Harmony Energy Income Trust H2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 27, 2025
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Operator

be in listen only mode. Questions are encouraged and can be submitted at any time via the q and a tab situated on the right hand corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today and publish responses where it's appropriate to do so.

Operator

Before we begin, I'd like to submit the following poll. And then I'd like to hand you over to Paul Mason, Managing Director. Good morning, sir.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

Thank you very much, Lily. Good morning, everyone, and thank you for taking the time to join us today for what is our third annual results presentation. It's been a year of fantastic progress for the company, from the point of view of bringing our final projects online, transitioning to a fully operating portfolio and increasing our operational capacity by 40% compared to the average that we had over the year, so setting us up well for the future in that sense. There are certain headwinds we've been up against around challenging revenue environments and some uncertainty around the future regulatory setup, and we'll talk a bit about how we see those things and how we can navigate those best going forwards. Through this presentation, we're gonna update on the the progress around the portfolio.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

We'll be talking about the revenue landscape that we find ourselves in, some of those challenges we've seen, but also recent improvements and how we think that looks going into the future. We'll be taking a look at some of the, some of the the key themes we see going forwards around, those the way we think the markets will evolve, what we're seeing happening to CapEx, and also around those those regular regulatory items. And finally, we'll be touching on the ongoing negotiations around a potential portfolio sale. Now we will make some statements around this. Clearly, the process remains ongoing and not all commercial terms are agreed.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

So for obvious reasons, we're restricted on what information we'll be able to provide. We've been keeping the market as up to date as we can, and we would encourage listeners to to to to look at those those statements that have been put out to date. We'll repeat some of those statements in this presentation, but please do be aware we we will not be answering questions specifically related to that process just due to those those commercial and regulatory restrictions that we have, and I hope that makes sense. So I'm gonna hand over to Max to start by talking about the portfolio progress we've seen and and how we how we built out the remaining assets and increased the capacity by 40%.

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

Yep. Thanks, Paul. So, yeah, it's been a terrific year in terms of portfolio construction completions. As Paul said, we are now fully operational as a portfolio. The second largest portfolio of GB Best by megawatt and the largest GB BES portfolio with an exclusive two hour duration.

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

And Paul will elaborate on the importance of the duration, which later in the presentation, which is a common theme, that we've always been talking to shareholders and engaging with shareholders around. The Hawthorn Pit and Wellmore Green projects were the final ones to be energized. They were we diversified our battery supply chain by using Envision, as the principal contractor for those projects, which is a good way of diversifying our risk around around construction. And they were successfully energized just prior to the financial year end in October. On top of that, the Rush Home project, was also energized slightly earlier.

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

That has been I've got projects the one which has faced the most challenges in terms of construction delays, but they were not construction delays caused by the contractor or our supply chain. It was a DNO led delay, which we had to resolve, over time involving a third party and, and and cable routes, etcetera, which were ultimately worked through. So we're very pleased to have seen that come online and, and performing well. And, so as Paul said, now that we are fully operational, going into this current financial year, we are looking at 40% increase, in relation to the weighted average over the financial year 2324. And that puts us in a really stable, strong position to take advantage of the, the positive trends that we're already experiencing in relation to revenues in in in the country.

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

So that's a good segue back to Paul in terms of talking about recent revenue trends.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

Thank you very much. So, yeah, absolutely. So as Max said, over the period, revenues were relatively low. So we've still seen that relatively low environment that we started to see around this time last year, we were talking about last year. We did see some signs of positivity.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

So key items that we've seen really starting to shine through are around a correlation between high renewable penetration and higher battery revenues, which is really encouraging to see because that's the whole thesis of what we're doing here and that's why we're building these batteries to provide an opportunity to store that excess renewables generation and then release it back onto the grid when the power prices are higher. And we've seen that more and more. So the better periods of revenue on this chart correlate very well to high wind output in particular being the dominant source of renewable generation in GB. We've also seen improvements through better use of batteries in the balancing mechanism. So this was it's been a big ongoing theme that we've talked about for many years.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

Still it's the launch of some new software in the, NISO control room and the launch of certain products which support that being balancing reserve and quick reserve. We have seen four times the amount of volume through the balancing mechanism in our batteries. So that's really encouraging. We still think there's a long way to go. There's a lot of opportunity that can continue to be unlocked in that area, but it's a good start and we're starting to see that come through.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

