independent Non-Executive Directors, or by the Board itself;
(iii) conducting the tender process and making recommendations
to the Board, about the appointment, reappointment and removal of
the external auditor, and approving the remuneration and terms of
engagement of the external auditor;
(iv) reviewing the effectiveness of the external audit process,
taking into consideration relevant UK professional and regulatory
requirements;
(v) To review and monitor the Auditors' independence and
objectivity and the effectiveness of the audit process; and
(vi) To develop and implement policy on the engagement of the
Auditors to supply non-audit services and taking into account
relevant guidance regarding the provision of non-audit services by
the Auditors.
The Audit Committee is required to report formally to the Board
on its findings after each meeting on all matters within its duties
and responsibilities.
9. AUDIT COMMITTEE REPORT (continued)
Financial Reporting
The Audit Committee is also responsible for reviewing the
financial reporting and in providing advice to the Board on whether
the Annual Report and Accounts, taken as a whole, is fair, balanced
and understandable, as required under the AIC Code, and provides
the information necessary for shareholders to assess the Company's
position and performance, business model and strategy.
The Audit Committee considered the detailed reviews undertaken
at various stages of the production process by the Investment
Manager, Administrator and Auditor, which are intended to ensure
consistency and overall balance.
The Committee also sought additional comfort from the Investment
Manager in relation to the conclusion reached by the Board.
As a result of the work performed by the Audit Committee, the
Board is able to conclude that the Annual Report and Financial
Statements for the period ended 31 December 2020, taken as a whole,
is fair, balanced and understandable and provides the information
necessary for shareholders to assess the Company's performance,
business model and strategy.
The Committee also reviews the significant financial reporting
issues and judgements made in connection with the preparation of
the Company's Financial Statements and considers whether the
accounting policies adopted are appropriate.
Change of Power Curve Provider
The Manager undertook a benchmarking exercise in July 2020 as
part of the June 2020 valuation process. The data set proposed was
reliable in terms of its underlying assumptions and the outputs
were less volatile than previously.
The Committee worked with the Manager to understand the
implications of the change of the power curve provider. The
Committee challenged the Manager on the change to ensure the
integrity of the financial information being produced by the
Company. Following its review, the Committee was satisfied that the
change was appropriate in the circumstances.
Review of Weighted Average Cost of Capital
During 2020, the Manager proposed that the Capacity Market
income stream was more appropriately discounted at a rate of around
6% rather than the previous 8%, as reported in the June 2020 NAV
and Interim Results. The impact of the adjustment would see the
overall WACC move to c.11.1%, which was within the bandwidth
determined by Grant Thornton in their valuation opinion for the
Interim Report and Financial Statements as at 30 June 2020 and as
at 31 December 2020.
The Committee considered this recommendation and the
implications on the Company's NAV. Further, the Committee reviewed
the Manager's assessment of the Company's key peers and overall
market conditions. Following an assessment of the risks associated
with the Capacity Market income stream, the Committee was
ultimately satisfied that a review of the discount rate to 6% was
justified in the circumstances.
COVID-19
The Committee reviewed the impact of COVID-19 on the Company and
worked with the Investment Manager in order to mitigate any
potential impact of the pandemic on the Company's strategic
objectives. The Committee received confirmation from the Investment
Manager that appropriate planning had been implemented to mitigate
any impacts of the pandemic on availability of key staff, supply
chain and ongoing operations.
Going Concern and Viability
The Committee considered the analysis and stress testing
conducted by the Investment Manager as part of the Company's
fundraising activities during the period and as part of the
Committee's review of the Going Concern Statement and Viability
Statement on pages 30 and 31. The Committee was satisfied that the
Company remained a going concern and was expected to remain well
positioned to continue to operate and meet its liabilities over the
short term and the 3-year outlook period.
9. AUDIT COMMITTEE REPORT (continued)
Key Accounting Judgements and Estimates
The key accounting judgement reviewed by the Audit Committee is
the high level of judgement involved in determining the unquoted
investment valuations. The Investment Manager's fee is based on the
value of the net assets of the Company. The Investment Manager is
responsible for preparing the valuation of investments which are
reviewed by the Audit Committee and approved by the Board.
During the period, the valuation of the Company's investments
has been a focus point for the Audit Committee and the Board. The
Chair of the Audit Committee has worked closely with the Investment
Manager to understand how the Company's investment valuations are
calculated and this has been reported to the Board.
The Board has also carefully considered the discount rates used
by the Investment Manager and considers these rates to be
appropriate given the strategic objectives of the Company and the
commercial risks associated with the Company's Investment
activities.
The Audit Committee has also taken additional comfort from the
opinion of an external independent valuation assessment prepared by
Grant Thornton, which concluded that the Investment Manager's
calculation of valuation is fair and reasonable on a fair value
basis.
Following the detailed and ongoing assessment of investment
valuations, the Audit Committee and the Board are able to conclude
that the Company's Investments are valued fairly and
reasonably.
Auditor Independence, Objectivity and Effectiveness
BDO has formally confirmed its independence as part of the
annual reporting process, and the committee considered and agreed
that BDO, the engagement team and other partners and Directors
conducting the audit had complied with relevant ethical
requirements including the FRC's Ethical Standard and were
considered independent of the Company.
The Audit Committee discussed the effectiveness of BDO as
auditor and agreed that the auditor had adhered to high
professional and ethical principles and demonstrated the
appropriate skills and knowledge about the business, industry and
environment together with the regulatory and legal frameworks in
which the Company operates. The Committee also agreed that the
audit partner demonstrates experience in the energy sector and is
well informed about current topical issues with the FRC. The
Committee concluded that it had no concerns with BDO's
effectiveness.
Marc Reinecke has been BDO's lead audit partner for the Company
since IPO in 2018. This is Mr Reinecke's second annual audit for
the Company. In line with best practice, the Company would under
normal circumstances seek a rotation of the lead audit partner
every five years with an audit firm tender process every 10 years
and a mandatory audit firm rotation after 20 years.
The Audit and Risk Committee has recommended that a resolution
to reappoint BDO is proposed to shareholders at the next AGM.
Internal Controls and Risk Management Systems
The Audit Committee's responsibilities in respect of Internal
Controls and Risk Management are to:
(i) Review the reports on the internal controls of the Company's
service providers which identify the risk management systems in
place for assessing, managing and monitoring risks applicable to
such service providers;
(ii) Establish a process for identifying, assessing, managing
and monitoring the risks which may have a financial impact on the
Company;
(iii) Review reports on the conclusions of any testing carried out by the Auditors;
(iv) Carry out at least annually a robust assessment of the
emerging and principal risks facing the Company; and
9. AUDIT COMMITTEE REPORT (continued)
(v) Review and approve the statements included in the Annual
Report in relation to internal control and the management of
risk.
The Audit Committee review's the Company's Internal Controls on
an annual basis with the last review being conducted in November
2020. The Audit Committee obtains evidence of the internal control
frameworks of both the Administrator and Investment Manager to
review. Further, the Company Secretary reports to the Board
quarterly on any potential internal control failures.
The Audit Committee confirms that it has completed its
assessment of the Company's emerging and principal risks and the
details of this assessment are set out in emerging risks, principal
risks and uncertainties assessment on pages 32 to 37. The Audit
Committee considers the Company's risk matrix on an annual basis
with regular risk reporting being presented to the Board by the
Investment Manager on an ongoing basis. The Audit Committee Chair
has engaged with the Investment Manager during the year to improve
the risk reporting to the Board on an ongoing basis and this
improved reporting is expected to enhance the Board's oversight of
principal risks. The Audit Committee was satisfied with the
Investment Manager's overall assessment of principal risks.
Although the Board is ultimately responsible for safeguarding
the assets of the Company, the Board has delegated, through written
agreements, the day-to-day operation of the Company (including the
Financial Reporting Process) to Gresham House Asset Management
Limited as Investment Manager and JTC (UK) Limited as
Administrator.
Whistleblowing
The Audit Committee has arrangements by which staff of the
Investment Manager and Administrator and other service providers as
the Committee sees fit may, in confidence, raise concerns about
possible improprieties in matters of financial reporting or other
matters and satisfy itself that arrangements are in place for the
proportionate and independent investigation of such matters and for
appropriate follow-up action.
The process is to allow concerns to be raised with the Audit
Committee Chair on a confidential basis. The Audit Committee Chair
is then empowered to conduct an independent investigation, with the
support of appropriate service providers, including the Company's
Auditor. The Audit Committee Chair, on conclusion of the
investigation, will then report back to the Company's Audit
Committee, and external authorities or regulators, if required, and
the Audit Committee will then make a recommendation, including
proposed remedial action and agreed timetable, to the Board. Any
action taken by the Board or the Audit Committee in this regard,
will be reported to the Company's shareholders in the Annual
Report.
There were no instances of whistleblowing during the period.
External Audit
The Audit Committee also makes recommendations to the Board in
relation to the appointment of the external Auditors and to ensure
the independence of the external Auditor. It also reviews and
agrees the audit strategy paper, presented by the Auditor in
advance of the audit, which sets out the key risk areas to be
covered during the audit and confirms their status on
independence.
The Audit Committee has reviewed the engagement of the external
Auditor on the supply of non-audit services in order to ensure that
the independence of the external Auditor is maintained, taking into
account the relevant regulations and ethical guidance in this
regard.
The Company's Auditor did not provide any non-audit services
during the period.
The Audit Committee, after taking into consideration comments
from the Investment Manager and Administration Manager, regarding
the effectiveness of the audit process; immediately before the
conclusion of the annual audit, will recommend to the Board either
the re-appointment or removal of the Auditors.
9. AUDIT COMMITTEE REPORT (continued)
Internal audit
The Committee discussed the need for an internal audit function.
The debate included input from the Manager and consideration of the
assurance received from third parties under the risk management
framework. In the light of this consideration, the Committee
decided that there was no current requirement for an internal audit
as the internal controls and risk management were adequate and
effective.
Financial reporting
The Directors' responsibilities statement for preparing the
accounts is set out in the Report of the Directors on page 43 and a
statement by the Auditor about their reporting responsibilities is
set out in the Independent Auditor's Report on page 65.
Statement on Investment Manager's Risk Management and Internal
Controls
During the period the Committee has reviewed and has received
appropriate evidence of the Investment Manager's risk management
and internal control systems and the Committee is satisfied that
this framework is fit for purpose and appropriately designed to
safeguard the shareholder's investment and the Company's assets.
The Board and the Audit committee will continue to review this the
Investment Manager's risk management and internal control systems
regularly and at least annually.
Committee evaluation
An evaluation of the Committee was undertaken as part of the
overall board evaluation. The Committee was found to be working
well and the skills and experience of the members was found to be
appropriate for their roles. The Committee will concentrate on
development and training of committee members, as the regulatory
focus on audit and audit committees increases. An external
evaluation of the Committee will be undertaken during the course of
2021.
This Audit Committee Report is approved on behalf of the Board
by
Duncan Neale
Chair of the Audit Committee
27 April 2021
10. REMUNERATION COMMITTEE REPORT
Introduction
During the period, the Board mindful of the requirements under
the AIC Code and the Company's objective of maintaining high
governance standards. constituted the Remuneration Committee during
2020.
Remuneration Committee Composition
The Remuneration Committee is chaired by David Stevenson. David
is supported by the other three independent Non-Executive Directors
on this committee.
The Remuneration Committee meets at least once a year and
operates within clearly defined terms of reference. The Committee
met once during the period. The Committee's meetings were also
attended by representatives of the Company Secretary (JTC (UK)
Limited) and the independent remuneration consultant, Trust
Associates.
Given the size of the Board and the diverse range of experience
and skills possessed by the Directors, the Board has considered it
appropriate to have all Directors serve on this Committee. The
Chair of the Board was independent on appointment to the Board and
remains independent and is therefore eligible to serve on this
Committee.
Terms of reference
The Committee reviewed its terms of reference to ensure that
they were in alignment with the pro-forma terms of reference
published by ICSA and the latest version of the AIC Code.
Principal Responsibilities
The main role and responsibilities of the remuneration committee
include:
-- in conjunction with the chair, setting the Directors' remuneration levels; and
-- considering the need to appoint external remuneration consultants.
Independent Remuneration Review
During the year, the Committee engaged independent consulting
firm Trust Associates to carry out a review of the remuneration to
be paid to the Directors for the year commencing 1 January
2021.
The Directors' remuneration was set at launch at a level that
was considered to be appropriate for a company of its size and
nature at the time, and without knowledge of the level of
commitment that would be involved. Over the past two years, that
commitment has grown as the Company itself has grown.
In making their recommendations for the forthcoming year, Trust
Associates aimed to strike a balance between the demands of being
on the Board of the Company in terms of the time commitment, the
responsibility and risk which Directors assume, and the sector
environment and the fee levels of companies of a similar size and
complexity.
Trust Associates acknowledged the Directors respect for the
views of shareholders when considering fee increases and noted that
their recommendations were as a result conservative and put the
Directors at the low end of the daily rate range for the boards of
other investment companies.
Following a review of the report provided by Trust Associates
and taking into account the recommendations made by Trust
Associates, the Committee resolved that fees for 2021 be set as
follows:
-- Non-Executive Director - GBP45,000 per annum;
10. REMUNERATION COMMITTEE REPORT (continued)
-- Additional Fee for the role of Chair of the Board - GBP30,000 per annum; and
-- Additional Fee for the role of Chair of the Audit Committee - GBP17,500 per annum.
The Committee considers the increases in Directors' Fees to be
in-line with the Company's Remuneration Policy approved by the
Company's shareholders at the Company's 2020 AGM. The Committee has
delegated authority to set the remuneration of the Non-Executive
Directors, including the remuneration of the Chair of the Board,
under its terms of reference.
Trust Associates also concluded that should a Senior Independent
Director ("SID") be appointed, the Board may wish to make an
incremental payment for that role in the amount of approximately
GBP3,000 per annum as a guide. Should the Board decide that it is
appropriate to appoint a SID in due course, the Committee will also
provide a recommendation in relation to the appropriate
remuneration for this role in line with the Company's remuneration
policy.
Trust Associates also noted that it is common practice for
Directors to be paid for significant amounts of work that are
additional to the usual work of the Board. The only payment of this
nature made during the period was an additional one-off payment in
the amount of GBP7,000 to Duncan Neale for the additional support
and services that he provided to the Company in delivering the
Company's first Annual Report and Financial Statements for the year
ended 31 December 2020.
Committee evaluation
An external evaluation of the Committee will be undertaken
during the course of 2021.
This Remuneration Committee Report is approved on behalf of the
Board by
David Stevenson
Chair of the Remuneration Committee
27 April 2021
11. DIRECTORS REMUNERATION REPORT
Directors' Remuneration Report for the period to 31 December
2020
The Board presents the Directors' Remuneration Report for the
period to 31 December 2020 which has been prepared in accordance
with the requirements of the Large and Medium-sized Companies and
Groups (Accounts and Reports) Regulations 2008 (SI2008/410) and the
Companies Act 2006.
Under the requirements of Section 497 of the Companies Act 2006,
the Company's Auditor is required to audit certain disclosures
contained within the report. Where disclosures have been audited,
they are indicated as such. The Auditor's opinion is included in
their report on pages 65 to 70.
The Annual Remuneration Statement
The Chair of the Remuneration Committee has summarised the major
decisions on Directors remuneration, including the discretion which
has been exercised in the award of Directors' remuneration, the
substantial changes relating to Directors' remuneration made during
the year and the context in which those changes occurred and
decisions have been taken in the report from the Remuneration
Committee on page 59.
Remuneration Policy
The Company's policy is that the remuneration of NEDs should be
determined with due regard to the experience of the Board as a
whole, the time commitment required and to be fair and comparable
to that of other Non-Executive Directors of similar companies. The
Company may also periodically choose to benchmark Directors' fees
with an independent review, to ensure they remain competitive, fair
and reasonable.
This policy has been effective from the date of admission to
trading and was approved at the Company's 2020 AGM and will be put
to shareholders for approval at least every three years
thereafter.
The fees for the Directors are determined within the limits set
out in the Company's Articles of Association which states that the
Directors' remuneration for their services in the office of
Director shall, in the aggregate does not exceed GBP500,000 per
annum or such higher figure as the Company, by ordinary resolution,
determines. A review by Trust Associates did not lead to a change
in the policy being identified.
The Directors are entitled only to their annual fee and to be
reimbursed for any expenses properly and reasonably incurred by
them respectively in and about the business of the Company or in
the discharge of his or her duties as a Director. The fees payable
to each Director is set out in the tables below.
Any Director who performs services which in the opinion of the
Directors are outside the scope of the ordinary duties of a
Director, may be paid such reasonable additional remuneration to be
determined by the Directors or any committee appointed by the
Directors and such additional remuneration shall be in addition to
any remuneration provided for by way of their annual fee and their
reasonable expenses.
No element of the Directors' remuneration is performance
related, nor does any Director have any entitlement to pensions,
share options or any long term incentive plans from the
Company.
The Directors hold their office in accordance with the Articles
and their appointment letters. No Director has a service contract
with the Company, nor is any such contract proposed. The Directors'
appointments can be terminated in accordance with the Articles and
without compensation.
In order to avoid conflicts of interest, no Director is involved
in the setting of their own remuneration and remuneration is set by
the Remuneration Committee, remuneration is set by the Remuneration
Committee in line with the remuneration policy and aggregate
remuneration levels are limited under the Company's Articles of
Association.
John Leggate and David Stevenson signed letter of appointments
with the Company dated 14 October 2018. Duncan Neale signed a
letter of appointment with the Company dated 15 October 2018.
Catherine Pitt signed a letter of appointment with the Company
dated 28 February 2019. These agreements are terminable on three
months' notice by either side. The Directors are not entitled to
any performance related variable consideration or any other taxable
benefits under these agreements.
