Energy storage refers to the capture of energy for the purposes of using it when needed to reduce imbalances between energy demand and supply. Battery energy storage owners provide grid operators with balancing services to support them in dealing with system intermittency, largely caused by the addition of renewable sources of electricity like wind turbines and solar farms. The technology is well established as a means of regulating power security, ensuring power quality and balancing electricity demand.

Main economic reasons to invest in energy storage are:

1. High yield
   The Company targets an attractive dividend of 7.0 pence per Ordinary Share in each financial year.


2. Growth potential in grid flexibility from decarbonising environment
   As the dominant technology for fast-acting, short-duration response incentivised by grid operators, lithium-ion battery energy storage prices have declined by over 80% in the last decade, allowing the technology to become a viable part of large-scale grid infrastructure. This has occurred as the contribution of wind and solar energy sources to total power generation has increased drastically, with renewables representing 43% of UK electricity supplies in 2023. This has increased demand for stable flexibility resources, which are expected to grow further internationally in the coming years as more markets focus on decarbonisation.


3. Multiple Revenue streams
   Energy storage assets are able to access multiple revenue streams that can be stacked on top of each other. These are broadly separated into grid balancing services, peak shifting to ensure sufficient capacity is available, and energy trading. This combination provides flexibility to assets to participate in multiple markets and maximise value to investors.

The battery energy storage assets in the Company’s portfolio benefit from several revenue streams across multiple, uncorrelated markets which can be divided into three general areas of activity.

Grid-balancing ancillary services respond to fluctuations in supply and demand in real-time to ensure grid operators are able to effectivity balance power flows across the energy system. These services compensate for voltage and frequency fluctuations that affect grid stability.

Peak shifting ensures sufficient capacity is available on a grid and is secured through long-term contracts on which the prevailing ancillary and/or wholesale merchant strategy can be stacked.

Wholesale energy trading activity involves purchasing electricity when the price is low to be stored and sold, or discharged, when prices are higher during periods of peak demand.

This combination of revenue streams is accessed by the Company across different geographies to protect revenues from any potential downturn in a single market, providing improved stability to the Company’s performance.

Further explanation of how the Company earns revenues from these activities can be found in the latest Audited Full-Year Results for the year-ended 31 March 2024

The Company made a choice early on to acquire ready-to-build projects – those with land rights, planning permission and a grid connection all secured – where possible to manage the buildout process leveraging the Investment Manager’s in-house technical teams. This ultimately leads to higher returns compared to an operational asset purchase strategy due to the successful management of the higher risk profile of construction projects, which can be built at cost without a markup included in the purchase price. The Company’s strategy also ensures the best quality operational assets due to the tight controls in place from start to finish while continually bolstering the knowledge and expertise kept in the Investment Manager to be applied to future projects.

As the Company’s presence continues to grow in scale, it can leverage its experience as an international owner to select favourable markets and projects whilst also evaluating any potentially advantageous capital recycling programs. The international portfolio's composition is continuously evaluated to ensure all capacity remains wedded to the Company’s goals.

The Company typically reports revenue on a "MW per hour" basis. This includes every hour of the reporting period, including nights, weekends, and bank holidays

The total is calculated by multiplying the estimated average revenue by operational capacity and the hours in the period. For the 12 months ended 31 March 2024: £15.11per MW per hour x 311.5 MW x 8,784 hours* = c.£41.3 million in estimated revenue for the period.
*8,784 is the number of hours in the 12 month period.

The revenue generated this reporting period was from an average operational capacity of 311.5 MW.

Please refer to the Investment Objective and Policy section of the prospectus, which can be found here: Prospectus 29 March 2022.pdf (gsenergystoragefund.com)

Absolutely. While the Company’s investment policy requires 40% of assets to be located in GB and Ireland, the Company can adjust capital allocation based on market conditions, given its presence across five markets. The Investment Manager is actively exploring and considering the sale of certain assets and reallocating that capital.