What we've seen post the period end, but over the past quarter, is a real increase in revenues, and that's really returning to the more traditional shape of revenues that you would expect to see where spreads are wider in the winter, where we have cold weather, we have demand going up as we're using more electricity for heating, etcetera, and we're getting higher gas prices that go along with that. So that's created this opportunity for, for for higher prices, more price spikes going into the winter, and that's been really encouraging. It's actually partially due to that increase in underlying revenue per megawatt, partially due to that increased operational capacity. But in the first quarter of the twenty twenty four, twenty twenty five financial year, we've actually already earned 63% of the revenue which was generated over the whole of financial year 2324. So that's showing the value of having those, that fully operating portfolio as we move into a period of higher revenue, so the timing has worked well for us in that respect.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

Just to come on to that correlation point and demonstrate that, what we saw over the summer months was this very strong correlation between the blue line, which is the wind generation on shown on the on the, the right hand axis, and the orange line, which is the GB fleet, so average revenues earned by batteries in GB, which is on the left axis. So very strong correlation over those warmer months. The driver of that was higher winds. And when we saw the wind generation being high, we saw prices for wholesale electricity really drop go often negative. So we had record number of negative hours in 2024, '1 hundred and '70 '6 negative hours, which is 65% more than we saw in 2023, a trend we expect to continue.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

And but we saw those those that wind really dominating, pushing generation above the demand so that we could buy very cheap power and then store that power and sell it back onto the grid when demand was a bit higher or when the wind dropped off. So as I said earlier, the peak periods really correlated to the better periods for best revenue. As we move back into the the colder months from October onwards, that correlation is broken somewhat and that's because we're we're seeing the the spread being driven more by the, the gas pricing again. So we've got higher gas pricing, but we've also seen periods where low wind such as the spike sort of just as we get into December there, you'll see, the the spike of of higher winds there, sort of correlating with, with lower best revenue. That's because the wind is is taking the slack off the gas and that's, meaning that there isn't so much, tightness in the system.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

Prices were lower. But then we've seen, the low wind period in in November correlate with a little spike in, in best revenues. And again, that's because low wind coincided with a period of relatively high demand. So there was a shortage on the system. So we're just seeing these the the wind generation is starting to be a real driver in what's going on with battery revenues.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

And this is, as I said, what we've always believed, what we've always said. And we're now at, say, wind being 30% of GB electricity, but looking ahead and looking at the plans around, Clean Power 02/1930, that wind generation forecast to increase significantly. This will become a much bigger driver of what's going on with battery revenues, which is in line with what we've always suggested. So it's encouraging to see those correlations starting to come through. And just to touch on, we often talk about this.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

As you know, the company is still the largest, the owner of the largest exclusively to our duration battery portfolio. We're starting to see many others, add duration or when new build projects are more often than not now two hour duration batteries. So, the others are starting to to to do this, but still good to note that the two hour duration batteries are continuing to outperform their shorter duration counterparts. And that gap is widening as we start to see more of those trends around wholesale spreads, wind driving low prices, etcetera, going through into the into the winter. So the gap widening, and we can still expect that trend to continue going forwards.

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

It's worth saying the the average duration of best in The UK at the moment is now one point just shy of one point four hours long. So there is still a way to go. Although, as Paul said, out of the all new capacity that came online last year, 67% of it was two hour duration.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

Now moving on to the outlook going forward. So, this chart is a chart that we've published, and updated over time. This is the most recent revenue and cost projections that we use for valuation purposes. So when we're calculating the net asset value of of of the company, we have to make assumptions around what what the future looks like. We do rely on third party revenue forecasts.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

And as we know, they have moved around a reasonable amount over the past couple of years, particularly over the short term. Now they appear to have stabilized. They've come down quite a lot. And right now, they seem to be fairly well calibrated to what we're seeing going going on if we look in the market. So I think hopefully that that sort of volatility and that short term moving around will be calming down now.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

But what we really wanted to focus on here was the growth story and why we're at a relatively low point of this curve. And it's really coming back to those fundamentals that we've talked about, increased renewable penetration. We've seen that correlation between higher renewable generation and battery revenues, But we've got that alongside demand growth as we electrify heating and transport, really interesting stuff coming out of the climate change committee yesterday highlighting those trends and what's needed to happen. And we're also seeing more demand from things like energy intensive data centers coming through. So you've got increased electricity demand.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

