This week, Denmark’s DONG Energy achieved a welcome exit as it sold the Severn gas-fired power station in Wales to a consortium of investors led by Macquarie Infrastructure and Real Assets for £350 million (€417 million; $574 million). In so doing, it also encapsulated a trend.
DONG Energy is something of a pioneer at working with investment groups, whether getting them to invest in its projects or buy them. Back in December 2010, the Netherlands’ PGGM became the first-ever pension fund service provider to invest in a UK offshore wind farm before it had been constructed when it took a stake in the Walney wind farm. Almost a year later, DONG then sold off Walney’s transmission assets to investors including PGGM again as well as the likes of Macquarie Capital and Barclays Integrated Infrastructure Fund.
The trend is that many energy groups are now trying, like DONG, to get investors of private capital – whether infrastructure funds or institutional investors – to buy their existing assets or co-invest in developing new ones. And they are doing this not because they want to – but because they have to.
One market observer told us that, pre-Crisis, energy utilities and developers “had the experience and they had the capital”. This meant, he added – in a slightly sinister tone of voice – that they “didn’t used to play nice”. They certainly had little need to engage with investors because they could fund all their strategic plans from their own balance sheets.
Now things are very different. In the “new normal”, post-Crisis, they find themselves capital-constrained but with huge capital expenditure requirements. For example: they need money to spend on generation; transmission; dealing with renewable energy intermittency; to build out areas like wind and nuclear; for inter-connections; and to meet 2020 carbon reduction targets. That’s a long list – and, unlike in the good old days, they don’t have the money.
On the other hand, institutional investors – as has been well documented – have a wall of money looking for a home in relatively safe, reliable assets. So, the question that increasingly investor-friendly energy firms have been asking themselves is ‘how do I access it?’
One way is to sell off parts of what they already have so they can recycle capital into new developments. “Divesting non-core assets and thereby strengthening the capital base” was given as a reason for the power station deal referred to in the opening paragraph. It also helps to explain deals such as this year’s $1.5 billion sale of Czech gas system operator Net4Gas by RWE to Allianz and Borealis – a deal which, incidentally, is shortlisted in our 2013 Infrastructure Investor awards (click HERE to vote).
But many of the most attractive non-core assets that energy firms had in their portfolios have already been sold off. Attention is now turning to the capital needed to help fund projects in development – where the energy firms are effectively seeking joint venture partners. Here, there are huge opportunities – but also obstacles to be overcome.
To take onshore wind as an example, institutional investors will often find it difficult to invest – perhaps because individual projects are too small or there is too much early-stage risk. But this is in turn prompting innovation aimed at providing institutions with the level of comfort they need – for example, by bundling projects together into a portfolio thus providing scale as well as life-cycle diversification; as well as the use of insurance wraps.
Another obstacle is that the trend is slow moving. Part of this is to do with institutional investors’ risk aversion. It’s also down to utilities/developers finding themselves uncomfortable with these new arrangements and hence dragging their feet. “The energy firms have always built and operated these assets themselves,” points out Charles Currier, a partner in law firm CMS Cameron McKenna’s corporate department in London. “They tell us that they don’t want to become property developers where they build something and someone else gets the benefit.”
However, the kind of portfolio bundlings referred to typically involve the energy firms retaining an equity interest. This is short of full ownership, but still offers significant skin the game.
Besides, finding solutions with investors is no longer an option – it’s a necessity.