UK Market: A Key Test for the Sale of 395 MW Battery Portfolio

The sale of Harmony Energy Income Trust's battery portfolio could redefine market benchmarks in the UK. Investors are closely watching the sector's ability to attract premiums amid uncertain conditions.

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The ongoing sale of Harmony Energy Income Trust’s (HEIT) 395.4 MW/790.8 MWh portfolio, one of the largest energy storage funds in the UK, is being closely observed by industry stakeholders. The process, managed by advisory firm JLL, has attracted non-binding offers for individual assets and the entire portfolio. HEIT plans to enter exclusivity with a preferred buyer in December and finalize agreements by January 2025.

An Indicator for the Market

The process is considered a key indicator of the maturity of the UK operational battery market. With few comparable transactions recorded to date, analysts believe this sale could set critical valuation benchmarks. London-listed companies such as Gresham House Energy Storage Fund and Gore Street Energy Storage Fund may also be affected.

Cost and Valuation: A Complex Equation

Peel Hunt analysts have raised concerns about the implied valuation of HEIT’s portfolio, estimated at approximately £837,000/MW. This valuation significantly exceeds the construction costs of a similar project, calculated at around £625,000/MW by Modo Energy. The critical question remains: would a buyer be willing to pay this substantial premium in the absence of exceptional financial performance to justify such a gap?

Battery revenues remain below target, and the cost of capital is decreasing as capital expenditures are forecasted to decline further. This places HEIT in a challenging negotiation position, with some experts suggesting that a discount might be more appropriate than a premium in this context.

Revenue Improvement: Encouraging Signs

Despite these challenges, energy storage revenues in the UK have shown signs of recovery in the second half of 2024 after a tough period due to market saturation. Annual revenues for two-hour systems reached between £57,000/MW and £68,000/MW from August to October, compared to lows of £46,000/MW earlier in the year.

This improvement is attributed to windy conditions and rising gas prices, leading to increased market volatility. In October, HEIT recorded average revenues of £70,000/MW/year, supported by record-high price spreads in the electricity market.

Prospects and Challenges

The closure of the UK’s last coal-fired power station in September 2024 led to an oversupply last winter, weighing on battery revenues. However, recent signs of increased volatility in the electricity market suggest a more favorable environment for storage assets. Gresham House plans to triple its annual revenues to £150 million by 2027 while expanding its capacity to 3 GWh.

Experts caution that revenues will remain volatile until structural improvements in the balancing mechanism are implemented by the national energy operator.

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