Belgian power grid operator Elia System Operator announced today that it is considering buying a controlling stake in Vattenfall Europe’s German electricity network.
Elia said it has started discussions with Vattenfall but did not disclose a timeline for the process. If the Belgian operator ends up buying Vattenfall’s German network – which spans some 9,700 kilometres across eastern Germany – it would be its first investment outside of its home country.
Vattenfall reopened the bidding process for its German grid last November, after exclusive talks with a Goldman Sachs/Allianz/RREEFF consortium broke down. The operator said talks had failed because of several key issues, one of them being the purchase price. The consortium was said to have put in a bid of about €500 million.
A look at the sale of energy group E.ON’s German electricity network provides some insight into what sort of price Vattenfall might have in mind and why infrastructure investors might have a hard time competing with strategics like Elia for this type of asset.
E.ON sold its German grid – spanning over 10,000 kilometres from the Danish border, in the north, to the Alps, in the south – to Dutch high-voltage operator TenneT late last year for €1.1 billion. That is twice the price the Goldman Sachs-led consortium reportedly was willing to offer for Vattenfall even thought the two grids do not differ significantly in size.
But one infrastructure investor at the time said his fund could never have offered the price TenneT did because Germany’s regulatory framework is unclear. He said that German regulation caps returns on equity at 8.5 percent unless the asset is outperforming but that there are not clear criteria in the regulation defining this.
Additionally, the regulator has high capex requirements, which the investor estimated at between €2 billion and €3 billion until 2014. As a consequence, when the investor probed the market, he found that he could not raise more than €400 million for the asset, well below the regulator’s capex requirements.
Vattenfall is selling its German grid as part of a European Union directive to stimulate competition and diversify ownership in the country’s electricity sector.