11. DIRECTORS REMUNERATION REPORT (continued)
The Annual Remuneration Report
The Remuneration Committee considers any change in the
Directors' remuneration policy. The report from the Remuneration
Committee is set out on page 59.
Directors' remuneration and interests (audited)
Directors' remuneration (excluding National Insurance
Contributions) for the Company and dividend received for the period
under review was as follows:
2020 Percentage Short Percentage Total Fixed Total Total
Increase term variable Increase remuneration Variable Remuneration
Salary since pay Period since Period remuneration Period from
and Fees 24 August from 01/01/20 24 August from 01/01/20 Period from 01/01/20
for Period 2018 to 31/12/20 2018 to 31/12/20 01/01/20 to 31/12/20
from on Salary GBP on short to 31/12/20
01/01/20 and term
to 31/12/20 Fees variable
GBP *** pay
Catherine
Pitt 40,000 - - - 40,000 - 40,000
------------- ----------- -------------- ----------- -------------- -------------- -------------
David
Stevenson 40,000 - - (100%) 40,000 - 40,000
------------- ----------- -------------- ----------- -------------- -------------- -------------
Duncan
Neale(*) 45,000 - 7,000 40% 45,000 7,000 52,000
------------- ----------- -------------- ----------- -------------- -------------- -------------
John Leggate 65,000 - - - 65,000 - 65,000
------------- ----------- -------------- ----------- -------------- -------------- -------------
Total 190,000 - 7,000 (30%) 190,000 7,000 197,000
------------- ----------- -------------- ----------- -------------- -------------- -------------
2019 Short term Total Fixed Total Variable Total Remuneration
variable remuneration remuneration Period from
Fixed Salary pay Period from Period from 24/08/18 to
and Fees Period from 24/08/18 24/08/18 31/12/19
Period from 24/08/18 to 31/12/19 to 31/12/19
24/08/18 to to 31/12/19
31/12/19 GBP
Catherine Pitt 26,667 - 26,667 - 26,667
------------- ------------- -------------- --------------- -------------------
David Stevenson
** 53,333 5,000 53,333 5,000 58,333
------------- ------------- -------------- --------------- -------------------
Duncan Neale
(*) 60,000 5,000 60,000 5,000 65,000
------------- ------------- -------------- --------------- -------------------
John Leggate 86,667 - 86,667 - 86,667
------------- ------------- -------------- --------------- -------------------
Total 226,667 10,000 226,667 10,000 236,667
------------- ------------- -------------- --------------- -------------------
*In view of the significant additional work undertaken, the
Board agreed to pay an additional fee of GBP7,000 (2019 - GBP5,000)
to Duncan Neale during 2020.
** In view of the significant additional work involved
delivering the Company's first Annual Report and Financial
Statements, the Board agreed to pay an additional fee of
GBP5,000.
*** Movement based on annualised figures.
The Directors of the Company had the following beneficial
interests in the issued Ordinary Shares as at 31 December 2020 and
at the date of this report:
As at the date of this report
Directors 27 April 2021 As at 31 Dec 2020
John Leggate 37,415 37,415
Duncan Neale 13,425 13,425
David Stevenson 13,464 13,464
Catherine Pitt 14,660 14,660
11. DIRECTORS REMUNERATION REPORT (continued)
The Company does not oblige the Directors to hold shares in the
Company, but this is encouraged to ensure the appropriate alignment
of interests.
2020/21 remuneration
The remuneration levels for the forthcoming year for the
Directors of Gresham House Energy Storage Fund plc are expected to
be at the current annual fee level, as shown in the table above.
The Board review's Directors' remuneration at least annually to
ensure that it is in line with market rates.
Consideration of shareholders' views
An ordinary resolution to approve the Remuneration Report will
be put to shareholders at the Company's 2021 AGM and shareholders
will have the opportunity to express their views and raise any
queries in respect of the remuneration policy at this meeting.
Statement of voting at the 2020 Annual General Meeting
The Company's remuneration policy was subject to a vote at the
2020 AGM. The voting outcome is shown in the table below:
Resolution to approve Companies
remuneration policy Votes Percentage
Votes for* 162,311,910 100.00%
------------ -----------
Votes against 5,000 0.00%
------------ -----------
Total votes validly cast 162,351,111
------------ -----------
Total votes cast as % of issued
share capital 69.30%
------------ -----------
Votes withheld** 0
------------ -----------
* Includes discretionary votes
** A vote withheld is not a vote in law and is not counted in
the calculation of the votes for or against a resolution.
Further, the Directors' Remuneration Report was subject to an
advisory vote at the 2020 AGM. The voting outcome is shown in the
table below:
Resolution to approve directors'
remuneration report Votes Percentage
Votes for* 162,316,392 100.00%
------------ -----------
Votes against 5,000 0.00%
------------ -----------
Total votes validly cast 162,321,392
------------ -----------
Total votes cast as % of issued
share capital 69.29%
------------ -----------
Votes withheld** 29,719
------------ -----------
* Includes discretionary votes
** A vote withheld is not a vote in law and is not counted in
the calculation of the votes for or against a resolution.
External advisers
During the year, the Board received external advice with respect
to remuneration and appointed Trust Associates to provide advice on
remuneration. Details of this advice is set out in the Remuneration
Committee Report on page 59.
Payments to past Directors or for loss of office
There are no payments to disclose. Under the terms of the
Directors' Remuneration Policy there would be no compensation for
loss of office.
11. DIRECTORS REMUNERATION REPORT (continued)
Performance graph
The graph below represents the Company's performance during the
period since the Company's Ordinary Shares were first listed on the
London Stock Exchange on 13 November 2018 and shows Ordinary Share
price total return and Net Asset Value total return performance on
a dividends reinvested basis. Both series are rebased to 13
November 2018, being the date the Company's Ordinary Shares were
listed.
This graph has been chosen as a comparison as it is a publicly
available broad equity index which focuses on smaller companies and
is therefore more relevant than most other publicly available
indices.
Relative importance of spend on pay
The difference in actual spend between 31 December 2020 and 31
December 2019 on Directors' remuneration in comparison to
distributions (dividends and share buybacks) and other significant
spending are set out in the table below.
PAYMENTS MADE DURING THE PAYMENTS MADE DURING THE
YEARED 31 DECEMBER PERIOD 24 AUGUST 2018
2020 TO 31 DECEMBER 2019
GBP GBP
Remuneration to Directors 197,000 236,667
------------------------- -------------------------
Dividends paid to shareholders 14,341,916 5,244,925
------------------------- -------------------------
Buy-back of Ordinary Shares - -
------------------------- -------------------------
Total 14,538,916 5,458,592
------------------------- -------------------------
Finally, as noted above, the Directors have beneficial interests
in the Ordinary Shares of the Company. Dividends paid in respect of
these interests were as follows:
Total Paid Total Paid during Total Paid during
in 2021 to year ended 31 period ended
date of report December 2020 31 December
GBP GBP 2019
GBP
Catherine Pitt 257 820 175
---------------- ----------------- -----------------
David Stevenson 236 616 224
---------------- ----------------- -----------------
Duncan Neale 235 602 175
---------------- ----------------- -----------------
John Leggate 655 1,694 175
---------------- ----------------- -----------------
Total 1,382 3,371 749
---------------- ----------------- -----------------
This Directors' Remuneration Report is approved on behalf of the
Board by
David Stevenson
Chair of the Remuneration Committee
27 April 2021
12. NOMINATION COMMITTEE REPORT
Introduction
During the period, the Board, mindful of the requirements of the
AIC Code and the Company's objective of maintaining high governance
standards, constituted the Nomination Committee during 2020.
Nomination Committee Composition
The Nomination Committee is chaired by Cathy Pitt. Cathy is
supported by the other three independent Non-Executive Directors on
this committee.
The Nomination Committee meets at least once a year and operates
within clearly defined terms of reference. The Committee met once
during the period. The Committee's meetings were also attended by
representatives of the Company Secretary, (JTC (UK) Limited).
Given the size of the Board and the diverse range of experience
and skills possessed by the Directors, the Board has considered it
appropriate to have all Directors serve on this Committee.
Terms of reference
The Committee reviewed its terms of reference to ensure that
they were in alignment with the pro-forma terms of reference
published by ICSA and the latest version of the AIC Code.
Principal Responsibilities
The Committee's principal responsibilities are:
-- leading the process for appointments;
-- ensuring plans are in place for orderly succession to the Board; and
-- overseeing the development of a diverse pipeline for succession to the Board.
The Committee is also responsible for supporting the Chair of
the Board in an annual review of the effectiveness of the Board,
its Committee and each of its Directors.
Composition, Succession and Evaluation
Composition
The Company has a Board comprising four Non-Executive Directors,
with the Chair being John Leggate. All of the Directors are
independent from the Investment Manager as defined in the AIC Code
and no circumstances have been identified that are likely to
impair, or could appear to impair, a Non-Executive Director's
independence. Further, all Directors' significant interests, as set
out in the Board of Directors summary on page 42, have been
reviewed and no conflicts of interest with the interests of the
Company have been identified. The Board does not consider these
interests to have any significant impact on the Directors' ability
to discharge their duties to the Company.
Biographical details of all Board members (including significant
other commitments) are shown on page 42.
When making new appointments, the Board will take into account
other demands on Directors' time. Prior to appointment, significant
commitments will be disclosed with an indication of the time
involved. Additional external appointments should not be undertaken
without prior approval of the Committee and Board, with the reasons
for permitting significant appointments explained in the annual
report.
12. NOMINATION COMMITTEE REPORT (continued)
The Committee reviewed the size and composition of the Board
having regard to the skills of each Director and the commitment
involved in service on the Board. The Board particularly considered
whether the time was right to appoint a Senior Independent Director
and/or a fifth director to the Board. The Committee agreed to defer
a decision on these issues until after the externally facilitated
Board evaluation to be conducted during 2021.
The Committee also considered the opportunity for scholarship
initiatives and board apprenticeship programmes. The Committee
considered that access to experience would be valuable for
disadvantaged individuals and for the Committee to support the
wider community. The Committee resolved to pursue initiatives to
support scholarship initiatives and board apprenticeship programmes
during 2021.
Board Evaluation
During the period, the Board, supported by the Company Secretary
conducted an internal Board effectiveness evaluation. The
evaluation involved the completion of board surveys prepared by the
Company Secretary and completed by the Directors. The evaluation
was a comprehensive internal review of the effectiveness of Board,
the individual Directors, the Chair and each of the Board
Committee's. The Board then met during the year to reflect on its
performance and its effectiveness, including the effectiveness of
the Board as a whole and its committees. The Board concluded that
the Directors have worked well together and the Committees were
effective in the performance of their duties. The Company's policy
is to have an externally facilitated board evaluation at least
every three years.
The Company will undertake its first externally facilitated
Board evaluation during 2021 by an appropriate independent external
consultant.
Areas for ongoing development included the establishment of key
operating processes for open and constructive engagement between
the Investment Manager and the Board, including improving ongoing
information flow to the Board and ascertaining the need for
additional shareholder engagement with the Board (via the
Chair).
Re-election and succession
John Leggate, David Stevenson and Duncan Neale were appointed to
the Board on 24 August 2018 and re-elected by the shareholders at
the 2020 AGM. Catherine Pitt was appointed to the Board on 1 March
2019 and duly elected by the shareholders at the 2020 AGM.
In accordance with the AIC Code, all Directors are required to
retire at the forthcoming AGM, and being eligible, offer themselves
for re-election.
While the Board has only been in place for a short time, the
Board will continue to monitor the Company's need for appropriate
and orderly succession. Further, in relation to the tenure of the
Chair, the Board considers it appropriate to have no fixed term for
the tenure of the Chair and deems this appropriate given the long
term nature of the Company's investments. However, the Nomination
Committee will review this policy on an annual basis.
Diversity
The Company recognises the benefits of having a diverse board
and sees increasing diversity at board level as an essential
element in maintaining an effective board. The Company has adopted
a formal Diversity Policy, which sets out the Company's approach to
and commitment to diversity.
The Company's policy is to ensure that there is broad experience
and diversity on the Board. Diversity includes, and makes good use
of, differences in knowledge and understanding of relevant diverse
geographies, people and their backgrounds including race or ethnic
origin, sexual orientation, sex, age, disability and religion.
Appointments to the Board should be made on merit, in the context
of complimenting and expanding the skills, knowledge and experience
of the Board as a whole (and in accordance with the Equality Act
2010).
12. NOMINATION COMMITTEE REPORT (continued)
The Nomination Committee will be responsible for the
implementation of the Company's Diversity Policy and for monitoring
progress towards the achievement of its objectives.
Committee evaluation
An external evaluation of the Committee will be undertaken
during the course of 2021.
This Nomination Committee Report is approved on behalf of the
Board by
Cathy Pitt
Chair of the Nomination Committee
27 April 2021
13. MANAGEMENT ENGAGEMENT COMMITTEE REPORT
Introduction
During the year, the Committee played an integral role in:
- reviewing the contractual relationship and performance of the Manager; and
- evaluating key service providers, including the company
secretary, depositary, registrar and broker.
Building on its work during 2019, the Committee continued to
work with the Manager and key service providers to ensure that the
Company had a robust system of internal financial controls and a
clear risk management procedure.
Management Engagement Committee Composition
The Management Engagement Committee is chaired by John Leggate.
John is supported by the other three independent Non-Executive
Directors on this committee.
The Management Engagement Committee meets at least once a year
and operates within clearly defined terms of reference. The
Committee met once during the period. These meetings were also
attended by representatives of the Manager and the Company
Secretary, (JTC (UK) Limited).
Given the size of the Board and the diverse range of experience
and skills possessed by the Directors, the Board has considered it
appropriate to have all Directors serve on this Committee.
Terms of reference
The Committee reviewed its terms of reference to ensure that
they remain in alignment with the pro-forma terms of reference
published by ICSA and the latest version of the AIC Code.
Principal Responsibilities
The Committee's principal responsibilities include:
-- monitoring and evaluating the Manager's investment
performance and, if necessary, providing appropriate guidance;
-- putting in place procedures by which the Board regularly
reviews the continued retention of the Manager's services;
-- considering the merit of obtaining, on a regular basis, an
independent appraisal of the Manager's services;
-- reviewing the level and method of remuneration, the basis of
performance fees (if any) and the notice period; and
-- putting in place processes to review the Company's risk
management and internal control systems designed to safeguard
shareholders' investment and the Company's assets. A review of the
effectiveness of these systems should be made annually by the Board
and reported to shareholders in the annual report.
The Committee also reviews the performance of other service
providers to the Company and makes recommendation to the Board,
including by:
-- reviewing and considering the appointment and remuneration of
service providers to the Company; and
-- considering any points of conflict which may arise between
the providers of services to the Company.
13. MANAGEMENT ENGAGEMENT COMMITTEE REPORT (continued)
Performance of the Manager
The Committee reviewed the performance of the Manager and the
Committee was generally satisfied that the Manger had performed
well during the period with the Company completing a number of
acquisitions during the period, driving the performance of the
operating assets, successfully deploying the capital raised during
2019 and conducting a further successful fundraising during
2020.
The Committee noted that information flow to the Board was the
key area for continuous improvement during 2021 to match scaling up
of the portfolio, with the Committee committing to continuing to
collaborate with the Manager to improve reporting and information
flow to the Board and its Committees.
The Committee reviewed the size of the Manager's workload,
key-person policies and resources to handle the anticipated
workload. The Committee also noted the additional resources added
to the Manager's team, in particular the additional capacity to
support the Company's financial modelling and strengthening the
asset operational management team.
The Committee reviewed the remuneration of the Manager and found
these fees to be in line with market rates for the services
delivered to the Company during the period.
The Committee is satisfied that the Manager has performed well
under the terms of the AIFM Agreement and is of the view that the
continued engagement of the Manager is in the best interests of the
Company and would support the Company's long term sustainable
success.
Performance of Key Service Providers
The Committee undertook at review of all key service providers
to the Company and there were no issues to report.
The Committee specifically discussed the performance of JTC (UK)
Limited both as Administrator and as Company Secretary and
concluded that the performance as Administrator and Company
Secretary remained satisfactory. JTC continue to work with the
Manager and Board on a process of continuous improvement around
financial information, internal controls and corporate
governance.
Committee evaluation
An evaluation of the Committee was undertaken as part of the
overall board evaluation. The Committee was found to be working
well and the skills and experience of the members was found to be
appropriate for their roles.
This Management Engagement Committee Report is approved on
behalf of the Board by
John S. Leggate CBE, FREng.
Chair of the Management Engagement Committee
27 April 2021
14. Independent auditor's report to the members of Gresham House
Energy Storage Fund plc
Opinion on the financial statements
In our opinion the financial statements:
-- give a true and fair view of the state of the Company's
affairs as at 31 December 2020 and of the Company's profit for the
year then ended;
-- have been properly prepared in accordance with international
accounting standards in conformity with the requirements of the
Companies Act 2006; and
-- have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the financial statements of Gresham House Energy
Storage Plc (the 'Company') for the year ended 31 December 2020
which comprise the statement of comprehensive income, the statement
of financial position, the statement of changes in equity, the
statement of cash flow and notes to the financial statements,
including a summary of significant accounting policies. The
financial reporting framework that has been applied in their
preparation is applicable law and international accounting
standards in conformity with the requirements of the Companies Act
2006.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the
Auditor's responsibilities for the audit of the financial
statements section of our report. We believe that the audit
evidence we have obtained is sufficient and appropriate to provide
a basis for our opinion. Our audit opinion is consistent with the
additional report to the audit committee.
