Investing in the Future of Energy - For a Large Profit
Fast-growing energy storage platform trading at a 40% discount to NAV
Here’s one VERY asymmetric investment opportunity in my view. Gore Street Energy Storage Fund (LSE: GSF) - London's first listed energy storage fund.
For the impatient reader, see the key investment highlights below:
Scarce, Desirable Assets: GSF’s utility-scale energy storage assets are a highly sought-after portfolio in the energy transition landscape. The recent take-private acquisition of its peer Harmony Energy at a 94% premium to its share price pre sale process announcement underscores the underlying value and scarcity of these infra assets, providing a strong read-across for GSF
Significant Discount to NAV: GSF shares currently trade at 60p, which represents a 40% discount to Net Asset Value. This presents a potential entry point for investors seeking to acquire high-quality energy infrastructure assets at a compelling valuation
Fast-Growing Operational Capacity: Energized capacity continues to grow, with recent additions like the 200MW "Big Rock" project in California
Attractive Dividend Yield: GSF offers a dividend yield of ~7.5%, based on the last four quarters' total payout of 4.5p per share. I believe this is likely to rise even further
Healthy Balance Sheet: The fund maintains a robust financial position, further bolstered by the expected unlocking of $60-80 million in US Investment Tax Credits (15-20% of market cap) which can be used to pay an extra dividend to shareholders, or to pay down GSF’s debt in full and become a fully unlevered platform
Positioned at the forefront of renewable growth, Gore Street Energy Storage Fund (LSE: GSF) plays a crucial role in enabling the UK to achieve its ambitious net-zero emissions target by 2050. GSF was first launched in 2018 and remains the only UK-listed energy storage fund with an internationally diversified portfolio located across five grids in Great Britain, Island of Ireland, Germany, Texas & California. The fund boasts a diversified portfolio of 28 projects strategically located across five electrical grids, collectively boasting a substantial portfolio capacity of 1.248 GW (includes capacity that is not yet operational). This wide-ranging presence underscores GSF's commitment to capitalizing on the critical need for energy storage solutions that support and stabilize renewable energy integration.
It makes money in the following ways:
Energy Arbitrage (Wholesale Trading): GSF's battery assets buy electricity from the wholesale market when prices are low and store it (e.g. during periods of high renewable energy generation for instance when the sun is shining and all solar PV assets generate power at the same time). They then discharge and sell this stored electricity back to the grid when prices are high (for instance at night when cities see peak demand periods and renewable generation is lower). The profit comes from the price differential between buying and selling. The increasing volatility in energy prices, driven by the growing integration of intermittent renewables like wind and solar, creates significant opportunity/need for battery storage assets.
Ancillary Services: Grid operators (like National Grid ESO in the UK) require various services to maintain the stability, frequency, and voltage of the electricity network. GSF's battery assets are contracted to provide these "ancillary services." These encompass activities such as frequency regulation, voltage control and reactive power support
Capacity Market Payments: In some markets (like the UK and Ireland), GSF receives payments for simply making its battery capacity available to the grid. These are often long-term contracts that guarantee a certain level of income for providing future energy capacity, ensuring sufficient power is available during periods of high demand or grid stress.
Resource Adequacy Contracts: In regions like California (where GSF’s Big Rock asset is located), resource adequacy contracts provide a fixed annual payment for guaranteeing the availability of power capacity to meet specific demand requirements, similar to capacity payments but often with different market mechanisms. GSF has secured such contracts, providing a stable, long-term revenue component.
Note: “Big Rock” is currently being energized and hasn’t yet generated revenues, which is why California and Resource Adequacy Contracts are missing in the charts above.
