The outlook for many dividend-paying energy firms could start to look bleak as they shift their business models away from oil & gas, but renewable energy players could help fill the void they leave behind.
As the UK, Europe and North America all rapidly transition away from coal, gas- and nuclear-powered energy towards solar and wind powered energy, they still face an obstacle, namely, the variability of the sun and wind.
This creates a real problem for electricity grid operators who are under pressure to use renewable energy sources but still also need to balance the grid and keep up with the demand for power.
This is where energy storage comes in.
Alex O’Cinneide (pictured), manager of the Gore Street Energy Storage fund, says that by solving a major problem for electricity grid operators an opportunity for investing in an asset class that is suited for paying steady consistent income has emerged. 
O’Cinneide’s £88m fund is a specialist investment trust focused on investing in battery energy storage assets that supply utility grids, which as of writing, yields a 6.7 per cent dividend.
“Our assets, which we are contracting to the grid operators who provide a service, enable the growth in renewables,” O’Cinneide explained.
He said the characteristics of battery energy storage assets make it most appealing to income investors.
“There are no operational risks with technology risk, it’s got great credit counterparties, we sell services to the National Grid and governments, we believe we’re going to be paid, and lastly a long cash tail,” he explained.
“So, the minute our assets are switched on, we get paid on a monthly basis against a range of different services, and we’re generating 10 per cent unlevered, we’re paying out 7 per cent yield on our capital and reinvesting the balance.”
He continued: “It’s got very good cash generation and we use that to support our dividend strategy with what we promised our investors and what we’ve met every quarter since we’ve been public.
“Then for growth, we raise more money to invest more and to build more assets.”
O’Cinneide recalled how a few years ago pension funds and insurance companies started investing directly into solar and wind as it was becoming de risked asset.
He explained: “In 2015, we started exploring where we saw a sub sector of renewables [that] had characteristics that we liked.”
These characteristics were ‘hyper growth’, an ‘attractive return base’, and ‘something that is relevant’, which is what led to O’Cinneide and the firm deciding to invest into energy storage.
“We wanted it to be material to the conversation around our transition to a low carbon economy,” he said.
Many believe the sector has incredible growth momentum behind it.
“There is an expected 60x growth in the sector in our four countries over the next 20 years, and its sector which is of critical concern,” he explained.
“Without energy storage, we frankly cannot hit our targets on carbon reduction and on changing the makeup of our grid.”
He added: “The continued penetration of wind and solar in our electricity grid, and the continued decommissioning of baseload power, which is non-renewables like coal, gas and nuclear, means that more intermittent power will drive more and more energy storage.”
Energy storage, unlike solar and wind, is a flexible asset, O’Cinneide explained.
He said: “If you own a piece of solar and wind in the UK, you’re doing one thing with it: you’re producing electrons and you’re selling electrons.”
But with energy storage, there is a whole range of different services.
O’Cinneide said: “There are different ways that the grid keeps in balance, different ways that we manage the local network. We are providing backup power to the grid at times of high demand, we have the opportunity to do things like energy trading.
“So, there [are] multiple things you can do with our asset and all of those are very big and growing markets for us.”
Since launch, the fund has taken the portfolio from 6 megawatts to more than 300 megawatts, and is targeting half a gigawatt in 2021.
Nevertheless, h there are two big material risks to solar and wind renewable energy, the manager warned.
One risk is that “there’s some horrible change in legislation because a lot of their assets still have a subsidy within them,” he revealed.
The manager said: “If the UK needs money from somewhere and decides to do something to remove that subsidy retroactively, which has happened in Spain, in Italy, [and] a little bit in the UK.”
Another big risk is that renewables are selling electricity.
“One big risk is if oil & gas keeps going down, well, then that’s going to affect returns,” he said.
But the Gore Street fund manager said the trust doesn’t have exposure to either of those risks.
He explained: “First of all, we have no subsidies, we are selling our services to the market counterparty through an auction.
“We’re not selling electricity, we’re selling hours of access to our system providing balancing service.”
O’Cinneide continued: “When we look at a proposition versus the general energy market, we think, ‘well, you need to be on the renewable side of the equation here because that’s a declining asset value over there’.
“Our proposition in renewables is that we’re generating really strong returns, providing a critical service, and not taking on board material risks we can’t control.”
Performance of fund vs sector since launch
Source: FE Analytics
Gore Street Energy Storage has delivered a total return of 17.38 per cent since launch compared to 24.15 per cent for the IT Renewable Energy Infrastructure sector average. It is trading at a 12.7 per cent premium to net asset value (NAV), as at 24 November, is not geared, and has ongoing charges of 3.47 per cent, according to the Association of Investment Companies.