Independence
Following the recommendation of the audit committee, we were
re-appointed by the members on 30 June 2020 to audit the financial
statements for the year ending 31 December 2020. The period of
total uninterrupted engagement including retenders and
reappointments is two years, covering the years ending 31 December
2019 to 31 December 2020. We remain independent of the Company in
accordance with the ethical requirements that are relevant to our
audit of the financial statements in the UK, including the FRC's
Ethical Standard as applied to listed public interest entities, and
we have fulfilled our other ethical responsibilities in accordance
with these requirements. The non-audit services prohibited by that
standard were not provided to the Company.
Conclusions relating to going concern
In auditing the financial statements, we have concluded that the
Directors' use of the going concern basis of accounting in the
preparation of the financial statements is appropriate. Our
evaluation of the Directors' assessment of the Company's ability to
continue to adopt the going concern basis of accounting
included:
-- an assessment of the reasonableness of the Company's going
concern assessment by comparing the expected cash outflows to the
available cash reserves for a period of 12 months from the date of
approval of the financial statements;
-- an assessment of the appropriateness of the approach and model used by management; and
-- an assessment of the stress test performed by management
which assumed that there would be no cash inflows and all existing
funding obligations towards the investments would be met over the
next 12 months and this showed that the Company would have
sufficient headroom.
Based on the work we have performed, we have not identified any
material uncertainties relating to events or conditions that,
individually or collectively, may cast significant doubt on the
Company's ability to continue as a going concern for a period of at
least twelve months from when the financial statements are
authorised for issue.
Our responsibilities and the responsibilities of the Directors
with respect to going concern are described in the relevant
sections of this report.
Overview
2020 2019
Valuation ü Valuation ü
of unquoted of unquoted
investments investments
Going Concern Going Concern ü
------------------- -------- ------------------ ---------
Going Concern is no longer considered to be a
key audit matter because the risk in relation
to COVID-19 did not and continues not to have
Key audit matters a significant impact on the company's going concern.
------------------------------------------------------------
Materiality Financial statements as a whole
GBP5.3m (2019: GBP2.1m) based on 1.5% of net
assets (2019: 1.5% of total investment).
------------------------------------------------------------
An overview of the scope of our audit
Our audit was scoped by obtaining an understanding of the
Company and its environment, including the Company's system of
internal control, and assessing the risks of material misstatement
in the financial statements. We also addressed the risk of
management override of internal controls, including assessing
whether there was evidence of bias by the Directors that may have
represented a risk of material misstatement.
Key audit matters
Key audit matters are those matters that, in our professional
judgement, were of most significance in our audit of the financial
statements of the current period and include the most significant
assessed risks of material misstatement (whether or not due to
fraud) that we identified, including those which had the greatest
effect on: the overall audit strategy, the allocation of resources
in the audit, and directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the
financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these
matters.
Key audit matter How the scope of our audit addressed the
key audit matter
Valuation As detailed Our procedures in relation to management's
of unquoted in Note valuation of unquoted investments include:
investments 12, the
(refer to Note 3 and 5 on pages 77 and 79 and Note 12 on page 85 of the financial Company owns * We assessed the competency, qualification,
statements) an independence and objectivity of the external valuer
investment engaged by the Company and reviewed the terms of
portfolio their engagement for any unusual arrangements or
of unquoted limitation on the scope of their work.
equity
and loan
investments,
which as * With the use of our internal valuation experts, we
described challenged the appropriateness of the selection and
in the application of key assumptions in the discounted cash
accounting flow model including discount rate, net energy yield,
policies in annual generation, inflation rate, underlying costs
Note 5 and asset life by benchmarking to available industry
are held at data and actual results in the year.
fair value
in the
Company
Financial * Agreed net energy yield and annual generation used in
Statements. the discounted cash flow model to independent third
party pricing curve reports.
The
valuation of
the
investments * For new investments, we obtained and reviewed the
is a sale and purchase agreements and loan contracts and
subjective checked if they were accurately reflected in the
accounting valuation model.
estimate
where there
is an
inherent * For new investments we challenged the appropriateness
risk of of the valuations in particular the judgement if the
management acquisition price equals the fair value at
override acquisition date.
arising from
investment
valuations
being * Agreed period end working capital adjustments in
prepared by determining the fair value of the portfolio companies
the to the working capital recognised in the management
Investment accounts of the portfolio companies as well as bank
Manager, statements, invoices and VAT returns.
who is
remunerated
based on the
Net Asset * Agreed the movements in loans provided to the
Value (NAV) portfolio companies including interest rates to
of the underlying loan agreements, vouched cash movements to
Company. bank statements and re-performed the calculation of
interest.
The Company
has engaged
an
independent
expert Key observation
valuer to
help Based on the audit procedures performed,
mitigate we found the assumptions made by the management
the risk. in relation to the valuation to be appropriate.
The fair
value was
determined
through
the use of a
discounted
cash flow
model. The
valuation
involved
significant
judgements
and
estimates
from
management
including,
but not
limited to
discount
rates,
changes
in power
prices,
changes
in energy
production,
changes in
the
economic,
legal and
taxation
or
regulatory
environment.
Changes to
the
estimates
and/or
judgements
can result,
either
on an
individual
or
aggregate
basis, in
a material
change
to the
valuation of
unquoted
investments.
------------- -----------------------------------------------------------------------
Our application of materiality
We apply the concept of materiality both in planning and
performing our audit, and in evaluating the effect of
misstatements. We consider materiality to be the magnitude by which
misstatements, including omissions, could influence the economic
decisions of reasonable users that are taken on the basis of the
financial statements.
In order to reduce to an appropriately low level the probability
that any misstatements exceed materiality, we use a lower
materiality level, performance materiality, to determine the extent
of testing needed. Importantly, misstatements below these levels
will not necessarily be evaluated as immaterial as we also take
account of the nature of identified misstatements, and the
particular circumstances of their occurrence, when evaluating their
effect on the financial statements as a whole.
Based on our professional judgement, we determined materiality
for the financial statements as a whole and performance materiality
as follows:
Company financial statements
2020 2019
GBPm GBPm
-------------------------------- ------------------------------
Materiality GBP5,300,000 GBP2,100,000
-------------------------------- ------------------------------
Basis for determining 1.5 % Net assets 1.5% of Total investments
materiality
-------------------------------- ------------------------------
Rationale for We considered that net We considered that the total
the benchmark assets is the most relevant investments was the most
applied performance measure used appropriate benchmark for
by investors when assessing the Company's financial
the Company performance, due to it being
an investment entity.
The basis for materiality
changed from total investments
to net asset value in
2020 due to the Company
having been established
for a full year and the
fact that the Company
reports its net asset
value (NAV) on a quarterly
basis. Therefore, net
assets is deemed to be
the most appropriate benchmark
in line with other listed
renewable energy funds.
-------------------------------- ------------------------------
Performance GBP3,445,000 GBP1,365,000
materiality
-------------------------------- ------------------------------
Basis for determining 65% of materiality 65% of materiality
performance
materiality
-------------------------------- ------------------------------
Specific materiality
We also determined that for transactions and balances which
impact on the Company's realised return , a misstatement of less
than materiality for the financial statements as a whole, specific
materiality, could influence the economic decisions of users. As a
result, we determined materiality for these items to be GBP0.5
million based on 3% of profit before tax . We further applied a
performance materiality level of 65% of specific materiality to
ensure that the risk of errors exceeding specific materiality was
appropriately mitigated.
Reporting threshold
We agreed with the Audit Committee that we would report to them
all individual audit differences in excess of GBP25,000 (2019:
GBP42,000). We also agreed to report differences below this
threshold that, in our view warranted reporting on qualitative
grounds.
Other information
The Directors are responsible for the other information. The
other information comprises the information included in the Annual
Report and Financial Statements other than the financial statements
and our auditor's report thereon. Our opinion on the financial
statements does not cover the other information and, except to the
extent otherwise explicitly stated in our report, we do not express
any form of assurance conclusion thereon. Our responsibility is to
read the other information and, in doing so, consider whether the
other information is materially inconsistent with the financial
statements or our knowledge obtained in the course of the audit, or
otherwise appears to be materially misstated. If we identify such
material inconsistencies or apparent material misstatements, we are
required to determine whether this gives rise to a material
misstatement in the financial statements themselves. If, based on
the work we have performed, we conclude that there is a material
misstatement of this other information, we are required to report
that fact.
We have nothing to report in this regard.
Other Companies Act 2006 reporting
Based on the responsibilities described below and our work
performed during the course of the audit, we are required by the
Companies Act 2006 and ISAs (UK) to report on certain opinions and
matters as described below.
Strategic In our opinion, based on the work undertaken
report and in the course of the audit:
Directors' * the information given in the Strategic report and the
report Directors' report for the financial year for which
the financial statements are prepared is consistent
with the financial statements; and
* the Strategic report and the Directors' report have
been prepared in accordance with applicable legal
requirements.
In the light of the knowledge and understanding
of the Company and its environment obtained in
the course of the audit, we have not identified
material misstatements in the Strategic report
or the Directors' report.
Directors' In our opinion, the part of the Directors' remuneration
remuneration report to be audited has been properly prepared
in accordance with the Companies Act 2006.
------------------------------------------------------------------------
Matters on We have nothing to report in respect of the following
which we matters in relation to which the Companies Act
are required 2006 requires us to report to you if, in our
to report opinion:
by exception
* adequate accounting records have not been kept, or
returns adequate for our audit have not been received
from branches not visited by us; or
* the financial statements and the part of the
Directors' remuneration report to be audited are not
in agreement with the accounting records and returns;
or
* certain disclosures of Directors' remuneration
specified by law are not made; or
* we have not received all the information and
explanations we require for our audit.
------------------------------------------------------------------------
Responsibilities of Directors
As explained more fully in the Directors' responsibilities
statement, the Directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true
and fair view, and for such internal control as the Directors
determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to
fraud or error.
In preparing the financial statements, the Directors are
responsible for assessing the Company's ability to continue as a
going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless the
Directors either intend to liquidate the Company or to cease
operations, or have no realistic alternative but to do so.
Auditor's responsibilities for the audit of the financial
statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditor's report that includes our opinion. Reasonable assurance is
a high level of assurance but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements.
Extent to which the audit was capable of detecting
irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance
with laws and regulations. We design procedures in line with our
responsibilities, outlined above, to detect material misstatements
in respect of irregularities, including fraud. The extent to which
our procedures are capable of detecting irregularities, including
fraud is detailed below:
-- We obtained an understanding of the legal and regulatory
framework that is applicable to the Company and determined that the
relevant laws and regulations related to the elements of the
Company Act 2006 and tax legislation, and the financial reporting
framework. Our considerations of the other laws and regulations
that may have a significant effect on the financial statements
included the supervisory requirements of LSE Listing and Disclosure
Rules, Financial Conduct Rule 'FCA' Listing rules, and the
Association of Investment Companies 'AIC' SORP.
-- We understood how the Company is complying with these laws
and regulations by making enquiries of management and those
responsible for legal and compliance matters. We reviewed
correspondence between the Company and regulated bodies and
reviewed minutes of meetings and gained an understanding of the
Company's approach to governance.
-- We assessed the susceptibility of the financial statement to
material misstatement, including fraud and made enquiries of
management and the board of directors of any known instances of
fraud.
-- Obtaining an understanding of management's internal controls
that are relevant to the audit.
-- Challenging assumptions made by management in their
significant accounting estimates in particular in relation to
valuation of unquoted investments (see related key audit
matters).
-- Identifying and testing journal entries, in particular any
journal entries posted with unusual account combinations, journals
posted by senior management and journals posted and reviewed by the
same individual.
-- Communicating relevant identified laws and regulations and
potential fraud risks to all engagement team members and remained
alert to any indications of fraud or non-compliance with laws and
regulations throughout the audit.
Our audit procedures were designed to respond to risks of
material misstatement in the financial statements, recognising that
the risk of not detecting a material misstatement due to fraud is
higher than the risk of not detecting one resulting from error, as
fraud may involve deliberate concealment by, for example, forgery,
misrepresentations or through collusion. There are inherent
limitations in the audit procedures performed and the further
removed non-compliance with laws and regulations is from the events
and transactions reflected in the financial statements, the less
likely we are to become aware of it.
A further description of our responsibilities is available on
the Financial Reporting Council's website at:
www.frc.org.uk/auditorsresponsibilities . This description forms
part of our auditor's report.
Use of our report
This report is made solely to the Company's members, as a body,
in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the
Company's members those matters we are required to state to them in
an auditor's report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the Company and the Company's members as a body,
for our audit work, for this report, or for the opinions we have
formed.
Marc Reinecke (Senior Statutory Auditor)
For and on behalf of BDO LLP, Statutory Auditor
London
United Kingdom
27 April 2021
BDO LLP is a limited liability partnership registered in England
and Wales (with registered number OC305127).
15. FINANCIAL STATEMENTS
STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
Company number 11535957
For the year ended 31 December 2020 Notes Revenue Capital Total
(GBP) (GBP) (GBP)
--------------------------------------------- ------ ------------ ------------ ------------
Net gain/(loss) on investments at fair
value through the profit and loss 7 12,346,913 10,055,692 22,402,605
Interest on loans to affiliated entities
of the Investment Manager 8 761,169 - 761,169
Other income 188,236 - 188,236
--------------------------------------------- ------ ------------ ------------ ------------
Total income 13,296,318 10,055,692 23,352,010
Administrative and other expenses
Transaction fees - (309,778) (309,778)
Legal and professional fees - (1,002,983) (1,002,983)
Other administrative expenses 9 (3,329,721) - (3,329,721)
--------------------------------------------- ------ ------------ ------------ ------------
Total administrative and other expenses (3,329,721) (1,312,761) (4,642,482)
Profit before tax 9,966,597 8,742,931 18,709,528
Taxation 10 (20,570) - (20,570)
--------------------------------------------- ------ ------------ ------------ ------------
Profit and total other comprehensive income
for the year 9,946,027 8,742,931 18,688,958
--------------------------------------------- ------ ------------ ------------ ------------
Earnings per Ordinary Share (basic and
diluted) - pence per Ordinary Share 11 4.15 3.64 7.79
For the period from 24 August 2018 (incorporation Notes Revenue Capital Total
date) to 31 December 2019 (GBP) (GBP) (GBP)
--------------------------------------------------- ------ ------------ ------------ ------------
Net gain/(loss) on investments at fair
value through the profit and loss 7 5,306,389 6,226,732 11,533,121
Interest on loans to affiliated entities
of the Investment Manager 8 203,364 - 203,364
Other income 336,836 - 336,836
--------------------------------------------------- ------ ------------ ------------ ------------
Total income 5,846,589 6,226,732 12,073,321
Administrative and other expenses
Transaction fees - (1,266,301) (1,266,301)
Legal and professional fees - (836,000) (836,000)
Other administrative expenses 9 (2,279,026) - (2,279,026)
--------------------------------------------------- ------ ------------ ------------ ------------
Total administrative and other expenses (2,279,026) (2,102,301) (4,381,327)
Profit before tax 3,567,563 4,124,431 7,691,994
Taxation 10 - - -
--------------------------------------------------- ------ ------------ ------------ ------------
Profit and total comprehensive income for
the period 3,567,563 4,124,431 7,691,994
--------------------------------------------------- ------ ------------ ------------ ------------
Earnings per Ordinary Share (basic and
diluted) - pence per Ordinary Share 11 3.07 3.55 6.62
The total column of this statement is the Statement of
Comprehensive Income of the Company prepared in accordance with
International Financial Reporting Standards (IFRS) as adopted. The
supplementary revenue return and capital columns have been prepared
in accordance with the Association of Investment Companies
Statement of Recommended Practice (AIC SORP).
The Notes on pages 76 to 98 form an integral part of these
Financial Statements.
STATEMENT OF FINANCIAL POSITION
As at 31 December 2020
Company number 11535957
Notes 31 December 31 December
2020 2019
(GBP) (GBP)
Non-current assets
Investments in subsidiaries at fair
value through profit or loss 12 248,964,175 138,203,407
248,964,175 138,203,407
Current assets
Cash and cash equivalents 14 110,967,025 52,905,852
Restricted cash 15 - 10,843,595
Trade and other receivables 16 274,427 267,001
Loans receivable 13 - 6,109,952
111,241,452 70,126,400
Total assets 360,205,627 208,329,807
------------------------------------- ------ ------------ ------------
Current liabilities
Trade and other payables 17 (1,315,217) (2,450,447)
------------------------------------- ------ ------------ ------------
(1,315,217) (2,450,447)
Total net assets 358,890,410 205,879,360
------------------------------------- ------ ------------ ------------
Shareholders' equity
Share capital 22 3,485,564 2,042,707
Share premium 22 251,601,260 104,380,109
Merger relief reserve 22 13,299,017 13,299,017
Capital reduction reserve 22 64,123,617 78,465,533
Capital reserves 24 12,867,362 4,124,431
Revenue reserves 24 13,513,590 3,567,563
------------------------------------- ------ ------------ ------------
358,890,410 205,879,360
Total shareholders' equity 358,890,410 205,879,360
------------------------------------- ------ ------------ ------------
Net Asset Value per Ordinary Share
(pence) 21 102.96 100.79
The Financial Statements were approved and authorised for issue
by the Board of Directors and were signed on its behalf by:
John S Leggate CBE, FREng
Chair
Date: 27 April 2021
The Notes on pages 76 to 98 form an integral part of these
Financial Statements.
STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
Note Share Share Merger Capital Capital Revenue Total
capital premium Relief reduction reserves reserves shareholders'
reserve Reserve reserve equity
(GBP) (GBP) (GBP) (GBP) (GBP) (GBP) (GBP)
--------------- ----- ---------- ------------ ----------- ------------- ----------- ----------- --------------
As at 1
January
2020
(restated)* 2,042,707 104,380,109 13,299,017 78,465,533 4,124,431 3,567,563 205,879,360
Comprehensive
income for -
the year - - - - - -
Profit for
the period - - - - 8,742,931 9,946,027 18,688,958
--------------- ----- ---------- ------------ ----------- ------------- ----------- ----------- --------------
Total
comprehensive
income for
the year - - - - 8,742,931 9,946,027 18,688,958
--------------- ----- ---------- ------------ ----------- ------------- ----------- ----------- --------------
Transactions
with owners
Ordinary
Shares issued
at a premium
during the
year 22 1,442,857 149,757,143 - - - - 151,200,000
Share issue
costs 22 - (2,535,992) - - - (2,535,992)
Dividends
paid 22 - - - (14,341,916) - - (14,341,916)
As at 31
December
2020 22 3,485,564 251,601,260 13,299,017 64,123,617 12,867,362 13,513,590 358,890,410
--------------- ----- ---------- ------------ ----------- ------------- ----------- ----------- --------------
The total distributable reserves available at 31 December 2020
are GBP90,504,569 (2019: GBP86,157,527)
STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
Note Share Share Merger Capital Capital Revenue Total
capital premium Relief reduction reserves reserves shareholders'
reserve Reserve reserve equity
(GBP) (GBP) (GBP) (GBP) (GBP) (GBP) (GBP)
--------------- ----- ----------- ------------- ----------- ------------ ---------- ----------- --------------
As at 24
August 2018 - - - - - - -
Comprehensive
income for the
period - - - - - - -
Profit for the
period - - - - 4,124,431 3,567,563 7,691,994
--------------- ----- ----------- ------------- ----------- ------------ ---------- ----------- --------------
Total
comprehensive
income for
the period - - - - 4,124,431 3,567,563 7,691,994
--------------- ----- ----------- ------------- ----------- ------------ ---------- ----------- --------------
Transactions with
owners
Ordinary
Shares issued
at a premium
during the
period
(restated) 22 2,042,707 191,364,686 13,299,017 - - - 206,706,410
Share issue
costs 22 - (3,274,119) - - - - (3,274,119)
Issue of
redeemable
preference
shares 22 12,500 - - - - - 12,500
Redemption of
redeemable
preference
shares 22 (12,500) - - - - - (12,500)
Transfer to
capital
reduction
reserve 22 - (83,710,458) - 83,710,458 - - -
Dividends paid 22 - - - (5,244,925) - - (5,244,925)
As at 31
December 2019 22 2,042,707 104,380,109 13,299,017 78,465,533 4,124,431 3,567,563 205,879,360
--------------- ----- ----------- ------------- ----------- ------------ ---------- ----------- --------------
The Notes on pages 76 to 98 form an integral part of these
Financial Statements.
STATEMENT OF CASH FLOW
For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
Note 31 December 24 August
2020 2018 to 31
GBP December 2019
GBP
------------------------------------------- ----- ------------- ---------------
Cash flows used in operating activities
Profit for the year/period 18,688,958 7,691,994
Net gain on investments at fair value
through the profit and loss 12 (22,402,605) (11,533,121)
Interest income (784,206) (487,814)
Transaction fees and legal costs
on acquisitions* - 2,102,301
Taxation 20,570 -
Increase in trade and other receivables (7,425) (267,001)
(Decrease)/increase in trade and
other payables (excluding tax) (1,155,801) 679,390
------------------------------------------- ----- ------------- ---------------
Net cash used in operating activities (5,640,509) (1,814,251)
Cash flows used in investing activities
Acquisition of equity in subsidiaries 23 (238,095) (12,575,280)
Loans made to subsidiaries 23 (76,155,352) (74,162,215)
Transaction fees and legal costs
on acquisitions* - (2,102,301)
Loans repaid by investments 5,750,000 -
Loans to the affiliated entities
of the investment manager - (5,906,588)
Outflow to restricted cash 15 - (10,843,595)
Bank interest received 23,037 284,452
Net cash used in investing activities (70,620,410) (105,305,527)
Cash flows used in financing activities
Proceeds from issue of Ordinary Share
s at a premium 23 151,200,000 168,544,674
Share issue costs (2,535,992) (3,274,119)
Issue of redeemable preference shares - 12,500
Redemption of redeemable preference
shares - (12,500)
Dividends paid (14,341,916) (5,244,925)
Net cash inflow from financing activities 134,322,092 160,025,630
Net increase in cash and cash equivalents
for the year/period 58,061,173 52,905,852
------------------------------------------- ----- ------------- ---------------
Cash and cash equivalents at the 52,905,852 -
beginning of the year/period
------------------------------------------- ----- ------------- ---------------
Cash and cash equivalents at the
end of the year/period 110,967,025 52,905,852
------------------------------------------- ----- ------------- ---------------
* In the prior year, transaction fees and legal costs on
acquisitions were included in investing activities, this has been
included in operating activities in 2020. This was not considered
material to adjust retrospectively
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
1. General information
Gresham House Energy Storage Fund plc (the Company) was
incorporated in England and Wales on 24 August 2018 with company
number 11535957 as a closed-ended investment company. The Company's
business is as an investment trust within the meaning of Chapter 4
of Part 24 of the Corporation Tax Act 2010. The registered office
of the Company is The Scalpel, 18(th) Floor, 52 Lime Street,
London, EC3M 7AF. Its share capital is denominated in Pounds
Sterling (GBP or GBP) and currently consists of Ordinary Shares.
The Company's principal activity is to invest in a diversified
portfolio of operating utility-scale Battery Energy Storage Systems
(BESS), which utilise batteries and may also utilise generators.
The BESS Projects comprising the portfolio are located in diverse
locations across Great Britain. These Annual Financial Statements
cover the year ended 31 December 2020, with comparatives for the
period from 24 August 2018 (incorporation date) to the 31 December
2019.
Re-organisation
The Company is able to raise debt finance at either the Company
or Special Purpose Vehicle ("SPV") level. In order to facilitate
this,
Gresham House Energy Storage Holdings plc (the "Midco") was
incorporated on 25 June 2020, with the Company being the sole
shareholder.
Prior to the issue of debt by the Midco, it was necessary to
carry out a re-organisation of the Company. On 1 October 2020, the
Directors of the Company resolved to approve:
(a) the proposed disposal by the Company of the entire issued
share capital of all of its subsidiaries to the Midco;
(b) the proposed novation of the Company's obligations under all
loan agreements with its subsidiaries to the Midco and the entering
into of a new loan agreement with the Midco (with effect from 30
June 2020);
(c) the proposed novation of the Company's obligations under
certain share purchase agreements to the Midco (together the
"Re-Organisation"); and
(d) a loan agreement to be entered into between (1) the Company and (2) the Midco.
In addition, on 9 October 2020 the Board of Directors of the
Midco approved the Re-Organisation, adopted the Company's
Investment Policy and the protocol for acquisitions from affiliates
of the Investment Manager as set out in the AIFM Agreement, and
agreed to seek the approval of the Company as the Midco's sole
shareholder in order to undertake any acquisitions.
On 14 October 2020 the Midco issued (5%) fixed rate secured
bonds of GBP7,935,000 ("Power Bonds").
The investor profile for these bonds was to be the same as per
the Prospectus, with the purpose stated as all activities defined
by the Company's 'investment policy', as amended from time-to-time.
In particular:
-- to fund the acquisition of battery energy storage projects;
-- to refinance existing loans advanced by the Company; and
-- to finance loans advanced by Company.
The Investment Manager made a recommendation to the Board of
Directors of the Midco to authorise the close of the Power Bond
offering (Initial Series), with subscriptions totalling
GBP7,935,000. There is no financial support guarantees from the
Company.
In addition, another fund managed by the Investment Manager, the
Gresham House BSI Infrastructure LP Fund ("BSIF"), negotiated a
bespoke opportunity to co-invest GBP7.0 million in the Midco via a
separate loan note with a 5% coupon for 12 months.
Note 12 includes an overview of the balances within the Midco
and what would be included in the accounts of the Company if the
Company was required to consolidate the entity.
2. Basis of preparation
Statement of compliance
The Annual Financial Statements have been prepared in accordance
with International Accounting Standards in conformity with the
requirements of the Companies Act 2006. The Financial Statements
have been prepared on a historical cost basis except for financial
assets at fair value through the profit or loss.
Where presentational guidance set out in the Statement of
Recommended Practice (SORP) 'Financial Statements of Investment
Trust Companies and Venture Capital Trusts', issued by the
Association of Investment Companies (AIC) is consistent with the
requirements of International Financial Reporting Standards (IFRS),
the Directors have prepared the Annual Financial Statements on a
basis compliant with the recommendations of SORP. The supplementary
information which analyses the Statement of Comprehensive Income
between items of revenue and a capital nature is presented in
accordance with the SORP.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
2. Basis of preparation (continued)
Functional and presentation currency
The currency of the primary economic environment in which the
Company operates (the functional currency) is Pound Sterling (GBP
or GBP) which is also the presentation currency.
Going concern
The Directors have considered the impact which the current
economic downturn, triggered by COVID-19, could have on the ability
of the Company to continue as a going concern. A key risk facing
the Company is that investments may not be able to make
distributions or pay interest if they are not able to continue to
operate the assets or dysfunctional markets affect trading
operations.
The Company and the Investment Manager have so far been able to
ensure the operational integrity of the projects is maintained
particularly in terms of Operations & Maintenance and in terms
of all planned commercial activities, including Asset Optimisation
and in their view, power generation will remain essential to the
UK's infrastructure.
As at 31 December 2020, the Company had net current assets of
GBP110 million and had cash balances of GBP111 million (excluding
cash balances within investee companies), which are sufficient to
meet current obligations as they fall due. The major cash outflows
of the Company are the costs relating to the acquisition of new
assets and payment of dividends, both of which are discretionary.
All committed acquisitions at the end of the year and subsequent to
year end are sufficiently covered through current cash reserves.
The Company had no outstanding debt owing as at 31 December 2020.
The Company has no financial guarantees to support the Bond held by
the Midco.
As such, the directors have adopted the going concern basis in
preparing the Annual Report and Financial Statements.
3. Significant accounting judgements, estimates and
assumptions
The preparation of the Financial Statements requires management
to make judgements, estimates and assumptions that affect the
application of accounting policies and the reported amount of
assets, liabilities, income and expenses. Estimates and underlying
assumptions are reviewed on an ongoing basis. Revisions to the
accounting estimates are recognised in the period in which the
estimates are revised and in any future periods affected.
During the year the Directors considered the following
significant judgements and assumptions:
Assessment as an investment entity
Entities that meet the definition of an investment entity within
IFRS 10 are required to measure their subsidiaries at fair value
through profit or loss rather than consolidate them unless they
provided investment related services to the Company and are not
themselves investment entities. To determine that the Company
continues to meet the definition of an investment entity, the
Company is required to satisfy the following three criteria:
a) the Company obtains funds from one or more investors for the
purpose of providing those investors with investment management
services;
b) the Company commits to its investors that its business
purpose is to invest funds solely for returns from capital
appreciation, investment income, or both; and
c) the Company measures and evaluates the performance of its investments on a fair value basis.
The Company meets the criteria as follows:
-- the stated strategy of the Company is to deliver stable
returns to shareholders through a mix of battery energy storage
investments;
-- the Company provides investment management services and has
several investors who pool their funds to gain access to
infrastructure related investment opportunities that they might not
have had access to individually; and
-- the Company has elected to measure and evaluate the
performance of all of its investments on a fair value basis. The
fair value method is used to represent the Company's performance in
its communication to the market, including investor presentations.
In addition, the Company reports fair value information internally
to Directors, who use fair value as the primary measurement
attribute to evaluate performance.
-- A key indicator of whether a Company is an investment entity
is the existence of a formal exit strategy. Although there is
currently no documented exit strategy. The assets have a limited
life and are not expected to be held indefinitely and the
investments including the equity is held at fair value. The
Directors consider that there is a clear exit strategy from these
investments.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
3. Significant accounting judgements, estimates and assumptions
continued
-- A further indicator of whether a Company is an investment
entity is the expectation they hold more than one asset. Due to the
re-organisation in the year the Company holds one investment
directly but several indirectly, as there is a portfolio of assets
within the one asset the Directors consider the Company continues
to be an investment entity.
The Directors believe the Company meets the business purpose
criteria to invest for capital appreciation and/or income
generation and note that the Company is not required to hold its
investments indefinitely.
For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
The Directors are of the opinion that the Company has all the
typical characteristics of an investment entity and continues to
meet the definition in the standard. This conclusion will be
reassessed on an annual basis.
Assessment of the Midco as an investment entity
The Midco is not consolidated as the Midco is considered to be
an investment entity. The Board of the Midco have considered the
requirements of IFRS 10 as per above and confirm the Midco meets
this criterion. If the Midco was not considered to meet the
definition of an investment entity, then the Company would require
to consolidate the entity. Within Note 12 the net assets of the
Midco have been set out. The impact of consolidating the Midco
would be to increase the investment value to GBP264,393,793 and
recognise the Bond loan of GBP15,088,825 and additional net working
capital of (GBP340,794).
Investment Manager not a related party
The AIFM is not disclosed as key management personal in the
financial statements. To meet the key management personal
definition the AIFM would need to have authority and responsibility
for planning, directing and controlling the activities of the
entity.
The Directors are of the opinion that the AIFM does not meet
these criteria as the Board has to approve key decisions.
During the period the Directors considered the following
significant estimates:
Valuation of investments in subsidiaries
Significant estimates in the Company's Financial Statements
include the amounts recorded for the fair value of the investments.
By their nature, these estimates and assumptions are subject to
measurement uncertainty and the effect on the Company's Financial
Statements of changes in estimates in future periods could be
significant. See Note 19 for further details.
4. New and revised standards and interpretations
The following new standards, which could impact the financial
statements of the Company were effective for periods beginning on
or after 1 January 2020
- Amendments to IAS 1 and IAS 8: Definition of Material
In October 2018, the International Accounting Standards Board
(Board) issued 'Definition of Material (Amendments to IAS 1 and IAS
8)' to clarify the definition of 'material' and to align the
definition used in the Conceptual Framework and the standards
themselves.
There are three new aspects of the proposed new definition that
should be noted:
- The proposed definition now makes reference to 'obscuring'
information that may influence the decisions of primary users of
general purpose financial statements;
- The existing definition made reference to 'could influence'
whereas the proposed definition makes reference to 'could
reasonably be expected to influence'; and
- The existing definition referred to 'users' of the financial
statements whereas the proposed definition refers to 'primary
users' of the financial statements
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
4. New and revised standards and interpretations (continued)
- Amendments to References to the Conceptual Framework in IFRS Standards
The International Accounting Standards Board (IASB) has issued a
revised Conceptual Framework for Financial Reporting (Conceptual
Framework). The revised version introduces a number of new aspects
compared to the previous version issued in 2010, specifically
including:
- concepts on measurement, including factors to be considered
when selecting a measurement basis
- concepts on presentation and disclosure, including when to
classify income and expenses in other comprehensive income
- guidance on when assets and liabilities are removed from financial statements
It also updates
- the definitions of asset and liability; and
- the criteria for recognising assets and liabilities in financial statements
Finally, it has clarified the guidance on prudence, stewardship,
measurement uncertainty, and substance over form.
Neither of the standards had a material impact on the financial
statements.
New and revised standards in issue but not yet effective
There are no standards, amendments or interpretations in issue
at the reporting date which have been issued but are not yet
effective and are deemed to be material to the Company.
5. Summary of significant accounting policies
The principal accounting policies applied in the preparation of
these Financial Statements are set out below:
Segmental information
The Board is of the opinion that the Company is engaged in a
single segment business, being the investment in the United Kingdom
in battery energy storage assets.
Income and expenses (excluding investments)
Income and expenses are accounted for on an accruals basis. The
Company's income and expenses are charged to the Statement of
Comprehensive Income. Costs directly relating to the issue of
Ordinary Shares are charged to share premium.
Net gain or loss on investments at fair value through profit and
loss
The Company recognises movements in the fair value of
investments in subsidiaries through profit and loss.
Other income
Other income consists of bank interest and management fee income
which are accounted for on an accruals basis.
Taxation
The Company is approved as an Investment Trust Company (ITC)
under sections 1158 and 1159 of the Corporation Taxes Act 2010 and
Part 2 Chapter 1 Statutory Instrument 2011/2999 for accounting
periods commencing on or after 25 May 2018. The approval is subject
to the Company continuing to meet the eligibility conditions of the
Corporations Tax Act 2010 and the Statutory Instrument 2011/2999.
The Company intends to ensure that it complies with the ITC
regulations on an ongoing basis and regularly monitors the
conditions required to maintain ITC status.
From 1 April 2015 there is a single corporation tax rate of 19%.
Tax is recognised in the profit and loss except to the extent that
it relates to the items recognised as direct movements in equity,
in which case it is similarly recognised as a direct movement in
equity. Current tax is the expected tax payable on any taxable
income for the period, using tax rates enacted or substantively
enacted at the end of the relevant period. The Company may use
taxable losses from within the tax group to relieve taxable profits
in the Company.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
5. Summary of significant accounting policies continued
Investment in subsidiaries
Investments in subsidiaries are held at fair value through
profit and loss.
Subsidiaries are entities controlled by the Company. Control
exists when the Company is exposed, or has rights, to variable
returns from its involvement with the subsidiary entity and has the
ability to affect those returns through its power over the
subsidiary entity. In accordance with the exemption under IFRS 10
Consolidated Financial Statements, the Company is an investment
entity.
The Company does not have any subsidiaries that provide
investment management services and are not themselves investment
entities. As a result, the Company does not consolidate any of its
subsidiaries.
