BY RICHARD HEAP:
This week, London-based investor Gore Street Capital switched on a 10MW energy storage system in Essex.
It is the largest operational asset in the Energy Storage Fund that Gore Street launched in 2015, and uses technology from NEC Energy Solutions and Nippon Koei. But it is unlikely to be the largest asset in the fund’s portfolio for long.
The fund contains eight operational and development-stage assets totalling 189MW, and the bulk of this is in development or construction.
The largest of these are two 50MW projects that it is developing in Northern Ireland, and it is working on two 30MW projects in the Republic of Ireland. It paid £77m for a majority stake in the 160MW portfolio in June 2019.
This isn’t total plain sailing. Gore Street said this week that it was suspending construction work on its assets from today, which is in line with government stipulations on social distancing in both the UK and Ireland.
However, it added that those four were all on track to complete on schedule in 2021, and chief executive Alex O’Cinneide said that he sees “no material impact” from Covid-19 on Gore Street’s investment objectives.
He said in that statement that “the income that our assets produce is neither directly impacted by either energy demand nor prices, as we principally sell hours of access to our projects for the grid”. The fund works with National Grid in the UK and Eirgrid in Ireland to provide grid balancing services. The growth of intermittent renewables is another reason for his confidence.
Energy Storage Report spoke to O’Cinneide to find out more about the company’s plans and his view on the impacts of the Covid-19 pandemic.
His background is in private equity and renewables, and he was head of investments at Abu Dhabi’s Masdar Capital from 2007 to 2012, which includes the period when it bought 20% of the 630MW offshore wind farm London Array. He set up Gore Street Capital in 2015, including the first pure play energy storage fund in the UK.
The 10MW scheme that it turned on this week, and the larger assets in Ireland, are an indication of how cost reductions are driving growth in the market. For example, its first storage asset of 6MW was the largest in the UK when it switched on in 2016.
“We see more manufacturers of quality coming in and producing really good kit at good prices. We see a maturing of the capital structure. We can see in the market that banks are lending into projects on a normal basis,” he said.
Growing interest in storage also comes from other investors, but O’Cinneide said the company differentiates itself from rivals because it doesn’t use gas peaking power plants.
As for the assets themselves, Gore Street mainly invests in schemes using lithium-ion batteries because of cost falls in that sector, but it will look at other technologies: “We’ll look for the technology which suits the services which we want to offer into the market and manufacturers who can stand behind that solution for 15 years,” he said.
The emphasis on cheaper technologies is important because so much of the return at a storage development is tied up in the initial capital expenditure.
“The cost per megawatt is very important. You have a reasonable capex on day one, you have a very low O&M cost going forward and a long cash tail,” he said. “Anything you can do to lower your capex on day one accelerates your IRR. We are trying to build the cheapest cost-per-megawatt asset base as that will develop the strongest returns going forward.”
The fund is looking to build a portfolio containing projects that deliver a 10% return to investors over its lifespan, and so initial costs are vital: “It’s hard to recover from the wrong capex decision.”
The fund’s main revenue stream is providing frequency services for grid operators, but O’Cinneide said there were challenges: “The frequency contracts in the UK have got shorter and shorter,” he said.
“We expected those to be longer contracts, and for longer, so that’s a negative. On the positive side, we’ve seen more different types of contracts become available, such as energy arbitrage.”
That will only grow, and Covid-19 shows the importance of energy storage to boost resilience in the energy system. This then supports society at large.