The Share Price Discount to NAV: A Closer Look
GSF’s shares are currently trading at a 40% discount to their Net Asset Value. This phenomenon, common among many investment trusts, particularly those in the infrastructure and renewable energy sectors, presents both a potential opportunity if investors can discern real value from value traps. GSF's share price has been circulating around 60p, while its latest reported Net Asset Value per share was 100.7p as of December 31, 2024. Why the discrepancy one may ask? I believe there can be true disconnects between a listed fund's internal valuation of its assets and how the market perceives the realizable value or future cash flows from those assets. There is currently a broader market sentiment towards renewable energy trusts, particularly those with exposure to fluctuating power prices or evolving regulatory landscapes, which is weighing on the share price. In particular given the high-for-longer interest rate environment. However, here we’re not talking about a renewable developer, as much as a set of operational assets (soon to be 100% operational). This is where the read-across from Harmony Energy Income Trust (LSE: HEIT) is key.
The HEIT Acquisition: A Recent Precedent
The recent acquisition of Harmony Energy Income Trust by Foresight Group provides a compelling read-across for GSF and other trusts facing similar discounts. HEIT, like GSF, was grappling with a significant share price discount to its NAV for an extended period. However, Foresight's successful cash offer of 92.4p per share ultimately aligns with HEIT's NAV of 92.38 pence as of January 31, 2025. The acquisition price represents a 42% premium to the share price of 65.2 pence on March 14, 2025 (the day before the offer period began), and a 94% premium to its closing price of 47.8 pence on May 29, 2024 (the day before the asset sale process was announced). Also worth noting that it represents a further 5% premium over Drax's previous take-private offer of 88.0p per share, in a process that became nothing short of a bidding war.
This outcome demonstrates that, for trusts trading at deep discounts, strategic buyers are willing to pay prices close to NAV to gain control of high-quality underlying assets. This scenario highlights a potential pathway for unlocking shareholder value for other discounted trusts in the sector, suggesting that the current market valuation may not fully reflect the true worth of their portfolios.
Unlocking Value: The US Investment Tax Credits (ITCs)
Another significant development that underscores the potential hidden value within GSF's portfolio is the recent monetization of US Investment Tax Credits (ITCs). GSF recently announced an agreement for the sale of ITCs from its Texan "Dogfish" asset, expecting gross proceeds of approximately £18-19 million, which investors doubted given Trump’s stance on the energy sector and his view on renewables in particular. This transaction is anticipated to close by the end of June 2025, providing a direct cash injection to the fund.
Crucially, this successful sale sets a positive precedent and provides excellent read-across for the remaining ITCs associated with GSF's California-based "Big Rock" project. While the full value of the Big Rock ITCs is yet to be finalized, the company had previously guided for combined ITCs from both Dogfish and Big Rock in the range of $60-80 million. At current exchange rates, this combined value represents approximately £45-60 million.
Considering GSF's current market capitalization of £303m ($409m), these tax credits alone represent a substantial amount, roughly 15-20% of the total market cap, which can be used to pay an extra dividend to shareholders, or to pay down GSF’s debt in full and become a fully unlevered platform, with an even more attractive risk/return profile. This adds another layer of safety for investors at the current share price, who not only are buying the assets at a 40% discount to NAV, but also can count on a 15-20% increase in cash essentially “for free”, which is in my view not fully reflected in the share price as investors are weary of Trump’s attacks on the renewable sector - I don’t want to go too deep into this, but it’s clear by now that assets that are coming operational as we speak are still going to be entitled to their ITC in full, as shown by the sale of the Dogfish ITC earlier this quarter.
Implications for Investors:
It's crucial to acknowledge that discounts can persist for extended periods, and there's no guarantee that they will narrow. Nevertheless, I am comfortable owning this for the dividend yield, which currently sits at 7.5% and I believe will go up to double digits next year. I will, in time, publish here a deeper analysis on this, and showing why I believe a long-term hold scenario is attractive for GSF if investors are fine holding a dividend-paying, operational infra asset that can deliver double digit annual returns. For the time being, I just wanted to share this idea as I believe it is a highly asymmetric return opportunity and wanted to share before share price climbs away from would-be investors!
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Disclosure: At the time of this article's publication, the author holds shares in GSF. This position may be altered or liquidated at any time without prior notification.