We're gonna have to increase the renewable generation significantly to meet that demand and that needs storage. So we're at a relatively low point. We think the fundamentals remain as strong as ever, and we're confident in that growth trajectory. Having said that, we've seen that clearly there is whilst these are reasonable forecasts for the longer term, we've seen over the short term there can be some volatility around that. And we're seeing the market for tolling agreements where we can remove some of that volatility improve.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

So there are more options around that. And we've been working hard to position the company well so that we can take advantage of some of those, those agreements if the pricing is at an attractive level. So what we don't want to do is lock in long term pricing at the sort of levels we're seeing today because we believe in that growth story and we don't want to give away that that that value. But we see that there is clearly value in removing some of that short term volatility and and and downside risk over the shorter term. So we're monitoring that.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

There are opportunities, and that's something that we are working hard to position the company to take advantage of as and when the timing is right. And then one of the other trends we've seen is players looking to bring optimization in house. So almost the opposite end of the spectrum to to locking in some some revenue and some value is to sort of try and bring it in house, take full control over that trading. And although we have direct experience of actually designing optimization algorithms and and selling those to energy traders, we don't think the timing is right for that for the for for the company. We're seeing increased competition amongst a larger number of third party revenue optimizers with large teams specialized in, in in in providing the service.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

We're seeing the services become more complex, and we we see that actually bringing in house is a fairly significant additional risk and given the cost of outsourcing that to a specialist third party, and in many cases, specialist third parties who may be able to add some level of revenue protection through tolling agreements, We see that as the preferred option rather than trying to bring that in house for what might be a relatively small cost saving. And finally, just in terms of giving a little bit of guidance around what all of this means, if the out turn is in line with these projections, the company expects that this would allow a covered dividend of around 4p per share in the 2024, '20 '20 '5 financial year. So a return to being able to pay a dividend compared to last year, which where we obviously had to cancel that any further dividends. So that's providing a little bit of guidance. You can see that growth trajectory and what we, and and what we believe is is is the future is looking like.

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

It's important just to note that that guidance is not official. It will be reviewed and monitored, and we will make a firmer statement around that, towards the end of the financial year.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

Coming on so we looked at what the revenues may look like going forwards. Just to provide a bit of balance and color around the wider market context. We are seeing CapEx decline quite significantly, and this creates a potential risk for the company, less around what it means for operating revenues going forwards. We actually think and have often said that batteries are sort of competing with the technologies and there's a long way to go before batteries start to compete with other batteries and a bit of cost saving on the battery fund is going to flow through directly to revenues. I think we're a long way from that.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

But what it does do is create a perception from the market around the value of a battery project. And if I'm looking to invest, do I prefer to buy an operating asset or do I take a look at this and say, I'll wait and I'll try and build it when the CapEx is cheaper? We have often said and still believe that this is an oversimplified view. Actually, the complexity and risk associated with acquiring a site and then building it out and the risks of grid connections lining up suppliers, supply chains more generally, is probably underestimated in that analysis.

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

And it's fair to say we can speak from experience.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

Yes. Having built out more than most, that is definitely an underestimated area. And also, I think to the extent CapEx comes down, it generally becomes more expensive to actually acquire the sites in the first place. Those project rights, having a site, having a grid connection, having which has got planning permission and you're ready to build, will that that will become a more valuable thing as the CapEx comes down. So it's not as simple as saying lower CapEx reduces value of projects, but it is it is a perception and it's a it's a risk that we wanted to highlight.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

And on the counter to that, we're still seeing battery build out rates lower than most forecasts, and we're seeing grid connection reform, potentially, putting some barriers in in place to the build the white build out that would be required to meet something like the CP 30 plan. So by no means a fixed outcome from this, but there isn't there's a few areas of uncertainty.

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

Yeah. The other other point on trend from lower CapEx, does actually create some or heighten some additional risks such as geopolitical risks because it's well documented that I think roughly 80% of every battery is comes out of China. And, you know, in a in this new tariff rhetoric that we're hearing, you know, that could create some geopolitical risks, if if, you know, I China or any other country chose to use that to their advantage. So just to touch a bit more on other other, regulatory barriers to entry that we're seeing and how these these are evolving. I think the general point is that the regulatory environment remains very supportive for BESS.

