Against the current (WIR)

Just a few years ago power generation was one of infrastructure’s brightest spots. In Europe a solid framework of subsidies was in place to support renewable energy; maturing technologies allowed investors to pocket stable revenues while enjoying lower costs. Emerging markets meanwhile had few such schemes, but the increasing popularity of Independent Power Producers (IPPs) and the lack of economically viable alternatives meant that clean energy could flourish here too.

The outlook is looking dimmer now. In markets like Germany networks have failed to adapt to the new power generation mix, with such peaks and troughs in the level of available electricity that the country has at times been forced to sell it at negative prices. Onshore wind and solar assets are getting expensive at a time when subsidies are being cut across Europe; more exotic technologies are either too young or only investable on a massive scale. Conventional power is no alternative: strong exposure to volatile electricity prices remains unpalatable for most institutional investors.

Renewables in developing nations are also entering a new phase. The most established markets, such as South Africa, are witnessing strong competition; progress on power purchase regimes is on the way but slow and patchy elsewhere. Given developing economies’ power needs and potential, there are still great opportunities around, and certainly there have been some well publicised successes on a large scale. But building a viable pipeline of smaller deals is no easy task.

That doesn’t mean power-focused investors will do badly everywhere. Indeed many such specialists, such as Impax or the Green Investment Bank, are raising new funds on the back of the strong performance they’ve been able to demonstrate. But avenues to deploy the low-risk, low-return kind of capital institutions want to deploy are getting narrower. As dry powder continues to fill fund managers’ coffers, frustration may lead to wrong decisions.

Or it may lead managers to adopt a more open minded approach, as two examples from this week suggest. First, it emerged that Rijnmond Energie Facility, an 810-megawatt (MW) combined cycle gas turbine power plant, was being put up for sale in the Netherlands. The station will be sold through an auction in October after being repossessed by lenders to Rijnmond Energie CV (RECV), following a default by the project company, a subsidiary of US utility InterGen, on its credit facility.

The merits of this particular asset are fully known to the sellers only, and if the mandated advisers do their job correctly it probably won’t be such a bargain once the process concludes. But it still foreshadows a possible trend investors should pay attention to.

InterGen had been in trouble since early last year at least, when Moody’s took note of its exposure to weak merchant power markets in the Netherlands and the UK and downgraded its senior debt. But European utilities too have been suffering in the aftermath of the crisis, hit by a combination of oversupply – partly due to the rise of renewables – and weaker demand. Liquidity and solvability issues may lead more of them to divest assets, some of which will resemble Rijnmond Energie – a modern, efficient plant left stranded amid tough trading conditions for power merchants.

It may well be that financial investors could do a better job at running them – and benefit from a more clement market. “The growth in intermittent renewable generation is likely to increase supply side volatility, potentially giving rise to higher day ahead and intraday power prices. Gas plants are ideally suited to capitalise on this value given their relative flexibility compared to other generation types, particularly coal,” Talbot Hughes McKillop, the restructuring firm in charge of marketing Rijnmond Energie, told us on Tuesday.

Less thinly stretched than utilities, and more flexible in their strategies, financial owners could also put the asset to better use by redefining its ambitions. The future owners of Rijnmond Energie, for instance, will have the option to dismantle, relocate or recommission the plant in another country or region.

Another interesting development this week was the signing of a $500 million partnership between African Infrastructure Investment Managers (AIIM), a Cape Town-based fund manager jointly owned by Australia’s Macquarie and South Africa’s Old Mutual, and French developer MECAMIDI to develop up to 200MW of hydro power in parts of Africa. Alliances between managers and developers are not a new feature on the continent, as precedents by Actis or AIIM demonstrate. But this time there is a new angle: MECAMIDI is a specialist in small and medium-sized hydro plants, and indeed the tie-up will focus on building run-of-river power stations of up to 50MW.

Less environmentally and socially damaging, small plants are also quicker to develop and more flexible than larger-scale projects. Additionally, they can be aggregated in an attractive, diversified portfolio that’s likely to interest other institutional buyers further down the line. As such they may represent a promising template for rolling out renewable technologies in emerging markets, and could become a crucial complement to high-profile projects like the 400MW Kpone IPP in Ghana and the 450MW Azura IPP in Nigeria (in which AIIM is also an investor).

Much like electrons between poles, power markets are in flux almost everywhere. But instead of remaining hard-wired to past convictions, investors should view it as an opportunity to carve new niches for themselves.