As of 31 March 2024, the Company had £60.7 million in cash or cash equivalents, as well as £58.6 million in debt headroom on its existing debt facilities, sufficient to cover all contractual obligations and build out the Company's portfolio to over 750MW. The Company has two debt facilities; a $60m facility secured at the asset level and a £50m revolving credit facility at the fund level. The Investment Manager has advised that the Company is expected to draw both facilities fully to complete the assets currently under construction. Once both facilities are fully drawn, the Company is expected to run a gearing ratio of c.15% of GAV. The cash inflow following the transfer of the investment tax credits (c. $60-80 m) is not included in the above 15% of GAV figure. The Company maintains optionality over the use of the cash associated with the ITC.

Although the Company does not provide dividend forecasts, it maintains an attractive dividend target of 7.0 pence per Ordinary Share.

As a real asset investor, the Company’s revenue generation is directly linked to operational megawatts (MW). Once an asset achieves commercial operation, the Company will generate additional revenue immediately.

The Manager’s fees consist of:

• The Advisory Fee: The Investment Manager is entitled to receive from the Company an advisory fee payable quarterly in arrear calculated at the rate of one-fourth of one per cent. of Adjusted Net Asset Value (the “Advisory Fee”). For these purposes “Adjusted Net Asset Value” means Net Asset Value, minus cash on the Company balance sheet
• The Performance fee: If eligible, the Investment Manager will receive a sum equal to ten per cent. of such amount (if positive) by which Net Asset Value (before subtracting any accrued performance fee) at the end of a Calculation Period exceeds the Benchmark of 7 per cent. provided always that in respect of any financial period of the Company (being 1 April to 31 March each year) the performance fee payable to the Investment Manager shall never exceed an amount equal to 50 per cent. of the Advisory Fee in respect of that period.

In addition, the Investment Manager is paid a fee of £75,000 per annum for Alternative Investment Fund Manager (AIFM) services.

A Commercial Management Agreement (CMA) covers services required by the Company to enact its strategy and ultimately deliver returns to investors. These functions are kept in-house at the Investment Manager where possible to deliver a higher quality service at a lower cost than outsourcing to external parties.

CMA charges are provided to GSS, a direct subsidiary to the Investment Manager, and cover services integral to the Company’s operations. These include the construction, asset management and commercial activities of the Investment Manager’s technical team, which delivers and manages the safe operations of the Company’s international portfolio. By retaining these services within the Investment Manager, the Company’s exposure to variable contractor fees is reduced as costs are better controlled and managed to ensure efficient use of capital.

The CMA also includes, but is not limited to, accounting and reporting for entities across the GSF group; Company Secretary functions; corporate development; and other supporting services. In addition, it also contributes towards office fees and other background costs required to support the Company’s activities. These costs are calculated and recharged quarterly in line with the accrued expenditure throughout the year.

The Company believes the transition to a net zero economy is vital for securing a sustainable, prosperous future for all and is committed to reporting on the impact of its own operations when deploying energy storage systems. It continues to track and disclose a range of ESG metrics through internationally recognised frameworks in an effort to improve the measurement, management and disclosure of environmental and social outcomes. These frameworks include the Sustainable Finance Disclosure Regulation (SFDR) and Task Force on Climate-Related Financial Disclosures (TCFD).

The Company has also been awarded the London Stock Exchange’s Green Economy Mark, acknowledging that it derives greater than 50% of its revenues from environmental solutions.

The Company has further joined the United Nations Principles for Responsible Investment (UN PRI) to incorporate ESG issues into investment practice as well as the GIIN (The Global Impact Investing Network), which enables it to contribute to the growing knowledge base of impact investors worldwide.

Under existing waste regulations in Europe, the producer or commercial entity that brings batteries into the market is responsible for their collection and sustainable disposal.