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

Everyone is recognizing the crucial role that it it is playing and will continue to play in the transition to net zero. But also we are it's very important to remember that we are at the very early stages of that transition. You know, we're not there's there's a long way to go. So the clean power plant, for example, recognizes that. It sets very, very ambitious targets, in relation to not just batteries, but also other other technologies as well and also the transmission network.

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

So, you know, there's I think the phrase is there can be no transition without transmission. So, you know, there are many local and national challenges that need to be overcome in order to deliver on the clean power plan. So we see it as a as overachieving supportive for the the sector, but it does create some questions from an investor looking to get into the sector now with new build opportunities. You know, what how is this plan going to be delivered, and what's the short term impacts on on our business case? On top of that, REMA, the review of electricity market arrangements is continuing.

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

It's now done it. It's done two rounds of consultations now. The current, narrative seems to be supportive of zonal pricing. Now we don't want to get into that much on on on this on this webinar, but, fundamentally, there are pros and cons to zonal pricing. And for for us as an operational portfolio, we have a diversified geographic portfolio across, Scotland and England, which we think stands us in good in good stead from a zonal position.

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

It's very much dependent on the the revenue and generation mix in each of those zones, in terms of, you know, the business case for a battery in a zone with a lot of solar may be different from a business case of a battery, in a zone with a lot of wind and and vice versa. So there's a lot of adapting and and research and analysis to be done if we'd end up moving to a zonal system. I think the net benefit will be positive because I think the great advantage of batteries is their flexibility and their ability to adapt and evolve their business cases to suit the local environment. So we, again, see the overall picture as positive. However, if I was an investor coming into the sector fresh, it would give me pause for thought because where do I go?

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

What do I build? How quickly do I do it? The final point as Paul touched on is grid connection reform, which, is is something that is very much it's very fresh. It's still, it's still to to be firmed up, and we're expecting more clarity on that actually in the coming few months. This is more of an issue for developers than it is for owners of operating assets.

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

But effectively, what it's doing is looking to make more efficient the the existing queuing system and rewarding those projects which are most the furthest progressed and trying to, fast track those. But, likewise, if projects that are in at an early stage of development and, especially if they don't have planning, they are likely to face delays. And, you know, that group connection that they have in their hand now, which says twenty twenty nine, may well become twenty thirty five plus if they haven't passed the relevant gating criteria by by the deadlines. So I think this represents more challenges for developers. It puts those operating batteries or those batteries which are in construction or, you know, have reached financial investment decisions already, they are going to be better placed to take advantage of the near term positive revenue environments that we are currently seeing.

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

And those ones are the more early stage look to be facing further delays. So just to how what does this all mean, and how do we round this all up? So in the context of everything we've spoken about, it's worthwhile coming back to what we said at the beginning around where we are where we are at in terms of the sales process. Just

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

as

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

a quick reminder, we began marketing this portfolio back in the late summer. We were very encouraged by the the amount of bidders and interested parties that that were involved and engaged with us. We shortlisted those down over a two stage process and went into exclusivity with a preferred bill in December. That exclusivity was recently extended until the March 10 as we look to close out outstanding due diligence quest queries and and work streams. So talking about, you know, what what might happen, it's important to remember that that any any definitive agreement we reach is subject to shareholder approval.

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

We will be publishing well, assuming we we reach definitive agreement, we will be publishing a circular, which will contain detail of the transaction and how we would expect to return the proceeds back to shareholders. At the moment, our intention is to do it through a member's voluntary liquidation. And so but as I said, all more details will be published in that circular. In the event that, the transaction does not happen either by way of not reaching definitive agreement or, the shareholder vote is negative, obviously, the company will continue. All of the trends and and initiatives that Paul's mentioned already would be would be worked through.

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

Sorry. I'm having a a back which is ironic. The, That that would involve talking to our our revenue optimizers around tolling arrangements and looking to increase the proportion of contracted revenue and our revenues. We'd also seek to explore leveraging options to try and deleverage back from where we currently are so that we put ourselves in a more stable and and robust position to manage better the, any any short term revenue volatility. And we we are very positive around that and the prospects for doing that.