Financial Instruments
In accordance with IFRS 9, the Company classifies its financial
assets and financial liabilities at initial recognition into the
categories of amortised cost or fair value through profit or
loss.
Financial assets
The Company classifies its financial assets at amortised cost or
fair value through profit or loss on the basis of both:
-- the entity's business model for managing the financial assets; and
-- the contractual cash flow characteristics of the financial asset.
Financial assets measured at amortised cost
A financial asset is measured at amortised cost if it is held
within a business model whose objective is to hold financial assets
in order to collect contractual cash flows and its contractual
terms give rise on specified dates to cash flows that are solely
payments of principal and interest on the principal amount
outstanding. The Company includes in this category loans receivable
and short term non-financing receivables which include cash and
trade and other receivables.
Loans receivable to affiliated entities of the investment
manager
Loans receivable to affiliated entities of the investment
manager are recognised initially at fair value and subsequently
stated at amortised cost less impairment. These are held at
amortised cost due to the short term nature of the loans; these
loans are to project companies owned by Gresham House PLC which are
included in the exclusivity portfolio. Once these are acquired
these will be held at fair value.
Impairment provisions for receivables from affiliated entities
of the investment manager are recognised based on a forward-looking
expected credit loss model. The methodology used to determine the
amount of the provision is based on whether there has been a
significant increase in credit risk since initial recognition of
the financial asset. For those where the credit risk has not
increased significantly since initial recognition of the financial
asset, twelve month expected credit losses along with gross
interest income are recognised. For those for which credit risk has
increased significantly, lifetime expected credit losses along with
the gross interest income are recognised. For those that are
determined to be credit impaired, lifetime expected credit losses
along with interest income on a net basis are recognised.
Investment in subsidiaries
Subsidiaries are entities controlled by the Company. Control
exists when the Company is exposed, or has rights, to variable
returns from its involvement with the subsidiary entity and has the
ability to affect those returns through its power over the
subsidiary entity. In accordance with the exception under IFRS 10
Consolidated financial statements, the Company is an investment
entity.
The Company does not have any subsidiaries that provide
investment management services and are not themselves investment
entities. As a result, the Company does not consolidate any of its
subsidiaries.
Cash and cash equivalents
Cash and cash equivalents comprise cash at bank and Treasury
fixed term deposits held with the bank with maturities of up to
three months which can be readily converted to cash.
Trade and other receivables
Trade and other receivables are recognised initially at fair
value and subsequently stated at amortised cost which is calculated
using the provision matrix of the expected credit loss model.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
5. Summary of significant accounting policies continued
Trade and other receivables (continued)
Financial liabilities measured at amortised cost
This category includes all financial liabilities, other than
those measured at fair value through profit or loss, including
short term payables.
Trade and other payables
Trade and other payables are recognised initially at fair value
and subsequently stated at amortised cost.
Deferred consideration
Deferred consideration relates to consideration payable in terms
of the purchase price stated in the Sale and Purchase Agreement
(SPA) and are recognised initially at fair value and subsequently
stated at amortised cost.
Financial asset measured at fair value through profit or loss
(FVPL)
A financial asset is measured at fair value through profit or
loss if:
a) its contractual terms do not give rise to cash flows on
specified dates that are solely payments of principal and interest
(SPPI) on the principal amount outstanding; or
b) it is not held within a business model whose objective is
either to collect contractual cash flows, or to both collect
contractual cash flows and sell; or
c) it is classified as held for trading (derivative contracts in an asset position).
The Company's investment in subsidiaries (which comprises both
debt and equity) is held at fair value through profit or loss under
IFRS 9 as the equity portion of the investment does not meet the
SPPI test nor will the Company elect to designate the investments
at fair value through other comprehensive income. The debt
investment forms part of a group of assets that are managed, and
the performance evaluated on a fair value basis.
The Company includes in this category equity instruments
including investments in subsidiaries (which comprises both debt
and equity). There are no consolidated subsidiaries.
Recognition and derecognition
Financial assets are derecognised on the date on which the
Company commits to purchase or sell an asset. A financial asset is
derecognised where the rights to receive cash flows from the asset
have expired, or the Company has transferred its rights to receive
cash flows from the asset. The Company derecognises a financial
liability when the obligation under the liability is discharged,
cancelled or expired.
Impairment of other financial assets
While cash and cash equivalents are also subject to the
impairment requirements of IFRS 9, there has been no impairment
loss identified. Investments held at fair value through profit or
loss are not subject to IFRS 9 impairment requirements.
Dividends
Dividends are recognised when they become legally payable, as a
reduction in equity in the Financial Statements. Interim equity
dividends are recognised when paid. Final equity dividends will be
recognised when approved by the shareholders.
Equity
Equity instruments issued by the Company are recorded at the
amount of the proceeds received, net of directly attributable issue
costs. Costs not directly attributable to the issue are immediately
expensed in the Statement of Comprehensive Income. The Company's
capital is represented by the Ordinary Shares, Share Premium (until
cancellation), Retained Earnings and Capital Reduction Reserve.
Share Premium
The surplus of net proceeds received from the issuance of new
shares over their par value is credited to this account and the
related issue costs are deducted from this account. The reserve is
non-distributable. The share premium was cancelled during the prior
period and transferred to the capital reduction reserve (see
below).
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
5. Summary of significant accounting policies continued
Equity (continued)
Merger Reserve
The merger reserve relates to shares issued for shares to
acquire investments. This reserve is not distributable
Revenue Reserves
The revenue net profit arising in the Statement of Comprehensive
Income is added to or deducted from this reserve which is a
distributable reserve.
Capital Reserves
The capital reserve comprises of increases and decreases in the
fair value of investments held at the period end, gains and losses
on the disposal of investments, transaction and legal fees. The
capital reserves are not distributable.
6
7 Following a successful application to the High Court and
lodgement of the Company's statement of capital with the Registrar
of Companies, in the prior period, the Company was permitted to
cancel its share premium account. This was completed on 13 February
2019 by a transfer of the balance of GBP97,009,475 from the share
premium account to the capital reduction reserve (refer to Note
22). The capital reduction reserve is classed as a distributable
reserve and dividends to be paid by the Company may be offset
against this reserve.
Fair value measurement and hierarchy
Fair value is the price that would be received on the sale of an
asset, or paid to transfer a liability, in an orderly transaction
between market participants at the measurement date. The fair value
measurement is based on the presumption that the transaction takes
place either in the principal market for the asset or liability, or
in the absence of a principal market, in the most advantageous
market. It is based on the assumptions that market participants
would use when pricing the asset or liability, assuming they act in
their economic best interest. A fair value measurement of a
non-financial asset takes considers the best and highest value use
for that asset.
The fair value hierarchy to be applied under IFRS 13 is as
follows:
Level 1: Quoted (unadjusted) market prices in active markets for
identical assets or liabilities.
Level 2: Valuation techniques for which the lowest level input
that is significant to the fair value measurement is directly or
indirectly observable.
Level 3: Valuation techniques for which the lowest level input
that is significant to the fair value measurement is
unobservable.
For assets and liabilities that are carried at fair value and
which will be recorded in the financial information on a recurring
basis, the Company will determine whether transfers have occurred
between levels in the hierarchy by reassessing categorisation at
the end of each reporting period.
6. Fees and expenses
Accounting, secretarial and Directors
JTC (UK) Limited has been appointed to act as secretary and
administrator for the Company through the Administration and
Company Secretarial Agreement. JTC (UK) Limited is entitled to a
GBP60,000 annual fee for the provision of Company Secretarial
services and a GBP55,000 annual fee for the provision of fund
accounting and administration services, based on a Company Net
Asset Value of up to GBP200 million. An ad valorem fee based on
total assets of the Company which exceed GBP200 million will be
applied as follows:
- 0.04% on the Net Asset Value of the Company in excess of GBP200 million
During the year/period, expenses incurred with JTC (UK) Limited
for administrative and secretarial services amounted to GBP126,356
(2019: GBP153,925) with GBP57,500 (2019: GBP28,750) being
outstanding and payable at the year/period end.
AIFM
The AIFM, Gresham House Asset Management Limited (the Investment
Manager), is entitled to receive from the Company, in respect of
its services provided under the AIFM agreement, a fee as
follows:
- 1% on the first GBP250 million of the Net Asset Value of the Company
- 0.9% on the Net Asset Value of the Company in excess of GBP250
million and up to and including GBP500 million
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
6. Fees and expenses (continued)
AIFM (continued)
- 0.8% on the Net Asset Value of the Company in excess of GBP500 million
During the year/period, Investment Manager fees amounted to
GBP2,400,485 (2019: GBP1,571,270) with no outstanding payable
amount at the year/period end.
The Investment Manager is a wholly owned subsidiary of Gresham
House plc, a significant shareholder in the Company (12.23% of
total issued Ordinary Shares). Ben Guest (a Director of the
Investment Manager), Bozkurt Aydinoglu (0.57% of total issued
Ordinary Shares) and Gareth Owen (0.49% of total issued Ordinary
Shares) are also significant shareholders in the Company. Ben Guest
also holds, via a wholly owned vehicle Lux Energy Limited, a
significant financial interest in the Company (Ben's total holdings
are 5.74% of total issued Ordinary Shares, including direct and
indirect holdings).
7. Net gain on investments at fair value through the profit and
loss
31 December 24 August
2020 2018 to 31
December
2019
(GBP) (GBP)
---------------------------------------------- ---- ------------ ------------
Unrealised gain on investments at fair value
through the profit and loss (see Note 12) 10,055,692 6,226,732
Interest on loans to subsidiaries (see Note
12) 12,346,913 5,306,389
22,402,605 11,533,121
--------------------------------------------------- ------------ ------------
8. Interest on loans to affiliated entities of the Investment
Manager
31 December 24 August
2020 2018 to 31
December
2019
(GBP) (GBP)
------------------------------------------- ---- ------------ ------------
Interest on loans to affiliated entity of
the investment manager 761,169 203,364
761,169 203,364
------------------------------------------------ ------------ ------------
9. Administrative and other expenses
31 December 24 August
2020 2018 to 31
December
2019
(GBP) (GBP)
------------------------------------- ---- ------------ ------------
Administration and secretarial fees 126,356 153,925
Audit fees 121,000 62,000
Non audit fees 18,911 48,000
Depositary fees 36,081 36,443
Directors' remuneration 216,073 265,442
Investment Manager fees 2,400,486 1,571,270
Sundry expenses 410,815 141,946
3,329,722 2,279,026
------------------------------------------ ------------ ------------
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
10. Taxation
The Company is recognised as an Investment Trust Company (ITC)
for the accounting year/period and is taxed at the main rate of
19%.
The Company may utilise group relief or make interest
distributions to reduce taxable profits to nil for the year ended
31 December 2020. A corporation tax charge of GBP20,570 has been
recognised for the Company for the year ended 31 December 2020
(period ended 31 December 2019: none).
The 2020 charge relates to the period ended 31 December 2019 as
a small amount of group relief was unavailable to be utilised to
reduce taxable profit to nil.
31 December 24 August 2018
2020 to 31 December
2019
(GBP) (GBP)
---------------------------------------------- -------- ------------ ------------------
(a) Tax charge in profit or loss
Current tax on profits for the year/period - -
Adjustments for current tax of prior periods 20,570 -
------------ ----------------
20,570 -
(b) Reconciliation of the tax charge for
the period
Profit before tax 18,709,528 7,691,994
------------ ----------------
Tax at UK main rate of 19% 19.00% 3,554,810 1,461,479
Tax effect of:
Non-taxable income (10.22) (1,914,490) (1,183,079)
Non-deductible expenses 1.33 249,425 399,437
Subject to group relief/designated as
interest distributions (10.11) (1,889,745) (677,837)
Adjustments for current tax of prior periods 0.11% 20,570 -
-------- ------------ ----------------
Tax charge for the year/period 0.11% 20,570 -
---------------------------------------------- -------- ------------ ----------------
11. Earnings per Ordinary Share
Earnings per Ordinary Share (EPS) amounts are calculated by
dividing the profit or loss for the period attributable to ordinary
equity holders of the Company by the weighted average number of
Ordinary Shares in issue during the period. As there are no
dilutive instruments outstanding, basic and diluted Earnings per
Ordinary Share are identical.
31 December
2020
Revenue Capital Total
(GBP) (GBP) (GBP)
----------------------------------------------- ------------ ------------ --------------
Net profit/(loss) attributable to ordinary
shareholders 9,946,027 8,742,931 18,688,958
Weighted average number of Ordinary Shares
for the period 239,953,710 239,953,710 239,953,710
------------ ------------
Profit per Ordinary Share (basic and diluted)
- pence per Ordinary Share 4.15 3.64 7.79
------------ ------------ --------------
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
11. Earnings per Ordinary Share continued
24 August
2018 to
31 December
Revenue Capital 2019
(GBP) (GBP) Total
(GBP)
-------------------------------------------------- ------------ ------------ -------------
Net profit attributable to ordinary shareholders 3,567,563 4,124,431 7,691,994
Weighted average number of Ordinary Shares
for the period 116,184,609 116,184,609 116,184,609
------------ ------------
Profit per Ordinary Share (basic and diluted)
- pence per Ordinary Share 3.07 3.55 6.62
------------ ------------ -------------
Excluding the period prior to the initial public offering on 13
November 2018, the EPS for the period ended 31 December 2019 would
have been 5.54 pence (based on 138,916,380 weighted average
Ordinary Shares).
12. Investment in subsidiaries
As at 31 December Place of business Percentage Equity Loans Closing balance:
2020 ownership equity and
loans
(GBP) (GBP)
(GBP)
------------------- ------------------- ----------- ---------- ------------ -----------------
The Scalpel, 18th
Gresham House Floor, 52 Lime
Energy Storage Street, London,
Holdings plc EC3M 7AF 100% 6,285,848 242,678,327 248,964,175
6,285,848 242,678,327 248,964,175
---------- ------------ -----------------
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
12. Investment in subsidiaries continued
Further analysis
The Company owns 100% of the ordinary shares in Gresham House
Energy Storage Holdings plc (GHESH). There are a number of
indirectly held subsidiaries held by GHESH, this is the net asset
position of the underlying net assets of the Midco. The investment
totalling GBP248,964,175 in GHESH comprises underlying investments
in the following companies:
Investment Place of Business Percentage Total investment
(GBP)
Noriker Staunch Railway House, Bruton Way, Gloucester,
Limited England, GL1 1DG 100% 15,758,538
5 New Street Square, London, England,
ESS2 EC4A 3TW 100% 24,156,127
5 New Street Square, London, England,
ESS3 EC4A 3TW 100% 19,262,407
Octagon Point, 5 Cheapside, EC2C
WMGS 6AA 100% 3,746,322
5 New Street Square, London, England,
Cleator EC4A 3TW 100% 7,448,425
5 New Street Square, London, England,
Glassenbury EC4A 3TW 100% 36,471,706
Octagon Point, 5 Cheapside, London,
ESS4 EC2V 6AA 100% 45,615,597
Suite 1.14 First Floor, 33 Foley
Street, Fitzrovia, London, W1W
Bloxwich 7TL 100% 22,397,138
Railway House, Bruton Way, Gloucester,
Noriker Power England GL1 1DG 4% 238,095
Octagon Point, 5 Cheapside, EC2C
ESS6 6AA 100% 38,238,323
Octagon Point, 5 Cheapside, EC2C
ESS7 6AA 100% 47,058,902
-----------------
Investments to SPV's- subtotal 260,391,580
Octagon Point, 5 Cheapside, EC2C
Biggerbrook 6AA 100% 1,951,194
5 New Street Square, London, England,
Byers Brae EC4A 3TW 100% 2,051,020
-----------------
Bonds issued by
Midco (15,088,825)
Working capital
in Midco (340,794)
-----------------
Total investment
in Midco 248,964,175
-----------------
An example of what the company would look like if the Midco was
consolidated is included in Note 3.
The net fair value movement comprises the following:
(GBP)
----------
Interest accrued on loans 12,346,913
Unrealised gain on investments (see Note 7) 10,055,692
22,402,605
----------------
As at 31 Place of Percentage Equity Loans: Equity Net fair Closing
December business ownership principal and loans value balance:
2019 advanced movement equity
and loans
(GBP) (GBP) (GBP) (GBP)
(GBP)
---------------- --------------- ----------- ----------- ----------- ------------ -------------- ------------
Railway House,
Bruton Way,
Noriker Gloucester,
Staunch England, GL1
Ltd (NSL) 1DG 100% 7,150,538 15,895,774 23,046,312 3,957,040 27,003,352
5 New Street
Square,
HC ESS2 London,
Holdco Limited England, EC4A
(HCESS2) 3TW 100% 4,634,116 25,025,110 29,659,226 (2,042,637) 27,616,588
5 New Street
Square,
HC ESS3 London,
Limited England, EC4A
(HCESS3) 3TW 100% 1,648,697 15,539,520 17,188,217 2,709,942 19,898,159
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2020 (with comparatives for the period
from 24 August 2018 (incorporation date) to 31 December 2019)
12. Investment in subsidiaries continued
West Midlands
Grid Storage Octagon Point,
Two Limited 5 Cheapside,
(WMGS) EC2C 6AA 100% 37,701 4,052,749 4,090,450 (19,861) 4,070,589
Cleator 5 New Street
Battery Square,
Storage London,
Limited England, EC4A
(Cleator) 3TW 100% 1,954,436 4,596,159 6,550,595 141,394 6,691,989
Glassenbury 5 New Street
Battery Square,
Storage London,
Limited England, EC4A
(Glassenbury) 3TW 100% 7,817,744 16,729,612 24,547,356 6,095,156 30,642,513
Octagon Point,
5
HC ESS4 Cheapside,Lon
Limited don
(HCESS4) EC2V 6AA 100% 3,800,399 17,787,731 21,588,130 692,087 22,280,217
27,043,631 99,626,655 126,670,286 11,533,121 138,203,407
----------- ----------- ------------ -------------- ------------
The net fair value movement comprises the following:
(GBP)
----------
Interest accrued on loans (see Note 7) 5,306,389
Unrealised gain on investments (see Note 7) 6,226,732
11,533,121
-----------------
Prior to restructure (see Note 1):
The loans attract an interest rate of 8% per annum from the date
of advance. Interest compounds on 31 December of each period and
the loans are unsecured, with the borrowers not able to create any
form of security interest over any of its assets without prior
written consent of the Company.