The Company has owned assets since 2018 and has, therefore, had few instances where recycling of end-of-life battery cells is needed. Systems were removed from the Port of Tilbury asset in GB in February 2023 following a recall by LG Energy Solutions (LG-ES) after it was found that thousands of cells manufactured at two of the Company's sites between April 2017 and September 2018 may carry defects. The Company facilitated this process by connecting LG-ES with the battery recycling firm Battri, which uses hydrometallurgical to extract black mass material from cells for use in future battery systems.

As assets approach their end of life, the Investment Manager will explore available options to ensure that batteries are disposed of sustainably.

The Company is conscious of the overall supply chain of batteries, not just the end of their life cycle. As such, it is a member of the Fair Cobalt Alliance, which aims to improve working conditions for cobalt mining. The 2024 ESG & Sustainability report, to be released in the first week of September, will have more detailed information regarding the Fair Cobalt Alliance.

All assets within the Company’s portfolio currently utilise lithium-ion technology. The portfolio includes projects of varying capacity, duration lengths and chemistries, including NMC cells (nickel manganese cobalt) and LFP (lithium iron phosphate) cells. The Company is technology agnostic but, at present, does not see any energy storage technology as a viable alternative to lithium-ion batteries due to its market dominance, pricing, safety, performance track record, and established infrastructure benefit. If technologies arise that are more efficient and cost-competitive, the Company can add these technologies to the portfolio under the existing investment mandate.

For an updated list of the manufacturers for each portfolio asset, please refer to the portfolio page on the website: https://www.gsenergystoragefund.com/content/about/portfolio

The Company's safety measures for the existing fleet are robust and significant, not only to ensure continued uptime for its assets but also to protect those working on site. As more capacity is added to the Company's portfolio and its global BESS fleet, it is key that correct health and safety standards are maintained and supported by appropriate regulations and widely available guidance.

Newer projects are being retrofitted with electrolyte vapour detection (additional mitigation through hardware to avoid thermal runaway). This measure, in conjunction with a robust health and safety strategy, mitigates fire risk. The 2024 ESG & Sustainability report, to be released in the first week of September, will have more detailed information regarding health and safety.

Lower battery prices affect the portfolio in numerous ways. For both operational and construction assets, a reduction in battery prices would result in lower repowering costs. Increasing the duration of some of the Company's assets also contributes to the economic case of retrofitting, as lithium-ion cells and battery packs represent the largest equipment cost required to add additional duration to existing sites. The Investment Manager remains cognisant of market conditions, particularly with the lack of availability of equity capital and the high cost of debt. The Company will build out its operational capacity of over 750 MW; anything beyond this is dependent on a series of variables, including debt costs, equity availability, capex costs, falling lithium costs, market opportunities, and revenue levels.

The unaudited Net Asset Value per Ordinary Share is calculated in sterling by the Administrator on a quarterly basis. Such calculations are published through a Regulatory Information Service and made available through the Company’s website. The Net Asset Value is the value of all assets of the Company less its liabilities to creditors (including provisions for such liabilities) determined in accordance with the Association of Investment Companies’ valuation guidelines and in accordance with applicable accounting standards under IFRS.

The Company’s NAV is calculated and publicly disclosed every quarter. The Company's results undergo semi-annual audits by the Company’s auditor, Ernst and Young, along with valuations by the Company’s external valuer, BDO. These take place during the interim and annual reporting periods.

The Company has a £50m RCF facility with Santander and $60m project-level financing for the Big Rock asset in California. These facilities would constitute c.£99m or c.15% of Gross Asset Value (GAV) if fully drawn. The Board's gearing policy strictly limits all borrowings to no more than 30% of GAV at any given time.

Please refer to the Portfolio section of the website, found here:
https://www.gsenergystoragefund.com/content/about/portfolio

The electricity grids the Company operates in all have different market designs and requirements and, therefore, offer different opportunities.