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

However, it's worth remembering that in at our IPO, we we set out a mechanic whereby we would put the company forward for a continuation vote in the event that our NAV was below £250,000,000 as of thirty first December twenty twenty four. That, criteria has been triggered. Therefore, a continuation vote will be tabled. The sales process may impact that, but, fundamentally, what we've tried to do is put shareholders in the most informed position, so that, a, they have up to date revenue information and and our views on the market and the prospects the near term prospects of the company. But also, if they so choose, it's now an opportunity to exit on the, knowledge that we have run a very competitive and thorough marketing process rather than doing that post a failed continuation vote, in which case we would be, at a competitive and commercial disadvantage.

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

So we feel that we have given the power to the shareholders to make the best best decision with the full information that's available to them now. So that concludes our presentation. We will now turn to some of the q and a.

Operator

Max, Paul, thank you very much for your presentation. Ladies and gentlemen, please do continue Guys, as you can see, we have received a number of questions throughout today's presentation. And perhaps if we dive straight into it, the first question we have here reads as follows. How sustainable is the revised dividend policy?

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

Yeah. Thank you for the question. So just to reiterate, the policy remains as it was amended recently, which is we are aiming to pay out 85% of the cash flow that we generate over the period, at least 85%. The guidance around the 4p per share is is very much linked to the assumption that revenues over the current financial year will be in line with that valuation forecast that we put up. So to the extent that the revenues are higher, that that could be a higher number.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

To the extent they're lower, it could be a lower number. So as Max said, this is not a firm not a firm dividend guidance. In terms of what the future looks like, I would say you've got that view of revenues increasing and the macro drivers behind that, but we know that there could be better or worse years. So, it and that's the reason we've moved to that more dynamic policy around dividends rather than a fixed pence per share target. I think going forward, so I would say in addition to what we've been covering to date, there will have to be debt repayments factored in.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

So not all additional free cash flow would be able to be distributed to to to shareholders through dividends. There will need to be an element of debt amortization there. So it it it's very much linked to what's going on in revenues going forward as to what that dividend will look like. But as I said, we do see the fundamentals are all strong in terms of supporting that increased increased revenue. So, hopefully, that's helpful.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

I appreciate it's probably not as as direct and clear as you would like, but, unfortunately, the the the markets we're operating in do lead to that that that uncertainty around revenues going forward, hence the dynamic policy.

Operator

Thank you. The next question we have here from an investor is DNO. What is this, please?

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

Yes. So DNO stands for for distribution network operator. Apologies. We should have been clear on that. As opposed to the TSO, which is the transmission system operator, the DNOs basically operate the more local distribution networks.

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

So, all of our projects are distribution connected rather than transmission connected. What that means is when we apply, applied for the connection in the first place, they have to interact with the local distribution network operator and not with National Grid. So National Grid manages the transmission system. Various companies, such as UK Power Networks, SSE, Western Power Distribution, depends on where they are, they they manage them all localised. And going the transmission route or the distribution route has its pros and cons, but we can elaborate on that in another another session.

Operator

Thank you. The next question we have here is, what is the potential level of tolling revenues from the market sounding you made? How does it compare to the levels you show on slide 11?

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

Yeah. Good question. So flicked back to Slide 11 just so we've got that in front of us. So I would say right now, if you were to be locking in sort of anything from a two year toll all the way up to a ten year toll, you're probably locking in something that's close to the lower end of where we're starting. So if you look at sort of 70 to 80 mark, that's probably where you're at.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

But the caveat to this would be these revenue projections here are all in real terms. So that means that as we go forward, we expect the real amount the actual amount of money that we receive will be higher than that due to inflation being added on top of these these projections. The tolls that you are able to put in place are typically fixed, not index linked. So they're actually if I lock in a £70,000 per megawatt per year toll today, that's actually declining in value in real terms over time. So that's the balance we've got, is looking at how long would we want to lock in and how much of the portfolio.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

And I think we would never be looking to put 100% of the portfolio into tolls, and we would be unlikely to be going for long term agreements due to that sort of degradation of value over time through inflation. So I think a reasonable strategy would be looking at a sort of a shorter term tolling agreement for a portion of the portfolio.

Operator

Thank you. The next question we have here is, do your assets offer the potential to increase duration further if you wanted to?

