2 February 2024
Harmony Energy Income Trust
plc
(the "Company" or "HEIT")
Trading
Update
Harmony Energy Income Trust plc,
which invests in battery energy storage system ("BESS") assets in Great Britain ("GB"),
today provides a trading update ahead of the publication of its
quarterly Net Asset Value update and audited annual results later
this month.
Weaker Revenue Environment in 2023 and January
2024
BESS revenues for the year ended 31
October 2023 were markedly lower than revenue generated in the same
period in 2022. Whilst a reduction from the remarkable highs of
2022 was expected and built into third party revenue forecasts, the
scale and the speed of the reduction has exceeded market
expectations.
There are multiple drivers of this
reduction in revenue, both macro and sector-specific:
· Saturation of ancillary service markets. The high rate of
build-out of BESS in GB led to saturation of ancillary services and
has driven clearing prices to record low levels. This was
widely anticipated and the Company positioned its 2-hr duration
portfolio specifically to protect against this event and take
maximum advantage of the inevitable shift by BESS towards wholesale
market revenue strategies and the Balancing Mechanism
("BM").
· Reduction in wholesale power price volatility and spreads. As
a 2-hr duration portfolio, this is more relevant to the Company
than ancillary services. Wholesale spreads in FY 2023 and FQ1
2024 have narrowed primarily due to a reduction in natural gas
prices, itself due to milder than expected weather and high levels
of European reserves. In addition, GB has imported a large
volume of energy from Europe (via interconnectors) and high
consumer prices have encouraged a material reduction in consumer
energy usage.
Wholesale price spreads are forecast
by independent experts to increase during 2024 and beyond. This is
driven by a range of factors including increased consumer energy
demand (as the cost-of-living crisis eases), continued
electrification of the country's heating and transport
infrastructure, greater penetration of intermittent renewables and
an increase in pricing for natural gas and carbon.
· Implementation issues with National Grid ESO ("NGESO") Open
Balancing Platform ("OBP"). Another key factor in recent revenue
weakness is NGESO's continued sporadic use of BESS in the BM.
Despite a well-publicised policy and comprehensive plan from NGESO
to increase BESS dispatch rates in the BM via process and software
enhancements over 2024 and 2025, the December 2023 launch of the
new "bulk dispatch" software was curtailed due to technical issues.
Since its re-launch on 8 January 2024, NGESO appears to only be
using OBP intermittently, with the Company's portfolio seeing some
days of high BM volume, and some of zero. BESS projects
utilise algorithms and AI software to execute revenue strategies,
and so the inconsistent use of OBP by NGESO not only limits BESS
volumes in the BM, but also creates uncertainty over how much daily
capacity BESS can dedicate to other strategies and services.
The Investment Adviser continues to have dialogue on this
topic with NGESO directly and also via stakeholder interest
groups. NGESO has a published ambition to operate the GB
system with zero carbon emissions by 2025 (i.e. reducing its use of
coal and gas). A consistent use of OBP in relation to BESS by NGESO
would, in the Investment Adviser's opinion, not only help
accelerate NGESO's progress towards this goal, but also result in a
near-immediate and marked increase in the Company's revenue
performance.
Despite the conditions described
above, the Company's operating Portfolio continues to out-perform
peers (on a £/MW basis). The Company's Pillswood (Phase 1)
and (Phase 2) projects ranked #1 and #3 respectively for the
calendar year 2023, and every one of the Company's five operating
assets appear in the Top-10 leaderboard for January 2024 (excluding
non-BM units and estimated revenue from the Embedded Export Tariff)
(Source: Modo
Energy).
Operational free cash flow is
forecast to increase in 2024 as the Company's remaining three
projects (c. 236 MWh / 118 MW - c.30% of the current portfolio)
complete construction and begin operations. The Company has
sufficient cash reserves to complete construction of these
projects.
In addition, revenues going forward
will be supported by the Company's existing Capacity Market
contracts, for which delivery only began in October
2023.
Postponement of First Quarterly Dividend for FY2024, and
Strategy for 2024
In line with its stated dividend
policy, the Company distributed 8 pence per share to Shareholders
in relation to FY ended 31 October 2023. The first quarterly
distribution in relation to FY 2024 (2 pence per share) was
expected to be declared later this month and paid in March.
However the Board, with support from the Investment Adviser
has resolved to postpone this declaration.
While the reasons for the recent low
revenue environment are understood, and the market conditions are
expected to improve, the short-term outlook remains
uncertain. If these conditions do continue for an extended
period, this will impact on the ability of the Company to declare
and make distributions. It is well understood that BESS
revenues can vary across the course of a year and therefore prudent
cash management is required.
