Europe’s gas-fired power plants attract opportunistic investors

The logo of French group GDF Suez is seen on a building in the financial district of La Defense, near Paris August 1, 2013. (REUTERS/Benoit Tessier)

LONDON: Most of Europe’s modern, efficient gas-fired power plants are losing money at the moment but some are attracting investors, who are betting on rising power prices and willing to support them through the tough times.

Trading houses and investment funds from Europe and Asia have shown interest in snapping up power assets in Europe at reduced prices from utilities, which are selling them off to reduce their mounting debts.

“These focused investors are liquid and looking for well-structured plants to buy. They have a deep knowledge of power sector dynamics and trends, and they see value in semi-stranded assets,” said one senior banker involved in facilitating some of the deals.

“This [trend] has started in the U.K. and will move into Europe relatively quickly in the second part of the year,” he said.

Vitol two weeks ago concluded the purchase of Britain’s largest combined-heat-and-power (CHP) plant from Phillips 66. Australian bank Macquarie led an investment group that bought EDF’s U.K.-based Sutton Bridge gas plant late last year.

Trading houses such as Vitol have been struggling to maintain margins from their core trading activities due to tighter regulation and a drop in volatility of commodity prices.

In their quest for diversification, they are starting to invest some of their accumulated wealth in physical assets such as power plants and oil refineries.

Evidence that the trend is spreading to continental Europe is emerging. Earlier this week, GDF Suez said that it had agreed to sell 50 percent of a power plant portfolio in Portugal including gas-fired, coal and renewable power plants to Japanese trading house Marubeni.

Financial details of these deals are seldom disclosed, but banking sources who have seen the figures said they were very low, albeit fair value.

Utilities across Europe have been hit by high gas prices and low power contracts, which have squeezed their profit margins.

Companies from Dublin to Berlin and Stockholm to Lisbon have announced plans to divest or mothball power plants that are underperforming.

Swedish state-owned utility Vattenfall wrote down the value of its gas and coal-fired power plants at Dutch subsidiary Nuon by 14.5 billion Swedish crowns ($2.2 billion) in Q2.

Germany’s E.ON last month mothballed its Malzenice gas-fired power plant in Slovakia, just over two years after it started operating.

For investors with cash to spare and time to wait, these low-priced assets may provide an ideal opportunity.

In a July poll of 370 companies active in mergers and acquisitions (M&A) carried out for law firm Clifford Chance, 44 percent of respondents said that Europe’s economic uncertainty had increased their appetite for opportunistic M&A deals in Europe.

“Bidders regard current asset valuations as an opportunity to secure high-quality assets with growth potential at reasonable valuations,” said Andrew Whan, Tokyo-based partner in M&A at Clifford Chance.

Europe’s growing dependence on renewable energy is likely to mean a parallel need for backup capacity to fill supply gaps when the wind is not blowing and the sun is not shining.

Experts agree that these gaps will largely be filled by highly responsive and efficient gas-fired power plants, which are quick to switch on when they are needed.

Several countries, such as Britain or Germany, are weighing options to create a market in which backup capacity will be rewarded financially to remain on standby, also known as a capacity market.

These prospects have raised the interest of investors, who are betting on a recovery in power prices and on guaranteed returns resulting from capacity market auctions.

Once market conditions turn in their favor, they are likely to sell these assets at a profit.

For utilities, selling their assets or parts of them is a way to make the best out of a bad situation.

GDF Suez said its sale in Portugal would reduce its consolidated net debt by around 600 million euros this year and another 300 million euros in 2014.

A version of this article appeared in the print edition of The Daily Star on August 08, 2013, on page 6.




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