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

So the answer is, right now, a limited ability on the footprint that we have available to us. So most of the projects, we have sized the footprint to to fit on the two hour duration. I think the caveat to that would be that there is often spare land around which we could look to go and get planning, to increase the footprint, and and negotiate with the landowner so that that's a possibility. But I would also draw attention to the technological advances, and and just improvements in battery technology, cell density may well mean that by the time we come to repowering these batteries in, say, fifteen years' time, we might well be able to fit four hours on the same footprint that we currently fit two hours.

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

Or or sooner if if the

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

commercial landscape allowed and it was it was cost effective for us to do so. So if a business case for four hour duration battery becomes more prominent, to be honest at the moment, we do feel it's in its infancy and not fully not not yet ready for, for for for for an investment. But if it if it become if that changes, then, yeah, we would look to ways to increase the energy density of the footprint that we are currently using. And that may be, through technological advances, or it may be, as as Paul said, trying to increase footprint and add on additional containers. But it's a good interesting question.

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

If you compare our Pillsworth project with our Bumpers project, which were roughly a year in between each other in terms of the construction timing, the it's rough and, again, roughly the same number of megawatts and megawatt hours. I think I I forget the actual numbers, but it's roughly 55 containers for for bumpers and about 75 for for bills with. So that just shows the the advance of, between and that's just in one generation of of mega pack from from Tesla. So so, you know, the the this this, sector, the technology technological advances are are happening fast. So it's reasonable to assume that we could increase, duration simply by upgrading existing existing infrastructure.

Operator

Thank you. The next question we have here is, are there any make whole penalties or exit fees on the debt if repaid early?

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

It's no no make whole penalties. So there are some debt facilities which have very punitive, sort of early repayment terms. We don't have that. There is a sort of fairly standard project finance early repayment fee that does disappear in about a year's time. So it's a relatively small prepayment fee for the next twelve months and then and then there would be no prepayment fee.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

I'm actually reasonably confident we could negotiate the fee down. I think the bank would see it as a sort of a nice positive if they were to get a bit of a bit of prepayment for just deleveraging. If we were to repay the whole, the whole facility, that might be a different different matter.

Operator

Thank you. The next question we have here is, what is the total prospective supply versus the CP30 target? You mentioned that some areas are seven times oversubscribed. What is the overall supply picture? I take on board all your points about potential delays and issues with this new supply actually materializing.

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

Yeah. We we don't have the we don't have the actual figures to hand, but the seven times oversubscribed point was more, just drawing on the existing consultation, which talks about zones and, various, the countries under the CP 30 is divided into zones, and each of those zones has a certain amount of capacity allocated to it as a target, for various technologies. And it's just making the point that for some of those zones, the amount of batteries that are in the planning system and in the capacity market, register to be built in the future in those zones is way in excess of what the CP 30 limits are. So in terms of again, if you're developing a new project, risks to to your grid connection timetable for those are twofold. First of all, it's how advanced is your project in relation to planning lease, financial investment decision, your procure construction procurement, etcetera?

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

And the second one is, even if you've done all those things, are there are there already too many, assets in front of you in the queue in that zone? So it's it's it needs a lot of thought and analysis and planning from from the development point of view.

Operator

Thank you. The next question we have here is, what is the current CapEx cost per megawatt hour for new batteries?

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

So there's been a couple of, couple of surveys on this recently. So, Modo did a pretty comprehensive survey, and they they got a fairly wide range, I think it's fair to say, of of of what people are actually paying, and that is because each site is quite quite different in terms of how much you pay for your grid connection. And, and also the caveat to all of this is that the the CapEx surveys tend to miss out the actual acquiring of the project rights in the first in the first instance. But as a ballpark figure, you'd be somewhere for a two hour battery, somewhere between 500 and £600,000 per megawatt. So that's for a two hour battery.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

On top of that, you'd be looking to pay where you you would you would have to buy those project rights. So you have to find get the project from the developer who's got planning the land options, and the grid connection rights. So that could add anything from 50,000 to £200,000 per megawatt depending on what position that developer's in, what how what how good the site is, is it strategically important. So there is a wide range, but pure CapEx, I would say you're in that 500,000 to £600,000 per megawatt for a two hour battery.

Operator

Thank you. The next question we have here is how are developments in the balancing mechanism and other aspects of new revenue impacting the bottom line in the most recent quarter?

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

Yeah.

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

It's giving back to Yeah.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

It's a good question.

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

This one, isn't it?