Ancillary services still dominate GB and Ireland, but they differ in that the Company’s Irish assets are tied directly to the successful integration of wind power, with higher generation contributing to higher revenue levels for the Company’s assets. In Germany, the Cremzow asset provides a critical suite of balancing and frequency services to up to 11 transmission system operators across eight European countries through an interconnected grid system. It also participates in wholesale and intra-day arbitrage, presenting additional revenue-stacking opportunities. The starkest difference can be seen in Texas, where the Company’s operational assets support a grid prone to extreme volatility. The ERCOT electricity market in Texas also includes locational energy prices – unlike GB, Ireland and some mainland European markets – where single wholesale electricity prices apply across an entire grid. Locational energy prices offer diversification opportunities within a grid and interesting trading opportunities.

The Company’s most recent acquisition in California will carry out a similar role, once constructed, in a more regulated market, benefiting from long-term capacity contracts (RA) worth up to 40% of project revenue. This is considerably higher than an equivalent GB Capacity Market contract and allows us to consider raising project-level debt financing.

Projects have an expected lifespan of 25-30 years. Certain maintenance capital expenditures, such as battery replacements, are necessary during this period. Repowering occurs when batteries reach specific degradation thresholds, such as a predefined percentage of their nameplate capacity, to restore them to total capacity. We anticipate a repowering capital expenditure requirement every seven years as a general guideline, although this can vary by geography.

If the Company were to have available funds above the requirements of its construction portfolio, co-investment alongside the Japanese vehicle could be an attractive possibility.

The Investment Manager has published a blog looking at the potential effects of the Trump administration, which is available to view here.

In summary, reversing the widespread impact of Biden's main policy platform would be extremely challenging and is not expected. It would require full control of the House, the Presidency and Senate. The US legislative process is historically slow, making it difficult and unlikely for an incoming president to repeal the Act, and given the relatively short timeline until the ITC is expected to be received, and therefore is seen as extremely unlikely for GSF's assets in particular.

Another possibility would be to take direct action through executive orders that affect federal budgets and guidance. This could potentially limit access to investment tax credits for future standalone storage and other clean technologies for new investments. This, although disappointing in the context of decarbonisation, could potentially enhance the long-term profitability of GSF’s US assets, by reducing future competition.

The Company regularly tests the market for tolling agreements and are yet to be convinced they offer an attractive alternative or addition to our diversified approach to revenues. The recently and widely reported large tolling agreement in GB appears to fall in line with the price levels seen when testing the tolling market and, while it may serve to improve confidence among lenders, locking in an agreement at a low point in the market has considerable disadvantages.

Any upside from market recovery is eliminated for the tolling agreement period which, for investors, means they are forced to settle for a certain but potentially low return. Remaining merchant allows the Company to retain any potential upsides across a portfolio that is already derisked by its geographical spread across five uncorrelated markets.

More importantly, the Investment Manager has the control over each asset to optimise the Company's revenue strategy to ensure these upsides are accessible while ensuring they maintain best-in class operational performance. Tolls often come with increased cycle rates, which can degrade the battery, while putting in place stringent availability requirements and penalties if they dip below that level. The Investment Manager has an in-house commercial and asset management team working in unison to maintain availability while engaging in a wide range of optimal revenue streams.

There are a couple of differences between capacity market contracts in GB and the Resource Adequacy contract in California. For resource adequacy contracts, 4-hour duration is required, but in GB, there is the opportunity to bid as a one-hour asset. Also, the contract is not obtained through public auctions, but through bilateral negotiations with the suppliers, so there is no clear market price available, it's all negotiated bilaterally and not necessarily disclosed to third parties. Thirdly, there are more stringent and technical requirements for the CAISO RA contract. For GB, the Company is only expecting roughly 10% of revenue coming from capacity markets, for CAISO projects, the Company expects 40% from this long-term RA contract.

For the overall portfolio, this adds a significant portion of contract revenue. Big Rock is a large asset and will contract a large portion of its capacity under RA. Under the RA, the Company will have a higher percentage of contracted revenue.