Ian Cowie: battery trust play for shift away from Russian energy

Our columnist points out that reducing our energy dependency on Russia has never been more important and urgent.

You don't often find fund managers marching toward the sound of gunfire but that would be one way to describe a British renewable energy investment trust's first foray into continental Europe, with its acquisition of industrial-scale batteries in Cremzow, eastern Germany.

That's just across the border from Poland and about 300 miles from the Russian enclave at Kaliningrad. Just how far it is from the fighting in Ukraine is, sad to say, something of a moving target.

So I salute Gore Street Energy Storage Fund (LSE:GSF) for their bravery - if not their market timing - and wish them well with their new 28 Megawatt hours (MWh) facility. Reducing our energy dependency on Russia and making more of our own juice has never been more obviously important and urgent.

Unfortunately, as someone who began investing in British renewable energy more than a decade ago, I know only too well the technical problems, including fluctuations in output. That's why GSF's container-sized batteries are needed to balance demand and supply, smoothing out some of the shocks in electricity generated by solar and wind farms.

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Coming down from the clouds, I first invested in GSF when I bought shares for 105p in November 2020, and they were yielding an inflation-busting 6.7%. Since then, despite all the dismal news of war, they have ticked up to trade at 117p this week and are now pumping out nearly 7% income, according to independent statisticians Morningstar.

Alex O’Cinneide and Suminori Arima, the co-managers of this £397 million investment trust that was launched in May 2018, are acutely aware of how armed conflict could impact their newest asset.

O’Cinneide told me: “On Ukraine, outside of our shared horror at the scenes which we are all witnessing, the business effect is twofold for us.

“First, securing our supply chain to allow us to continue to deliver the energy storage that our economies need for safe secure and clean energy, has become even more important given instability in world markets.

“Second, and in relation to our move into Germany, this is a market we have been exploring for many years but it became clear to us that the change in administration would bring more support for renewables on the grid and therefore an increased need for energy storage.

“The invasion has rightly led the EU and the UK to move quickly away from imports from Russia and so renewables will have to increase greatly, and the need for the services our assets provide.”

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Less controversially, but more importantly from a financial point of view, GSF also announced on Thursday that it has acquired eight 9.9 MW storage facilities in Texas totalling 79.2 MW.  Three of them - which are each two-hour duration /20 MWh systems - have been operating since September 2021 and the remaining five are expected to go live within 12 months, delivering an expected total portfolio of circa160 MWh. Following the acquisition, the company will have 262 MW in operating assets, and a total portfolio of 708 MW.

Encouragingly, three out of GSF’s four directors have invested more in this trust than the annual fees they receive from it, according to research by the stockbroker Investec. Two directors - Caroline Banzsky and Max King - hold shares worth more than twice their annual fee. So they can fairly be said to have serious ‘skin in the game’ and will share ordinary investors’ pleasure or pain.

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Most topically, GSF’s board of directors this week declared an interim dividend of 2p per ordinary share for the quarter to the end of December last year. The ex-dividend date will be next Thursday, 17 March, and the dividend will be paid on or around 8 April.

Against all that, GSF’s cautious approach to asset allocation meant that, prior to the Texas deal announced on Thursday, more than two-thirds of the cash it raised had yet to be invested. This made its share price, which is 9.4% higher than its net asset value (NAV), look all the more expensive.

So-called ‘cash drag’ could be a problem. But Sachin Saggar an investment trust analyst at Stifel, points out: “Most of this cash is required for projects already under construction. For example, GSF’s Kilmannock facility is expected to become operational in the first quarter of this year and its Ferrymuir site is planned to do so in the fourth quarter of 2022, followed by the facility at Stony in the first quarter of next year.”

As my main investment aim is to pay for an enjoyable retirement, GSF’s mixture of gradual capital growth and eye-stretching dividend income, is perfectly acceptable. All the more so because my shares are held in an ISA, so there is no further tax to pay - a topical consideration for anyone who has yet to utilise their £20,000 annual allowance.

All things considered, GSF is not a share I expect to shoot the lights out. But I do expect it to help keep them on.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Gore Street Energy Storage Fund (GSF) as part of a globally diversified portfolio of investment trusts and other shares.