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

It Yeah.

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

There's a big difference.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

This one.

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

Okay.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

So so, yeah, I think it it it it is a good question. You can see balancing mechanism, in December, for example, became quite a big part of what of what we were doing and that was really good to see. It's then dropped off a bit in January, but the the reason for that is actually because the wholesale markets were so strong in January, it made sense for us to commit more capacity into those wholesale markets and not take the chance of whether or not, Nesto would call us in the balancing mechanism.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

So we've got a certain amount of capacity. We can choose to commit that day ahead or intraday within the wholesale markets or we can leave it and we can submit our pricing to to the control room who may or may not choose to use the the battery an hour before they they they need it. So and and that's through the balancing mechanism. So we've got that choice which is being made all the time. And when the wholesale prices get to a certain level, it's not worth taking that risk that you're not called.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

So we could probably have squeezed a bit more out of this by leaving a little bit more capacity to the balancing mechanism, but your certainty around achieving that revenue is then reduced. So it's becoming more important. The other products, so we mentioned balancing reserve and quick reserve, they've really acted to support the control room in using the balancing mechanism. So they go hand in hand. So whilst we don't actually see you see balancing reserve here, the purple, it's a relatively small part, but actually it's really important in enabling some of this larger green bar.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

So they go hand in hand. So how much have they played compared to just the spreads being wider? It's difficult to split out and with with with sort of confidence, but I I would say the balancing mechanism and and those additional services are really gonna be adding a little bit on top. So you're talking sort of maybe 10% incremental value to if you were just trading in wholesale markets.

Operator

Thank you. The next question we have here is, are you pursuing floor route to market to capture potential up size while securing a minimum level of revenues?

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

Short answer is is is no. And the reason behind that is when we have looked at the floor products which are on offer, the floors are still set at a very low level. So, whilst it provides a theoretical downside protection, it's actually protecting against unrealistically low scenarios for a sustained period. They typically require you to lock in a much longer term agreement. So we we like to have flexibility.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

So we don't typically sign up to long term optimization agreements so that we can see if which optimizers are doing a good job move around if that makes sense. And you're giving away upside through higher fees in exchange for that floor, which we're not valuing so well. So what we've looked at rather than that is that approach of partial tolling, which I talked about where we wouldn't put the whole portfolio into a tolling agreement. But if you put a partial part of the portfolio into a tolling agreement, you effectively create a floor. Yes, you give away some of the upside if things are going very well, but under most of the sort of more realistic scenarios, you're in a better place.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

So that's the way that we've analyzed and then looked at it. So just because we don't see the floors of being an attractive commercial proposition right now, if the offers change and they become attractive, then there's no reason we wouldn't consider it, but it's not been attractive to date.

Operator

Thank you. The next question we have here is, when deciding whether to buy new batteries, does Harmony compare the potential investment return to the investment return from buying back Harmony Energy shares?

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

We certainly would do. I think the reality is that we have not been in a position to make those sort of decisions. So we've obviously raised equity through two raises. And given where the shares are trading and have been for a period of time, there hasn't been an opportunity to go and raise additional equity to give us the ability to go and buy new projects. And similarly, we've got certainly as much debt as we would want to have in the structure right now, so we wouldn't go out and raise debt to buy new projects.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

But if we were sitting on a large cash balance and we were thinking about what to do, that would certainly be the calculation. And I think it would be a pretty easy calculation given where the shares are currently trading compared to now.

Operator

Thank you. The next question we have here is, do you see scope to reduce OpEx further in due course?

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

I would say not significantly. I think the OpEx that we have across the portfolio, the largest elements are really a lot of it is contracted for fixed on the over the long term and that's sort of long term maintenance contracts with battery suppliers. Potentially, there is something we could do on the Envision project, so the Hawthorne Pit and and Wellmore Green projects, which don't use Tesla batteries. They are long term contracts, but they are there is an ability to, to to to break those contracts at five yearly in increments. So but our assumption is that actually that would increase risk significantly and risk warranties.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

So that's not part of a base case strategy, but it's something that we could definitely look at in five years' time. Other than that, the large OPEX items are really driven by things which are not, not within our control, and that's things like network charges paid to the distribution network operators and insurance costs. And those insurance costs are linked to replacement costs. So if CapEx goes down, the insurance cost should go down. Equally, if we're insuring some revenue around business interruption.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

So if revenue is higher or lower, that should move a bit. But we've got limited ability to influence that and those network charges are set by the DNOs on an annual basis and that there isn't, again, an ability to influence those. So there might be some more things we can pull together and try to get economies of scale across the portfolio, but I don't see a massive sort of opportunity on the OpEx side.