Unless otherwise agreed, the loan principal and any interest
accrued shall be repayable on the earlier of (i) written demand
from the Company, or (ii) 31 December 2030.
There are no committed uncalled loan amounts or other
commitments made to these entities except for deferred
consideration payable as provided in these accounts. The repayment
of the loans (including the annual compound interest which will be
rolled up into the loans) will be made based on operational cash
flow requirements of these entities. There is no intention for the
Company to recall the loans within the next year.
On 9 October 2020, the Company entered into a loan agreement
with the Midco with effect from 30 June 2020. The principal amount
of the loan advanced to the investments on 1 July 2020 was GBP
148,940,048 and were transferred to the Midco at the fair value.
The loan attracts an interest rate of 8% per annum from the date of
advance.
The Midco then acquired the equity investments of the SPVs
previously held by the Company. The investments had a fair value of
GBP37m at the date of novation to the Midco, the equity instruments
were transferred with a loan receivable from the Midco being
recognised. The restructure did not give raise to any gains or
losses to be recognised in profit or loss.
The novation of the equity instruments to the Midco represents a
noncash transaction.
Interest compounds on 31 December of each year and the loans are
unsecured (although a security trustee does have security over the
bank account in the Midco). The borrowers are not able to create
any form of security interest over any of its assets without prior
written consent of the Lender.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
12. Investment in subsidiaries continued
Post restructure (see Note 1):
Unless otherwise agreed, the loan principal and any interest
accrued shall be repayable on the earlier of (i) written demand
from the Company, or (ii) 31 December 2030.
The Company meets the definition of an investment entity.
Therefore, it does not consolidate its subsidiaries but, rather,
recognises them as investments at fair value through profit or
loss. The Company is not contractually obligated to provide
financial support to the subsidiaries and there are no restrictions
in place in passing monies up the structure.
Immediate Projects Place Registered Office Percentage Ownership
Parent of business ownership
-------------- ------------ --------- ------------- ------------------ ----------- -------------
Gresham The Company "Midco" The Scalpel, Gresham House 100% Wholly owned
House Energy 18th Floor, Asset Management
Storage 52 Lime Limited, 5 New
Holdings Street, Street Square,
plc London, London, England,
EC3M 7AF EC4A 3TW
Refer to Note 19 for valuation disclosures relating to the
investments in subsidiaries.
The Manager of both the Company and the Midco evaluates the
performance of the portfolio of battery energy storage investments
through its subsidiary companies on a fair value basis. Both
Companies utilises the income approach to value its investments, as
it indicates value based on the sum of the economic income that a
project, or group of projects, is anticipated to earn in the
future. Where projects are acquired within the quarter to the
valuation date, the cost approach is used to determine the fair
value.
The Companies engaged with Grant Thornton as the Company's
independent and qualified valuers to assess the fair value of the
Companies' investments and have provided their opinion on the
reasonableness of the valuation of the Companies' investment
portfolio.
Therefore, the investment in subsidiaries is measured at FVTPL
under IFRS 9, as these financial assets are managed, and their
performance evaluated, on a fair value basis.
Reconciliation 31 December 31 December
2020 2019
(GBP) (GBP)
---------------------------------------------- ------------ ------------
Opening balance 138,203,407 -
Add: purchases during the period 238,095 27,043,631
Add: loans advanced 76,155,352 99,626,655
Less: Loan repayments (5,750,000) -
Add: Loans to affiliated entities of the
investment manager converted to investment 6,871,121 -
Add: Escrow release to investment (non-cash) 10,843,595 -
Add: accrued interest on loans 12,346,913 5,306,389
Total fair value movement through the profit
or loss 10,055,692 6,226,732
Closing balance 248,964,175 138,203,407
---------------------------------------------- ------------ ------------
The escrow was released directly to the underlying SPV.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
13. Loans receivable
The only loans receivable at 31 December 2020 are loans to the
Midco, which are accounted for as Investment subsidiaries.
As at 31 December 2019: Loans: Loans: 31 December
principal Interest 2019 Closing
advanced accrued balance:
(GBP) (GBP) loans
(GBP)
------------------------------------------ ----------- ---------- --------------
HC ESS 6 Limited (HCESS6) 3,606,018 150,169 3,756,187
Biggerbrook Limited (Biggerbrook) (being
the extension of Littlebrook) 1,762,070 44,225 1,806,295
HC ESS 7 Limited (HCESS7) 538,500 8,970 547,470
------------------------------------------ ----------- ---------- --------------
5,906,588 203,364 6,109,952
------------------------------------------ ----------- ---------- --------------
Prior to restructure (see Note 1):
The above loans related to funds provided by the Company to
finance BESS Projects prior to acquisition thereof, so that these
Projects can acquire equipment prior to construction.
The loans attracted an interest rate of 8% per annum from the
date of advance. The loan principal and any interest accrued shall
be repayable on the earlier of (i) written demand from the Company,
or (ii) 31 December 2030. Interest compounds on 31 December of each
period and the loans are secured over the various assets in these
companies. HCESS6 Limited and HCESS7 Limited are now owned by
Midco. Biggerbrook Limited is owned by Corylus Capital LLP.
Post restructure (see Note 1):
All loans were transferred to Midco by the Company in connection
with the restructure (see Note 1).
14. Cash and cash equivalents
31 December 31 December
2020 2019
(GBP) (GBP)
----------------------------------------------- ---- ------------ ------------
Cash at bank 110,967,025 13,705,852
Treasury fixed term deposits held at Barclays
Bank plc - 39,200,000
110,967,025 52,905,852
---------------------------------------------------- ------------ ------------
15. Restricted cash
31 December 31 December
2020 2019
(GBP) (GBP)
----------------- ---- ------------- ------------
Restricted cash - 10,843,595
- 10,843,595
------------------------------------ ------------
In the prior year the deposit was held in an escrow account that
required two signatures to access it, one of which was from a third
party. This restriction was so severe that the deposit was unlikely
to meet the definition of cash and cash equivalents. It was
excluded from cash and cash equivalents in the balance sheet, and
it was not shown as cash and cash equivalents within the cash flow
statement.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
16. Trade and other receivables
31 December 31 December
2020 2019
(GBP) (GBP)
--------------------------- ---- ------------ ------------
Legal & professional fees 13,995 -
Accrued income 89,902 52,386
VAT receivable 170,530 214,615
274,427 267,001
-------------------------------- ------------ ------------
17. Trade and other payables
31 December 31 December
2020 2019
(GBP) (GBP)
----------------------------------------------- ---- ------------ ------------
Administration and secretarial fees 57,500 28,750
Advisor and broker fees - 30,246
Audit fee accrual 121,000 58,000
Depositary fees - 3,000
Accrued IPO costs - 14,000
Professional fees - 274,918
Other accruals 85,617 270,476
Other creditor: Corylus (see Note 23) - 79,158
Other creditor: Gresham House plc (see Note
23) - 656,899
Deferred consideration for HCESS4 (Red Scar)*
(see Note 23) 1,030,530 1,035,000
Taxation payable 20,570 -
1,315,217 2,450,447
---------------------------------------------------- ------------ ------------
* This relates to the outstanding portion payable for
acquisition of the subsidiary at year end if certain performance
targets are met. These performance targets are not disclosed as
they are commercially sensitive. These performance targets here
substantially met and the amount in creditors as in the amount
expected to be paid.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
18. Categories of financial instruments
31 December 31 December
2020 2019
(GBP) (GBP)
----------------------------------------- ---- ------------ ------------
Financial assets
Financial assets at amortised cost:
Cash and cash equivalents 110,967,025 52,905,852
Restricted cash - 10,843,595
Trade and other receivables (excluding
VAT) 103,897 52,386
Loan receivable - 6,109,952
Fair value through profit or loss:
Investment in subsidiaries 248,964,175 138,203,407
Total financial assets 360,035,097 208,115,192
----------------------------------------------- ------------ ------------
Financial liabilities
Financial liabilities at amortised cost
Trade and other payables (1,315,217) (2,450,447)
Net financial assets 358,719,880 205,664,745
----------------------------------------------- ------------ ------------
At the balance sheet date, all financial assets and liabilities
were measured at amortised cost except for the investment in
subsidiaries which are measured at fair value.
19. Fair Value measurement
Valuation approach and methodology
The Company, via the Midco, used the income approach to value
its underlying investments. The income approach indicates value
based on the sum of the economic income that an asset, or group of
assets, is anticipated to produce in the future. Therefore, the
income approach is typically applied to an asset that is expected
to generate future economic income, such as a business that is
considered a going concern. Free cash flow to total invested
capital is typically the appropriate measure of economic income.
The income approach is the DCF approach and the method discounts
free cash flows using an estimated discount rate (WACC).
Valuation process
The Company, via the Midco, held a portfolio of battery energy
storage investments with a capacity of 315 Megawatt ("MW")
operational (the Investments). The Investments comprise 12 projects
held in 10 special project vehicles: the Staunch Project, the
Littlebrook Project, the Lockleaze Project, the Rufford Project,
the Roundponds Project, the Wolverhampton Project, the Glassenbury,
the Cleator Project and the Red Scar Project.
All of these investments are based in the UK. The Directors
review and approve the valuations of these assets following
appropriate challenge and examination. The current portfolio
consists of non-market traded investments, and valuations are
analysed using forecasted cash flows of the assets and use the
discounted cash flow approach for valuation purposes. For
period-end and interim report and Condensed Financial Statements
the Company engages external, independent and qualified valuers to
determine the fair value of the Company's investments or are
produced by the office of the Investment Manager. The Company
engages external, independent and qualified valuers to determine
the fair value of the Company's investments or valuations are
produced by the Investment Advisor. As at 31 December 2020, the
fair value of the portfolio of investments has been determined by
the Investment Advisor and reviewed by Grant Thornton UK LLP.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
19. Fair Value measurement continued
Valuation process (continued)
The valuations have been determined using discounted cash flow
methodology, whereby the estimated future cash flows relating to
the Company's equity investment in each project have been
discounted to 31 December 2020, using discount rates reflecting the
risks associated with each investment project and the time value of
money. The valuations are based on the expected future cash flows,
using reasonable assumptions and forecasts for revenues, operating
costs, macro-level factors and an appropriate discount rate.
As at the year end, the Company uses discount rates to value the
expected future cash flows of each investment project. From these
discount rates a blended discount rate of 10.8% is calculated. The
determination of the discount rate applicable to each individual
investment project takes into account various factors, including,
but not limited to, the stage reached by each project, the period
of operation, the historical track record, the terms of the project
agreements and the market conditions in which the project operates.
It is intended that this blended discount rate will also be applied
in respect of the expected future cash flows of projects acquired
by the Company in the future. The Investment Manager exercises its
judgement in assessing the expected future cash flows from each
investment. The Investment Manager produces, for each underlying
project, detailed financial models and the Investment Manager takes
into account, amongst other things, in its review of such models,
and make amendments where appropriate to:
a) discount rates (i) implied in the price at which comparable
transactions have been announced or completed in the UK energy
storage sector (if available); (ii) publicly disclosed by the
Company's peers in the UK battery energy storage sector (if
available); and (iii) discount rates applicable for other
comparable infrastructure asset classes and regulated energy
sectors;
b) changes in power market forecasts from leading market forecasters;
c) changes in the economic, legal, taxation or regulatory
environment, including changes in retail price index
expectations;
d) technical performance based on evidence derived from project performance to date;
e) the terms of any power purchase agreement arrangements;
f) accounting policies;
g) the terms of any debt financing at project level;
h) claims or other disputes or contractual uncertainties; and
i) changes to revenue, cost or other key assumptions (may include an assessment of future
cost trends, as appropriate).
In arriving at the valuation assumptions this includes
consideration of climate related matters such as expected levels of
renewable energy entering the grid system, demand patterns and
current regulatory policy these are factored into the pricing
assumptions which are prepared by an independent consultancy.
The Board reviews the operating and financial assumptions,
including the discount rates, used in the valuation of the
Company's underlying portfolio and approves them based on the
recommendation of the Investment Manager.
The Company, via the Midco, used the income approach to value
its investments. The income approach indicates value based on the
sum of the economic income that an asset, or group of assets, is
anticipated to produce in the future. Therefore, the income
approach is typically applied to an asset that is expected to
generate future economic income, such as a business that is
considered a going concern. Free cash flow to total invested
capital is typically the appropriate measure of economic income.
The income approach is the DCF approach and the method discounts
free cash flows using an estimated discount rate (WACC).
31 December 2020 31 December 2019
Key valuation input Range Weighted average Range Weighted average
--------------------- ------------- ----------------- ------------ -----------------
WACC 10.3 - 11.1% 10.8% 8.4 - 11.6% 11.2%
RPI 3% 3% 3% 3%
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
19. Fair Value measurement continued
Another key assumption in the valuation models is the volatility
of power prices. Due to the Asset Optimisation strategy, the
investments are able to benefit from a range of revenue streams,
either arbitrage on power price volatility or FFR and other similar
income streams. Due to the nature of the assets owned by the
investments, should one revenue stream be impacted the asset is
able to switch to alternative sources of revenue to seek to
maintain total revenue targets.
Sensitivity Analysis
The below table reflects the range of sensitivities in respect
of the fair value movements of the Company's investments, via the
Midco.
Due to the revenue optimisation strategy sensitivity on power
and price is not meaningful given the mix of revenue streams
available to maintain value, we have therefore provided a
sensitivity based on percentage changes in revenue overall. The
sensitivity analysis does not include an assessment of the fall in
the power price as underlying power curves are provided on a net
revenue (export electricity revenue less import electricity cost)
basis, therefore adjusting revenue as a total is more relevant a
measure.
Investment Project Valuation Significant Sensitivity Estimated Estimated
Technique Inputs effect on effect on
Description Fair Value Fair Value
31 December 31 December
2020 2019
(GBP) (GBP)
------------- --------------- ------------ -------------- ------------ -------------- --------------
Discount
NSL Staunch DCF rate +1% (1,224,113) (1,869,947)
-1% 1,401,859 2,156,727
Revenue +10% 1,157,930 1,797,638
-10% (1,176,750) (1,819,608)
Rufford,
Lockleaze, Discount
HC ESS2 Littlebrook DCF rate +1% (1,666,859) (1,889,713)
-1% 1,906,534 2,184,581
Revenue +10% 1,233,342 1,073,073
-10% (1,455,996) (1,636,324)
Discount
HC ESS3 Roundponds DCF rate +1% (1,494,752) (1,482,850)
-1% 1,751,979 1,742,053
Revenue +10% 1,163,309 1,411,084
-10% (1,125,303) (1,406,708)
Discount
WMGS Wolverhampton DCF rate +1% (263,187) (280,675)
-1% 300,777 322,860
Revenue +10% 361,590 356,813
-10% (340,677) (361,689)
Discount
Cleator Cleator DCF rate +1% (648,290) N/A
-1% 750,802
Revenue +10% 524,510
-10% (529,040)
Glassenbury Glassenbury DCF N/A N/A N/A N/A
Glassenbury Discount
B DCF rate +1% (3,302,809) (930,937)
-1% 3,819,262 1,079,622
Revenue +10% 2,608,817 835,207
-10% (2,606,621) (836,017)
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2020 (with comparatives for the period from
24 August 2018 (incorporation date) to 31 December 2019)
19. Fair Value measurement continued
Sensitivity Analysis (continued)
Discount
HC ESS4 Red Scar DCF rate +1% (3,840,242) -
-1% 4,546,579 -
Revenue +10% 3,019,526 -
-10% (3,819,002) -
Discount
Bloxwich Bloxwich DCF rate +1% (1,629,444) -
-1% 1,861,700 -
Revenue +10% 2,138,010 -
-10% (2,017,161) -
Discount
HC ESS7 Thurcroft DCF rate +1% (3,530,887) -
-1% 4,123,953 -
Revenue +10% 2,945,498 -
-10% (3,666,454) -
HC ESS6 Wickham DCF Discount N/A N/A -
rate N/A N/A -
Revenue N/A N/A -
N/A N/A -
Portfolio Sensitivity of RPI Sensitivity Estimated effect on
Fair Value
31 December 2020
(GBP)
------------------------------ ------------ --------------------
Inflation +0.25% 4,828,487
-0.25% (4,661,569)
The level in the fair value hierarchy within which the fair
value measurement is categorised is determined on the basis of the
lowest level input that is significant to the fair value
measurement in its entirety. For this purpose, significance of the
inputs is assessed against the fair value measurement in its
entirety. Assessing the significance of a particular input to the
fair value measurement in its entirety requires judgement,
considering factors specific to the asset or liability. If a fair
value measurement uses observable inputs that require significant
adjustment based on unobservable inputs or any other significant
unobservable inputs, that measurement is a Level 3 measurement.
The fair value hierarchy of financial instruments measured at
fair value is provided below.