The Board recognises the importance
of dividends to Shareholders and therefore is preparing to
implement a series of short-term actions which would better
position the Company for long-term stability and growth. These
actions will include a restructuring of the Company's existing debt
facilities (to reflect that 70% of the portfolio's MW capacity is
now operational), coupled with one or more asset sales. Any
cash proceeds from such sales would be used, in priority, to reduce
gearing and then to fund future dividend distributions for FY 2024
and 2025. These distributions could take the form of income and/or
capital distributions. The ambition of the Company remains
the payment of 8 pence per share per annum. Any funds available
after the payment of dividends could be used to repurchase shares.
Further updates will be communicated to Shareholders in due
course.
Asset Valuations have been Consistent
Despite the recent weak revenue
environment during 2023, it is important to note that discount
rates applied to the Company's "operating" and "under construction"
assets remained stable. Asset valuations have been supported by
long-term average revenue forecasts from independent experts, as
well as evidence of market transactions. The sale by the Company of
its Rye Common asset in September 2023, at a 1.5% premium to the
carrying value, is an example. The Investment Adviser continues to
opine, based upon its own enquiries and intelligence gathered from
other industry stakeholders, that there remains a high level of
appetite amongst private investors for BESS assets, especially
whilst 2-hr duration operational BESS projects are relatively
scarce and well-positioned to outperform once revenues conditions
improve.
Full Year Results for the year ended 31 December 2023 Results
and Q1 FY2024 NAV
The Company is currently completing
the audit of its financial results for the year ended 31 October
2023 and expects to publish its annual report and accounts
alongside its Q1 NAV for the period ended 31 January 2024 in the
week commencing 26 February 2024.
END
For further information, please
contact:
Harmony Energy Advisors Limited Paul Mason
Max Slade
Peter Kavanagh
James Ritchie
info@harmonyenergy.co.uk
|
|
Berenberg
Ben Wright
Dan Gee-Summons
|
+44 (0)20 3207 7800
|
Stifel Nicolaus Europe Limited
Mark Young
Edward Gibson-Watt
Rajpal Padam
Madison Kominski
|
+44 (0)20 7710 7600
|
Camarco Eddie
Livingstone-Learmonth
Andrew Turner
|
+44 (0)20 3757 4980
|
JTC
(UK) Limited Uloma
Adighibe
Harmony.CoSec@jtcgroup.com
|
+44 (0)20 3832 3877
|
LEI: 254900O3XI3CJNTKR453
About Harmony Energy Advisors Limited (the "Investment
Adviser")
The Investment Adviser is a wholly
owned subsidiary of Harmony Energy Limited.
The management team of the
Investment Adviser have been exclusively focussed on the energy
storage sector (across multiple projects) in Great Britain for over
seven years, both from the point of view of asset owner/developer
and in a third-party advisory capacity. The Investment
Adviser is an appointed representative of Laven Advisors LLP, which
is authorised and regulated by the Financial Conduct
Authority.
Important
Information
This announcement does not
constitute an offer to sell or the solicitation of an offer to
acquire or subscribe for shares in the
Company in any jurisdiction. This distribution of this announcement
outside the UK may be restricted by law. No action has been taken
by the Company that would permit possession of this announcement in
any jurisdiction outside the UK where action for that purpose is
required. Persons outside the UK who come into possession of this
announcement should inform themselves about the distribution of
this announcement in their particular jurisdiction.
This announcement contains (or may
contain) certain forward-looking statements with respect to certain
of the Company's plans and/or the plans of one or more of its
investee companies and their respective current goals and
expectations relating to their respective future financial
condition and performance and which involve a number of risks and
uncertainties. The Company's target returns are a target only and
there is no guarantee that these will be achieved. This Company
cautions readers that no forward-looking statement is a guarantee
of future performance and that actual results could differ
materially from those contained in the forward-looking
statements.
It should also be noted that any
future NAV per share announced by the Company in due course will,
in addition to the matters described in this announcement, also be
affected by valuation movements in the Company's Portfolio and
other factors including, without limitation, purchase prices
of battery energy storage systems and components, project
development and construction costs, income and pricing from
contracts with National Grid ESO and other counterparties, the
potential for trading profitability in the wholesale electricity
markets and/or Balancing Mechanism, performance of the Company's
investments, and the availability of projects which meet the
Company's minimum return parameters in accordance with the
Company's investment policy.