Operator

Thank you. The next question we have here is why has the reconciliation revenue stack increased so much recently?

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

That's a very good question. Essentially, this is linked to how much money we're making through wholesale and balancing mechanism trading. So we we have a very good estimate of how much we're gonna make pretty much immediately. Some of the some of the amounts that we are paid are subject to reconciliations from Alexon, who is the sort of the electricity system administrator. So until we actually get invoices from Alexon which confirm our estimates, we do not book those those those revenues.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

So we take a conservative view on that and book them as they come. To the extent you're making more money and trading more energy through wholesale and balancing mechanism, those amounts get get larger. So effectively, these are sorting themselves on out on a month plus one, month plus two basis. So it's just the fact that as we went into that winter period, we started trading more, the wholesale spreads were wider, so therefore those, those that element of revenue was larger. It's showing through there.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

So I think we could probably reallocate that to trading, But we've always taken the view of splitting it out because that's the way we recognize it. It's not revenue that was necessarily earned in that month. So we wanted to differentiate that. But effectively, it's linked to trading revenue.

Operator

Thank you. The next question we have here reads, to clarify, when you mention CapEx of 500 to 600 k per megawatt for two hour duration, is that per megawatt or per megawatt hour?

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

That's per megawatt. So, yeah, you can halve that to get the per megawatt hour.

Operator

Perfect. Max, Paul, I think that concludes all the questions. And thank you for answering all those questions you have from investors. And of course, the company can review all questions submitted today and will publish those responses on the Investor Meet company platform. Just before redirecting investors to provide you their feedback, which I know is particularly important to the company, Paul, could I please just ask you for a few closing comments?

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

Yes. Thank you very much, everyone, for taking the time to listen today. Just to reiterate, we're really pleased with the progress in terms of getting that portfolio fully operational. We do think that makes a huge difference to the way that the company is looking for the next twelve months. We're seeing those positive revenue, sort of signals coming through, and and and looking for that to continue over over the next twelve months, and, we look forward to updating you on the, the outcome of the ongoing sales process in due course.

Paul Mason
Paul Mason
Managing Director at Harmony Energy Income Trust

But thank you very much for your time.

Max Slade
Max Slade
Commercial Director at Harmony Energy Income Trust

And just to add that we and the board remain at your disposal to answer any further questions you may have, so please do reach out via your contact either at Comarco or either of our joint brokers, Panmure, Liberum, and Stifel.

Operator

Max, Paul, thanks for updating investors today. Can I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations? This will only take a few moments to complete, and I'm sure it'll be greatly valued by the company. On behalf of the management team of Harmony Energy and CommTrust PLC, we'd like to thank you for attending today's presentation, and good morning

Executives
    • Paul Mason
      Paul Mason
      Managing Director
    • Max Slade
      Max Slade
      Commercial Director
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Key Takeaways

  • The company achieved fully operational status for its battery portfolio, completing final projects and boosting operational capacity by 40% year-on-year.
  • During the year, battery revenues were low but improved with a strong correlation to high wind generation and enhanced use of the balancing mechanism—trade volume quadrupled—and in Q1 2024/25 the group earned 63% of FY23/24 revenues.
  • For valuation and dividend purposes, third-party forecasts show revenues at a low point on a long-term growth curve driven by rising renewables, with a flexible approach to tolling agreements and a targeted dividend of ~4 pence per share covering at least 85% of cash flow.
  • The sector faces headwinds from declining battery CapEx (approximately £500–600 k/MW for two-hour units), congestion in project queues, potential REMA zonal-pricing reforms and grid-connection changes, though net-zero policies remain supportive.
  • Harmony is in exclusivity with a preferred bidder for a potential portfolio sale, seeking shareholder approval and planning a member’s voluntary liquidation distribution, while also preparing for a continuation vote if NAV falls below £250 million.
AI Generated. May Contain Errors.
Earnings Conference Call
Harmony Energy Income Trust H2 2024
00:00 / 00:00

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