31 December 2020 Level 1 Level 2 Level 3
(GBP) (GBP) (GBP)
---------------------------- ---------- ---------- ------------
Investment in subsidiaries - - 248,964,175
- - 248,964,175
---------- --------------------------------------- ------------
31 December 2019 Level 1 Level 2 Level 3
(GBP) (GBP) (GBP)
---------------------------- ---------- ---------- ------------
Investment in subsidiaries - - 138,203,407
- - 138,203,407
---------- --------------------------------------- ------------
Valuation of financial instruments
The investment at fair value through profit or loss is a Level 3
in the fair value hierarchy and the reconciliation in the movement
of this Level 3 investment is presented in Note 12. No transfers
between levels took place during the period.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
20. Financial risk management
The Company is exposed to certain risk through the ordinary
course of business and the Company's financial risk management
objective is to minimise the effect of these risks. The management
of risks is performed by the Directors of the Company and the
exposure to each financial risk considered potentially material to
the Company, how it arises and the policy for managing it is
summarised below:
-- Counterparty risk
The Company is exposed to third party credit risk in several
instances and the possibility that counterparties with which the
Company and its subsidiaries, together the Group, contracts may
default by failing to pay for services received from the Company or
its subsidiaries or fail to perform their obligations in the manner
anticipated by the Group. Such counterparties may include (but are
not limited to) manufacturers who have provided warranties in
relation to the supply of any equipment or plant, EPC contractors
who have constructed the Company's plants, who may then be engaged
to operate assets held by the Company, property owners or tenants
who are leasing ground space and/or grid connection to the Company
for the locating of the assets, contractual counterparties who
acquire services from the Company underpinning revenue generated by
each project or the energy suppliers, or demand aggregators,
insurance companies who may provide coverage against various risks
applicable to the Company's assets (including the risk of terrorism
or natural disasters affecting the assets) and other third parties
who may owe sums to the Company. In the event that such credit risk
crystallises, in one or more instances, and the Company is, for
example, unable to recover sums owed to it, make claims in relation
to any contractual agreements or performance of obligations (e.g.
warranty claims) or require the Company to seek alternative
counterparties, this may materially adversely impact the investment
returns. Further the projects in which the Company may invest will
not always benefit from a turnkey contract with a single contractor
and so will be reliant on the performance of several suppliers.
Therefore, the key risks during battery installation in connection
with such projects are the counterparty risk of the suppliers and
successful project integration.
The Investment Manager regularly assesses the creditworthiness
of its counterparties and enters into counterparty arrangements
which are financially sound and ensures, where necessary, the
sourcing of alternative arrangements in the event of changes in the
creditworthiness of its present counterparties.
-- Concentration risk
The Company's investment policy is limited to investment (via
its subsidiary) in battery energy storage infrastructure, which
will principally operate in the UK. This means that the Company has
a significant concentration risk relating to the UK battery energy
storage infrastructure sector. Significant concentration of
investments in any one sector may result in greater volatility in
the value of the Company's investments via its subsidiary, and
consequently the Net Asset Value and may materially and adversely
affect the performance of the Company and returns to
shareholders.
The Company's BESS projects generate revenues primarily from
Firm Frequency Response (FFR), Asset Optimisation (Trading), CM and
other grid connection-related charges, including TRIADs and
Dynamics Containment. Revenues from the portfolio's seed BESS
projects are currently skewed to FFR revenues, FFR being the
provision to the National Grid of a dynamic response service to
maintain the grid's electrical frequency at 50Hz. In 2021,
operations are expected to be increasingly targeted towards Asset
Optimisation, as this becomes the more profitable business
activity. There are several additional revenue opportunities
emerging for the portfolio as a series of regulatory changes are
implemented.
The Investment Manager is of the view that the UK's exposure to
renewable energy generation has increased significantly over the
last few years and the pace has not lessened despite the removal of
legacy subsidies to onshore wind and solar. This is largely because
the development of offshore wind installations has continued apace.
As a result, generation from wind is having a growing impact on the
grid, generating a volatile supply of energy which underpins the
opportunity for BESS.
-- Credit risk
Cash and other assets that are required to be held in custody
will be held at bank. Cash and other assets may not be treated as
segregated assets and will therefore not be segregated from the
bank's own assets in the event of the insolvency of a custodian.
Cash held with the bank will not be treated as client money subject
to the rules of the FCA and may be used by the bank in the ordinary
course of its own business. The Company will therefore be subject
to the creditworthiness of the bank. In the event of the insolvency
of the bank, the Company will rank as a general creditor in
relation thereto and may not be able to recover such cash in full,
or at all.
The Investment Manager regularly assesses its credit exposure
and considers the creditworthiness of its customers and
counterparties. Cash and bank deposits are held with Barclays Bank
plc, a reputable financial institution with a Moody's credit rating
Baa2.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
20. Financial risk management continued
-- Credit risk (continued)
Investments held at fair value through profit or loss are not
subject to IFRS 9 impairment requirements.
For interest receivables on cash balances and loans receivable,
the Company uses a 12-month expected loss allowance.
The Company has completed some high-level analysis and forward
looking qualitative and quantitative information, to determine if
the interest and receivables are low credit risk. Based on this
analysis the expected credit loss on interest and receivables are
not material and therefore no impairment adjustments were accounted
for.
-- Liquidity risk
The objective of liquidity management is to ensure that all
commitments made by the Company which are required to be funded can
be met out of readily available and secure sources of funding. As
noted below, this may include debt funding.
BESS Projects have limited liquidity and may not be readily
realisable or may only be realisable at a value less than their
book value. There may be additional restrictions on divestment in
the terms and conditions of any sale agreement in relation to a
particular BESS Project.
The Company has assessed its ability to raise debt after
sufficient assets were acquired and to the extent funding was
available on acceptable terms. Accordingly, it has introduced
leverage into its subsidiary (the Midco) as explained in Note
1.
In addition, the Company may from time-to-time use borrowing for
short term liquidity purposes which could be achieved through a
loan facility or other types of collateralised borrowing
instruments. The Company is permitted to provide security to
lenders in order to borrow money, which may be by way of mortgages,
charges or other security interests or by way of outright transfer
of title to the Company's assets. The Directors will restrict
borrowing to an amount not exceeding 50% of the Company's Net Asset
Value at the time of drawdown. There will be no cross
collateralisation between the Projects.
The Company's only financial liabilities are trade and other
payables. The Company has sufficient cash reserves to cover these
in the short to medium term. The Company's cash flow forecasts are
monitored regularly to ensure the Company is able to meet its
obligations when they fall due.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
20. Financial risk management continued
The following table reflects the maturity analysis of financial
assets and liabilities.
< 1 1 to 2 to > 5 years Total
year 2 years 5 years
As at 31 December 2020 (GBP) (GBP) (GBP) (GBP) (GBP)
------------------------------------ ------------- --------- --------- ------------ ------------
Financial assets
Cash and cash equivalents (see
Note 14) 110,967,025 - - - 110,967,025
Trade and other receivables (see
Note 16) 103,897** - - - 103,897
Investment 6,285,848*** - - - 6,285,848
Fair value through profit or
loss:
242,678,327
Investment in subsidiaries - - - * 242,678,327
Total financial assets 117,567,770 - - 242,678,327 360,035,097
------------------------------------ ------------- --------- --------- ------------ ------------
Financial liabilities
Financial liabilities at amortised
cost
Trade and other payables (see
Note 17) 1,315,217 - - - 1,315,217
Total financial liabilities 1,315,217 - - - 1,315,217
------------------------------------ ------------- --------- --------- ------------ ------------
< 1 1 to 2 to > 5 years Total
year 2 years 5 years
As at 31 December 2019 (GBP) (GBP) (GBP) (GBP) (GBP)
------------------------------------ ------------- --------- --------- ------------- ------------
Financial assets
Cash and cash equivalents (see
Note 14) 52,905,852 - - - 52,905,852
Restricted cash (see Note 15) 10,843,595 - - - 10,843,595
Trade and other receivables (see
Note 16) 52,386** - - - 52,386
Loans receivable 6,304,087*** - - - 6,304,087
Fair value through profit or
loss:
Investment in subsidiaries - - - 104,933,044* 104,933,044
Total financial assets 70,105,920 - - 104,933,044 175,038,964
------------------------------------ ------------- --------- --------- ------------- ------------
Financial liabilities
Financial liabilities at amortised
cost
Trade and other payables (see
Note 17) 2,450,447 - - - 2,450,447
Total financial liabilities 2,450,447 - - - 2,450,447
------------------------------------ ------------- --------- --------- ------------- ------------
*excludes the equity portion of the investment in
subsidiaries
**excludes VAT
***calculated maturity amount
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
20. Financial risk management continued
-- Market risk
Market risk is the risk that the fair value or cash flows of a
financial instrument will fluctuate due to changes in market
prices. Market risk reflects interest rate risk, currency risk and
other price risks. The objective is to minimise market risk through
managing and controlling these risks to acceptable parameters,
while optimising returns. The Company uses financial instruments in
the ordinary course of business, and also incurs financial
liabilities, in order to manage market risks.
Price risk is the risk that the fair value or cash flows of a
financial instrument will fluctuate due to changes in market
prices. At 31 December 2020, the valuation basis of the Company's
investments was valued at market value. This investment is driven
by market factors and is therefore sensitive to movements in the
market. Refer to the Investment Manager's Report for assessing the
impact of market risk on the valuation of the investments. The
Company relies on market knowledge of the Investment Manager, the
valuation expertise of the third-party valuer Grant Thornton and
the use of third-party market forecast information to provide
comfort with regard to fair market values of investments reflected
in the Financial Statements. Refer to Note 19 for trading revenue
sensitivities.
-- Interest rate risk
Interest rate risk arises from the possibility that changes in
interest rates will affect future cash flows or the fair values of
financial instruments. The Company is exposed to interest rate risk
on its cash balances held with counterparties, bank deposits, loans
receivable, advances to counterparties and through loans to
subsidiaries. Bank deposits and Treasury fixed term deposits carry
a fixed rate of interest for a definite period and loans to
subsidiaries carry a fixed rate of interest until repayment at the
earlier of written demand from the lender or 31 December 2030. The
Company may be exposed to changes in variable market rates of
interest as this could impact the discount rate and therefore the
valuation of the projects as well as the fair value of the loan
receivables.
-- Currency risk
All transactions and investments during the current year were
denominated in Pounds Sterling, thus no foreign exchange
differences arose. The Company does not hold any financial
instruments at period end which are not denominated in Pounds
Sterling and is therefore not exposed to any significant currency
risk. Subsidiary entities may, from time to time, incur expenditure
in currencies other than Pounds Sterling.
-- Capital risk management
The capital structure of the Company at year end consists of
equity attributable to equity holders of the Company, comprising
issued capital and reserves. The Board continues to monitor the
balance of the overall capital structure so as to maintain investor
and market confidence. The Company is not subject to any external
capital requirements.
-- Other risks
The Company is exposed to other risks as set out in the
Prospectus dated 10 November 2020.
21. Net Asset Value per Ordinary Share
Basic NAV per Ordinary Share is calculated by dividing the
Company's net assets as shown in the statement of financial
position that are attributable to the ordinary equity holders of
the Company by the number of Ordinary Shares outstanding at the end
of the period. As there are no dilutive instruments outstanding,
basic and diluted NAV per Ordinary Share are identical.
31 December 31 December
2020 2019
------------------------------------------------ ------------ ------------
Net assets per statement of financial position 358,890,410 205,879,360
Ordinary Shares in issue 348,556,364 204,270,650
NAV per Ordinary Share - Basic and diluted
(pence) 102.96 100.79
------------------------------------------------- ------------ ------------
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
22. Share capital
Ordinary Share Share Merger Capital Total
Shares capital premium Relief reduction shareholders'
Number reserve Reserve reserve equity
(GBP) (GBP) (GBP)
(GBP) ( GBP)
-------------------------- ------------ ---------- ------------ ----------- ------------- ---------------
Allotted and issued
share capital
As at 31 December 2019
(restated) 204,270,650 2,042,707 104,380,109 13,299,017 78,465,533 198,187,366
Issue of Ordinary Shares
of GBP0.01 and fully
paid at GBP1.04 - 5
March 2020 30,000,000 300,000 30,900,000 - - 31,200,000
Issue of Ordinary Shares
of GBP0.01 and fully
paid at GBP1.05 - 27
November 2020 114,285,714 1,142,857 118,857,143 - - 120,000,000
348,556,364 3,485,564 254,137,252 13,299,017 78,465,533 349,387,366
-------------------------- ------------ ---------- ------------ ----------- ------------- ---------------
Share issue costs - - (2,535,992) - - (2,535,992)
Dividends paid - - - - (14,341,916) (14,341,916)
As at 31 December 2020 348,556,364 3,485,564 251,601,260 13,299,017 64,123,617 332,509,458
-------------------------- ------------ ---------- ------------ ----------- ------------- ---------------
Ordinary Share Share premium Merger Capital Total
Shares capital reserve Relief reduction shareholders'
Number (GBP) Reserve reserve equity
(GBP) (GBP) (GBP) ( GBP)
------------------------ ------------ ---------- -------------- ----------- ------------ ---------------
Allotted and
issued share
capital
Issue of 50,000
redeemable preference
shares - one
quarter paid
up - 12,500 - - 12,500
Redemption and
cancellation
of 50,000 redeemable
preference shares - (12,500) - - (12,500)
Issue of Ordinary
Shares of GBP0.01
and fully paid
at GBP1 - 13
November 2018
(restated) 100,000,000 1,000,000 85,700,983 13,299,017 - 100,000,000*
Issue of Ordinary
Shares of GBP0.01
and fully paid
at GBP1 - 31
May 2019 49,228,000 492,280 49,228,000 - - 49,720,280
Issue of Ordinary
Shares of GBP0.01
and fully paid
at GBP1 - 17
July 2019 14,610,000 146,100 15,194,400 - - 15,340,500
Issue of Ordinary
Shares of GBP0.01
and fully paid
at GBP1 - 17
October 2019 40,432,650 404,327 41,241,303 - - 41,645,630
204,270,650 2,042,707 191,364,686 13,299,017 - 206,706,410
------------------------ ------------ ---------- -------------- ----------- ------------ ---------------
Share issue
costs - - (3,274,119) - (3,274,119)
Transfer to capital
reduction reserve - - (83,710,458) 83,710,458 -
Dividends paid - - - (5,244,925) (5,244,925)
As at 31 December
2019 204,270,650 2,042,707 104,380,109 13,299,017 78,465,533 198,187,366
------------------------ ------------ ---------- -------------- ----------- ------------ ---------------
* Please refer to Note 23 for the non-cash flow portion of the
share issue.
A prior year restatement has been made to recognise a merger
relief reserve of GBP13.3 million in 2019 which had previously been
incorrectly included as part of share premium prior to being
transferred to the capital reduction reserve at year end. The
merger relief reserve relates to the premium on shares which were
issued in exchange for shares as part of the IPO.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
22. Share capital continued
Share capital and share premium account and capital reduction
reserve
On incorporation the Company issued 1 Ordinary Share of GBP0.01
which was fully paid up and 50,000 redeemable preference shares of
GBP1 each which were paid up to one quarter of their nominal value.
These 50,000 redeemable preference shares were subsequently
redeemed.
On 17 February 2020, the Board announced a non-pre-emptive
placing of new Ordinary Shares at an issue price of 104.0p per
Placing Share to fund further pipeline acquisitions and provide
increased general working capital. Further to that announcement,
the Company on 3 March 2020, the issue of 30,000,000 Ordinary
Shares raising gross proceeds of GBP31.2 million.
On 10 November 2020, the Company announced and published a
prospectus in respect of, a share issuance programme for up to 250
million new Ordinary Shares and on 25 November 2020 announced the
successful raise of gross proceeds of GBP120 million through the
issue of an initial tranche of 114,285,714 new Ordinary Shares at
an issue price of 105p per share.
Dividends
On 17 February 2020, a dividend of 1.0p per Ordinary Share for
the period from 1 October 2019 to 31 December 2019 was announced.
The dividend of GBP2,042,707 was paid on 20 March 2020 to
shareholders on the register as at the close of business on 28
February 2020. The ex-dividend date was 27 February 2020.
An interim dividend of 1.75p per Ordinary Share for the period
from inception to 31 March 2020 was announced on 11 May 2020. The
dividend of GBP4,099,736 was paid on 10 June 2020 to shareholders
on the register as at the close of business on 22 May 2020. The
ex-dividend date was 21 May 2020.
On 1 September 2020, a dividend of 1.75p per Ordinary Share for
the period from 1 April to 30 June 2020 was announced. The dividend
of GBP4,099,736 was paid on 25 September 2020 to shareholders on
the register as at the close of business on 11 September 2020. The
ex-dividend date is 10 September 2020.
On 27 October 2020, a dividend of 1.75p per Ordinary Share for
the period from 1 July 2020 to 30 September 2020 was announced. The
dividend of GBP4,099,736 was paid on 11 December 2020 to
shareholders on the register as at the close of business on 6
November 2020. The ex-dividend date is 5 November 2020.
On 19 February 2020, the Board declared a dividend of 1.75p per
Ordinary Share for the period 1 October 2020 to 31 December 2020.
This was paid on 26 March 2021.
