INTRODUCTION
The Fund (or the Company), invests in a diversified portfolio of utility-scale energy storage systems (‘‘ESS Projects’’), which utilise batteries and may also utilise generators. The ESS Projects comprising the Portfolio are located in diverse locations across Great Britain.
Individual projects are held within special purpose vehicles into which the Company invests through equity and/or debt instruments. It is intended that each ESS Project Company holds one project but an ESS Project Company may own more than one project. The Company will typically seek legal and operational control through direct or indirect stakes of up to 100%. The ESS Projects 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. 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.
ASSET TYPE AND DIVERSIFICATION
The Fund (or the Company), currently intends to invest primarily in ESS 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 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 also intends to invest in ESS Projects which use gas generators or diesel or dual-fuel diesel-and-gas reciprocating generators on projects which have a ‘‘net export’’ connection. These are likely to be generators in the range of 0.5 to 10MW per engine.
The Company invests with a view to holding assets until the end of their useful life. ESS 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 disposals for the purposes of realising or preserving value, or of realising cash resources for reinvestment or otherwise.
The Company intends that the ESS Projects in which it invests primarily generate revenue from in front of meter services, but may also provide behind-the-meter services.
ESS Projects are selected with a view to achieving appropriate diversification in respect of the Portfolio.
First, diversification will be sought by geographical location of the ESS Projects in which the Company invests across Great Britain.
Second, it is the Company’s intention that from the end of the Initial Investment Period, when 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 will also, from the end of the Initial Investment Period, target 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 ESS Projects which benefit from a number of different income streams with different contract lengths and return profiles through individual ESS Projects, as well as by enabling the ESS Projects in which the Company invests to take advantage of a number of different revenue sources. Initially, it is intended that the main revenue sources will be:
- Firm Frequency Response – the Company intends to invest in ESS Projects that generate FFR revenues 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 (‘‘FFR’’) to, initially, be entered into by Noriker with the National Grid and its subsidiaries.
- Asset optimisation – the Company intends to invest in ESS Projects that generate revenues from importing and exporting, or generating and exporting in the case of an ESS Projects including generators, power in the wholesale market and the National Grid-administered Balancing Mechanism (‘‘BM’’).
- Triads and other National Grid-related income – the Company intends to invest in ESS Projects that generate revenues from the three half-hour periods of highest system demand on the Great Britain electricity transmission system between November and February each year, separated by at least ten clear days (‘‘Triads’’) and other National Grid-related income including Generator Distribution Use of System (‘‘GDUoS’’), 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 cashflows 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.
- Capacity market – the Company intends to invest in ESS 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.
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 ESS Project, or providing availability based services to restore electric power stations or part of electric grids to operation. In such circumstances, the proportion of revenues coming from electricity sales may materially increase from that indicated above. From 2019, ESS Projects in which the Company may invest may also be able to enter into FFR contracts with Distribution System Operators (‘‘DSO’’) and provide reactive power services to the National Grid the timing of which is according to the current emerging 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 energy storage project such as developers, EPC contractors, battery manufacturers and landlords. Finally, each ESS Project internally mitigates operational risk because each ESS 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.
ASSET SOURCING
The Fund (or the Company), acquired the Seed Portfolio immediately after Admission and has identified the Exclusivity Portfolio in which the Company may invest, subject to completion of adequate due diligence and contract. Further information on this is provided in Part 9 (Seed Portfolio and Exclusivity Portfolio) of the Prospectus.
OTHER INVESTMENT RESTRICTIONS
The Fund (or the Company), will generally invest in ESS Projects where construction is substantially completed and at such a point that the ESS Project is capable of commercial operations. As a minimum, all ESS Projects will need to have in place a completed lease on satisfactory terms in relation to the land where that ESS Project is situated and an executed grid connection agreement and a certificate confirming completion of commissioning tests (‘‘G59 Certificate’’).
The Company may also provide loan finance to ESS Projects prior to acquisition so that the ESS Projects can acquire equipment prior to construction, provided that no more than 15 per cent. 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 investments. 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 per cent. of its total assets in listed closed-ended investment funds or in any other investment fund.
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.
DERIVATIVES
Derivatives may be used for currency, interest rate and power price hedging purposes for efficient portfolio management. However, the Directors do not anticipate that extensive use of derivatives will be necessary. At the date of the Prospectus, the Fund (or the Company) has not incurred any borrowings or indebtedness or other leverage and has not granted any mortgages, charges or security interests over or in relation to any of its assets.
EFFICIENT PORTFOLIO MANAGEMENT
Efficient portfolio management techniques may be employed by the Fund (or the Company), and this may include (as relevant) currency hedging, interest rate hedging and power price hedging.
LEVERAGE
The Fund (or the Company) does intend to assess its ability to raise debt and is expected to introduce leverage (at the Company level and/or the ESS Project Company level) 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 Projects.
INVESTMENT IN DEVELOPERS
The Fund (or the Company) may invest in one or more Developers of ESS Projects through equity issued by the relevant Developer, provided that investment in Developers (calculated at the time of investment) shall be capped at £1 million in aggregate.