Ordinary shareholders are entitled to all dividends declared by
the Company and, in a winding up, to all of the Company's assets
after repayment of its borrowings and ordinary creditors. Ordinary
shareholders have the right to vote at meetings of the Company. All
Ordinary Shares carry equal voting rights.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
23. Cash and non-cash flow items
The following table discloses non-cash flow items which is
excluded from the statement of cash flows and cash flow items
relating to investing and financing activities:
24 August 2018
to 31 December
2019
(GBP)
--------------------------------------------------- ----- ---- ------------------
Cash and non-cash flows used in
investing activities
Equity in subsidiaries
Total equity in subsidiaries (see
Note 12) 27,043,631
Transferred out/Purchase of investments
in equity (Non-cash flow*) (13,433,351)
Deferred consideration (see Note
17) (1,035,000)
Cash flows used in acquisition
of equity in subsidiaries 12,575,280
----------------
The non-cash movement in 2019 related to shares which
were issued for shares in subsidiaries
Loans to subsidiaries
Total movement in loans made to
subsidiaries (see Note 12) 99,626,655
Loans made to subsidiaries (Non-cash
flow*) (24,728,383)
Escrow released to subsidiaries
Other creditors (see Note 17) (736,057)
----------------
Cash flows used in loans made
to subsidiaries 74,162,215
----------------
The Non-cash movement in 2019 relates to loans which were purchased
for shares
Cash and non-cash flows used in
financing activities
Total Ordinary Shares issued (see
Note 22) 206,706,410
Proceeds from issue of Ordinary
Shares at a premium (Non-cash
flow*) (38,161,736)
----------------
Cash flow proceeds from issue
of Ordinary Shares 168,544,674
----------------
*In the prior period the non-cash flow transactions were in
respect of the shares issued at IPO in order to acquire the Seed
Assets. In the current year the non-cash transactions relate to the
Group restructuring where loans were transferred from the Company
to the Midco.
The non-cash movements for 2020 relate to movement in the
investments, these non-cash movements are reconciled and discussed
in Note 12.
24. Reserves
The nature and purpose of each of the reserves included within
equity at 31 December 2020 are as follows:
-- Capital reduction reserve: represents a distributable reserve
created following a Court approved reduction in capital
-- Revenue reserves represent cumulative revenue net profits
recognised in the Statement of Comprehensive Income
-- Capital reserves represent cumulative net gains and losses on
investments recognised in the Statement of Comprehensive Income
The only movements in these reserves during the period are
disclosed in the Statement of Changes in Equity.
NOTES TO THE FINANCIAL STATEMENTS (continued)
8 For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
25. Transactions with related parties and other significant
contracts
Following admission of the Ordinary Share s (refer to Note 22),
the Company and the Directors are not aware of any person who,
directly or indirectly, jointly or severally, exercises or could
exercise control over the Company. The Company does not have an
ultimate controlling party.
Details of related parties are set out below:
Directors
2020 2019
Directors' remuneration 197,000 236,667
-------- --------
Employers NI 19,073 28,859
-------- --------
Total key management
personnel 216,073 265,526
-------- --------
All directors' remuneration is short term salary.
The remuneration arrangements of Directors is disclosed in the
Director's Remuneration Report on page 47.
Dividends paid by the Company to the Directors are disclosed in
the Director's Remuneration Report on page 47. No dividend amounts
were payable as at 31 December 2020 (2019: none).
The aggregate fees of the Directors will not exceed GBP500,000
per annum. There are no performance conditions attaching to the
remuneration of the Directors as the Board does not believe that
this is appropriate for Non-Executive Directors. The Directors are
not eligible for bonuses, pension benefits, share options, long
term incentive schemes or other benefits.
Loans to related parties
Loans receivable represent amounts due to the Company from its
subsidiary.
Loans: Loans: 31 December
principal interest 2020 Closing
advanced accrued balance:
(GBP) (GBP) loans
(GBP)
------------------------------------------- ------------ ----------- --------------
Gresham House Energy Storage Holdings plc 230,033,724 12,644,603 242,678,327
230,033,724 12,644,603 242,678,327
------------------------------------------- ------------ ----------- --------------
NOTES TO THE FINANCIAL STATEMENTS (continued)
9 For the year ended 31 December 2020 (with comparatives for the
period from 24 August 2018 (incorporation date) to 31 December
2019)
25. Transactions with related parties and other significant
contracts (continued)
At 31 December 2019 and prior to the restructure (see note 1),
loans receivable represent amounts due to the Company from its
direct subsidiary undertakings, NSL, HCESS3, HCESS4, WMGS,
Glassenbury and Cleator as well its indirect subsidiary, HCESS2, as
follows:
Subsidiary Outstanding Interest receivable Total
loan GBP GBP
GBP
Noriker Staunch Ltd 15,895,774 1,077,308 16,973,082
HC ESS2 Limited 25,025,110 2,041,539 27,066,649
HC ESS3 Limited 15,539,520 1,290,644 16,830,164
HC ESS4 Limited 17,787,732 692,086 18,479,818
WMGS 4,052,749 116,003 4,168,752
Cleator 4,596,159 19,140 4,615,299
Glassenbury 16,729,612 69,668 16,799,280
------------ -------------------- ------------
99,626,656 5,306,388 104,933,044
============ ==================== ============
26. Capital commitments
As at 31 December 2020 (2019: none) the Company has no
significant binding or conditional future capital commitments.
27. Post balance sheet events
The Board of Directors announced the following:
-- On 11 January 2021, the Company (via MidCo) completed the
acquisition of a 25MW battery project located in North Shields,
Tyne and Wear ("Tynemouth").
-- On 1 February 2021, the Company (via MidCo) completed the
acquisitions of a 35MW battery project located in North Shields,
Tyne and Wear ("Port of Tyne") and a 10MW battery project located
in Essex ("Nevendon").
-- On 21 April 2021, the Company (via MidCo) completed the
acquisitions of Byers Brae a 30MW battery project located in West
Lothian.
The Investment Manager is currently investigating the impact of
the changes announced by the Chancellor of Exchequer in the Budget
on 3 March 2021, in particular the change to the main rate of
corporation tax from 19% to 25% from April 2023 on the valuation of
the portfolio. There are sufficient capital allowances already
available within the current portfolio to ensure no underlying
corporation tax is expected to be payable for many years and the
gearing level can be optimised to mitigate an impact of the rate
change, but further analysis will be required to assess this more
fully over time.
There were no further events after the reporting date which
require disclosure.
14. COMPANY INFORMATION
Non-Executive Directors Independent Auditor
John Leggate - Chair BDO LLP
Catherine Pitt 55 Baker Street
David Stevenson London
Duncan Neale W1U 7EU
Registered office Administrator and Secretary
The Scalpel JTC (UK) Limited
18(th) Floor The Scalpel
52 Lime Street 18(th) Floor
London 52 Lime Street
EC3M 7AF London
EC3M 7AF
-------------------------------------
Manager and AIFM Registrar and Receiving Agent
Gresham House Asset Management Limited Computershare Investor Services plc
5 New Street Square The Pavilions
London Bridgewater Road
EC4A 3TW Bristol
BS13 8AE
-------------------------------------
Corporate Broker and Financial Advisor Legal Adviser
(to 2 June 2020) Eversheds LLP
Cantor Fitzgerald Europe 1 Wood Street
5 Churchill Place London
Canary Wharf EC2V 7WS
London
E14 5HU
-------------------------------------
Corporate Broker and Financial Advisor Depositary
(appointed 3 June 2020) INDOS Financial Limited
Jefferies International Limited 54 Fenchurch Street
100 Bishopsgate London
London EC3M 3JY
EC2N 4JL
-------------------------------------
Tax Advisor (appointed 17 July 2020) Investment Valuer
Rees Pollock Chartered Accountants Grant Thornton LLP
35 New Bridge Street 30 Finsbury Square
London London
EC4V 6BW EC2A 1AG
Ticker: GRID
-------------------------------------
15. GLOSSARY
Asset Optimisation (Trading)
Asset Optimisation involves buying and selling electricity in
order to capture a spread between the high and low electricity
prices on any given day. This can be done via one or more market
mechanisms, hence the expression "Asset Optimisation" and includes
trading in the wholesale market and offering the battery to
National Grid via the Balancing Mechanism.
Asymmetric
An asymmetrical grid connection is where the import and export
capacities are different.
AUM
Assets Under Management: the total net assets of the
Company.
Balancing Mechanism
A tool used by the ESO to balance the electricity supply and
demand close to real time. The BM is used to balance supply and
demand in each half hour trading period of every day. Where the ESO
predicts that there will be a discrepancy between the amount of
electricity produced and the level of demand during a certain
period, they may accept a 'bid' or 'offer' to either increase or
decrease generation (or even increase consumption in the case of
storage assets). Sites must be registered in the BM to receive such
actions but once registered they are able to set their own prices
for being used.
Balancing services
National Grid procure services to balance demand and supply and
to ensure the security and quality of electricity supply across
Britain's transmission system. These include:
-- Black Start
-- Demand side response
-- Dynamic Containment (DC)
-- Enhanced frequency response (EFR)
-- Firm frequency response (FFR)
-- Optional Downward Flexibility Management (ODFM)
-- Short term operating reserve (STOR)
https://www.nationalgrideso.com/balancing-services
BESS
Battery Energy Storage Project which uses batteries as the means
to import / export electricity and has no diesel, gas, or other
generation source on site (except for Black Start purposes). The
Company's investments are primarily wholly BESS projects although
some older projects retain some small generation capacity.
Black start
A total or partial shutdown of the national electricity
transmission system (NETS) is an unlikely event. However, if it
happens, National Grid are obliged to make sure there are
contingency arrangements in place to ensure electricity supplies
can be restored in a timely and orderly way. Black start is a
procedure to recover from such a shutdown.
https://www.nationalgrideso.com/balancing-services/system-security-services/black-start/
Capacity Market (CM)
The income received by generators to ensure generation capacity
is available to meet short falls.
15. GLOSSARY (continued)
Combined Cycle Gas Turbine (CCGT)
Energy generation technology that combines a gas-fired turbine
with a steam turbine. The design uses a gas turbine to create
electricity and then captures the resulting waste heat to create
steam, which in turn drives a steam turbine.
Curtailment
Large wind farms are connected to the UK's high-voltage network
and National Grid balances electricity supply and demand. As demand
rises and falls during the day, electricity supply mirrors these
peaks and troughs.
National Grid accepts bids and offers from electricity
generators to increase or decrease electricity generation as and
when required. As such it may mean that there are times when
generators are paid to curtail their output (constraint
payments).
https://www.nationalgrideso.com/news/grounds-constraint
Dividend Cover
Dividend Cover for the purpose of this report refers to a
calculation for the ratio between net earnings of the investment
portfolio in the review period and dividends paid in respect of the
same review period.
For full year 2020 dividend cover, dividends paid in respect of
the year include the Q4 dividend paid in March 2021, the total
dividends in respect to 2020 are GBP18.399 million.
Net earnings of the investment portfolio are calculated as the
total EBITDA from underlying projects which includes liquidated
damages earnt by SPVs (typically on delays in construction to
compensate for lost revenues) less Company and holding company
costs (excluding capital related costs but including interest
expense).
Earnings are calculated on an accruals basis and therefore only
SPVS which were acquired in the accounting period have their
earnings included here. Transactions completing after the period,
but which had locked box income related to the current period will
have this recognised once the transaction is completed. For the
transactions completed in January 2021 such income will therefore
be recognised in the 2021 dividend cover calculation.
This measure aims to add clarity on the Company's ability to pay
dividends from the earnings and cash generation of its underlying
investments after deducting costs in the Company.
Dividend Yield
The annual dividends expressed as a percentage of the current
share price. Dividends for the year of 7.0p per Ordinary Share
relate to dividends declared in relation to the 12 months to 31
December 2020 including 1.75p paid on 26 March 2021 in relation to
Q4 2020. The share price used for Dividend yield as at the year-end
was the closing share price on 31 December 2020 of 112.5p per
Ordinary Share.
Dividend yield at the end of the year was therefore 7.0p/112.5p
= 6.2%. For the period ended 31 December 2019 the dividend yield
was 4.5p/107.5p = 4.2%.
Electricity System Operator (ESO)
Refers to National Grid ESO. The ESO is responsible for ensuring
Great Britain has the essential energy it needs so that supply
meets demand on the electricity system every second of every
day.
https://www.nationalgrideso.com/
15. GLOSSARY (continued)
Frequency Response services
A subset of Balancing Services which relate to services
performed by batteries to manage the frequency on the electricity
system. This includes the following services:
-- Dynamic Containment (DC)
-- Enhanced frequency response (EFR)
-- Firm frequency response (FFR)
-- Optional Downward Flexibility Management (ODFM)
https://www.nationalgrideso.com/balancing-services
Gross Asset Value (GAV)
Gross Asset Value is the total value of the investments under
the management of the Company.
International Financial Reporting Standards (IFRS)
International Financial Reporting Standards are accounting
standards issued by the International Accounting Standards Board
(IASB) and have been applied by the Company in the preparation of
the financial statements.
Liquidated Damages (LD)
Liquidated damages are presented in certain legal contracts as
an estimate of losses to one of the parties. It is a provision that
allows for the payment of a specified sum should one of the parties
be in breach of contract. Liquidated damages are meant as a fair
representation of losses in situations where actual damages are
difficult to ascertain.
Liquidated damages are often included in specific contract
clauses to cover circumstances where a party faces a loss from an
asset. The Company typically uses these in EPC arrangements to
protect earnings from an asset in the result of delays to
construction but are also common in other contracts such as for
O&M arrangements.
Load factors
The load factor is usually expressed as the percentage of the
actual output of a generator compared to its theoretical maximum
output in a year.
Locked box income
On some acquisitions the Company agrees a date at which the
benefit of any subsequent earnings then flow to the acquirer. This
date agreed is referred to as the Locked box date. Earnings flowing
to the acquirer are referred to as the Locked box income. This
mechanism is often used by the Company and aims to prevent the
Company losing out on value as a result of delays to transactions
completing. The period to which Locked Box income is earnt varies
between transactions. Each of the new acquisitions in January 2021
had a locked box date in 2020 meaning the Company achieved benefits
of earnings related to 2020 (through higher working capital in the
SPVs) once the acquisitions completed in 2021.
MidCo
Gresham House Energy Storage Holdings Plc: a UK company
incorporated on 25 June 2021 wholly owned by the Company. MidCo
owns all the underlying SPVs and operating assets and was the
issuer of bonds in 2021.
Net Asset Value (NAV)
Net Asset Value being the total Net Assets of the Company
divided by the total number of Ordinary Shares in issue as at 31
December 2020.
15. GLOSSARY (continued)
NAV total return
A measure showing how the net asset value (NAV) per share has
performed over a period of time, taking into account both capital
returns and dividends paid to shareholders.
NAV total return is shown as a percentage change from the start
of the period. It assumes that dividends paid to shareholders are
reinvested at NAV at the time the shares are quoted
ex-dividend.
NAV total return shows performance which is not affected by
movements in discounts and premiums (share prices). It also takes
into account the fact that different investment companies pay out
different levels of dividends.
The NAV total return for the period uses the opening NAV per
Ordinary share of 100.79p on 31 December 2019 and the quarterly
announced NAV per share through to 102.96p on 31 December 2020.
Ongoing Charges Figure
The Ongoing Charges Figure is seen as a useful indicator of the
overall cost burden for funds and similar investment vehicles. This
includes all charges and costs incurred by the Company which relate
to the ongoing operation of the Company. This includes management
fees, administration fees, audit fees, Director's remuneration,
depositary services costs and other similar costs. It excludes
capital costs and costs of raising new capital or making
acquisitions. The Ongoing Charges are then divided by the weighted
average NAV for the year or period over which it relates. Further
detail can be found here:
https://www.theaic.co.uk/sites/default/files/documents/AICOngoingChargescalculationOct20.pdf
Ordinary Share
Share in the Company with a nominal value of 1p.
Ordinary Share price total return
A measure showing how the share price has performed over a
period of time, taking into account both capital returns and
dividends paid to shareholders.
Share price total return is shown as a percentage change from
the start of the period. It assumes that dividends paid to
shareholders are reinvested in the shares at the time the shares
are quoted ex dividend.
Share price total return shows performance which is affected by
movements in discounts and premiums. It also takes into account the
fact that different investment companies pay out different levels
of dividends.
The share price total return for the period uses the opening
share price at close on 31 December 2019 of 107.5p and the daily
closing share price through to 112.5p on 31 December 2020.
Further detail can be found here:
https://www.theaic.co.uk/glossary/share-price-total-return-performance
Seed Assets
The assets acquired at IPO known as Staunch, Littlebrook,
Lockleaze, Rufford and Roundponds.
Site uptime
Calculation for the average level of availability in the
portfolio or for an asset in Frequency Response Services. This is
calculated by taking the average MWs available in each period as a
percentage of total capacity contracted.
Symmetrical
A symmetrical grid connection is where the import and export
capacities are the same.
15. GLOSSARY (continued)
System inertia
Inertia works to keep the electricity system running at the
right frequency by using the kinetic energy in spinning parts in
power plant generator turbines. When needed, the spinning parts in
generator turbines can rotate slightly faster or slower to help
balance out supply and demand. The more turbines you have, the more
energy there is in the system and the greater the system inertia,
which helps to stabilise the frequency.
https://www.nationalgrideso.com/information-about-great-britains-energy-system-and-electricity-system-operator-eso/technical-terms-explained
TRIADs
TRIADs are defined as the three half-hours of highest demand on
the GB electricity transmission system between November and
February each year, the TRIADs are part of a charge-setting
process. This identifies peak electricity demand at three points
during the winter in order to minimise energy consumption.
However, TRIADs must be at least 10 days apart. This is to avoid
all three potentially falling in consecutive hours on the same day,
for example during a particularly cold spell of weather.
https://www.nationalgrideso.com/news/triads-why-three-magic-number
Underlying Portfolio EBITDA
The earnings before interest, tax, depreciation and amortisation
earned by the operational SPVs ultimately earned by the Company
from commercial operations from all sources. If liquidated damages
are payable to this SPV then these are included.
Underlying Project Revenues
The revenue earned by the operational SPVs ultimately earned by
the Company from commercial operations from all sources. If
liquidated damages are payable to this SPV then these are
included.
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