Transactions in power & utilities moving to renewables

15 September 2017 Consultancy.uk

Transactions in the power and utilities sector have increasingly moved toward renewable deals according to a new report. Overall, the second quarter was down 32% on the previous quarter, and considerably so on the same period in 2016.

The latest edition of EY’s ‘Power transactions and trends’ has seen researchers with the Big Four firm explore wider transaction activity trends in the power and utilities sector, for Q2 2017. In that period, the sector saw total deal value hit $30.8 billion, with renewables being the second biggest drivers of transaction value after the more diverse ‘other sector.’ Transmission, distribution and generation followed, with the latter generating only a small amount of value. Deal volume also ticked up, hitting more than 140 in the most recent quarter, with 66 of them in the renewables segment.

Globally, the latest quarters’ figures show a 32% decline in deal activity, compared to Q1 2017. While deal activity is still higher than 2015 levels, there was also a decline relative to Q2 in 2016. The seeming decline in activity is unlikely to continue deeper into 2017 however; as the consequences of a low interest rate environment, a surplus of global capital, a relatively favourable outlook for P&U in light of new business models, and a shift towards increasingly cheap renewable technologies drive new investment.

Global P&U value and volume

The research also indicates increased interest from corporate investors in the wider renewables space, which include battery technologies and related firms and gas-fired power plants – although the latter appear to be risky investments in light of global Paris Agreement targets.

The research also looked at investment flows in terms of both inbound and outbound investment activities. Australia leads in terms of the most inbound investment value for a single country, with 19% of total at $6 billion. China follows, with 14% of total value, or $5.5 billion. The UK saw a relatively robust 9% of total investment activity, or around $2.8 billion in inbound investment. The rest of the world contributed 20% of the total pie, or $6.2 billion.

In terms of outbound investment, the rest of the world was on top in terms of total at $4.7 billion or 41% of the total. The US clocked 9% or $1.1 billion, while the UAE saw around $0.9 billion outbound.

European deal value and volume

Europe was a relatively active market, with total deal volume representing around a third of the total at 55 deals. Total deal value was a similar proportion, with $10.9 billion. This was an increase of 12% on the previous quarter and 31% year-on-year.

The T&D segment was the most active, with network investment adding $4.3 billion to total deal value; followed by ‘other’ types. Interestingly, after a boom in Q1 2017, renewables deal value was considerably lower than before, with average deal value falling from $278.5 million in Q1 to $62.15 million; however, the report notes that volume was driven largely by renewables (55% of total), even with relatively low value.

European investment landscape

Of the total $10.6 billion in investment value, Spanish projects saw the biggest inbound investment at $2.8 billion (27%), followed by the UK also at around $2.8 billion (26%). Norway attracted $1.9 billion in investments (18% of total), while the rest of Europe saw 11% of the inbound pie. In terms of outbound, the UK investors flowed 21% of the $8.2 billion into projects globally, although this was dwarfed by the rest of Europe’s 37% share.

Matt Rennie, EY Global Power & Utilities Transactions Leader, said, “The decline in Americas deal value suggests that concerns over rising interest rates in the US and US federal policy changes may be taking their toll on investor confidence — but time will tell. Regardless, we expect the relentless march of renewables and energy reform initiatives to continue to spur an increase in deal volume globally.”

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Brexit will have major impact on UK-EU electricity flows

22 April 2019 Consultancy.uk

Brexit could have a major impact on the consumer price of electricity in the UK, according to an analysis by Sia Partners. The total costs for UK society could swell to €600 million annually due to less efficient flows of electricity.

As the Brexit process has perpetually stalled, with no realistic end in sight now until Halloween, underprepared businesses have been handed a lifeline. The scramble to prepare for a No Deal scenario can now continue for another half-a-year, and one of the key factors which companies will need to consider when drawing up these plans is the cost of accessing utilities post-Brexit. In the digital age, virtually no business can survive without a ready supply of electricity – while the pay-cheques of staff will also need to inflate to accommodate future rises in bills.

With significant cross-border flows of electricity between continental Europe and the UK, Brexit is destined to have a major impact on individuals and companies in this manner, according to new analysis by consulting firm Sia Partners. These flows of electricity are governed by common European rules, but when the UK leaves EU, Britain’s electricity markets will no longer be integrated into Europe’s ‘Internal Energy Market’.

European model

Historically, electricity grids and markets were developed on a national level. However, years ago the EU set out to achieve integration in electricity grids, on the premise that coupling grids and markets can lead to significant benefits. By making electricity flows possible, price arbitrage can be faded out by allowing buyers to access cheaper prices offered beyond the country’s own borders, driving up competition and lowering average prices.

Brexit will have major impact on UK-EU electricity flows

An analysis of electricity flows between the UK and Ireland demonstrates this. Before Ireland was coupled to the UK, commercial electricity exchanges on the UK - Ireland border flowed 40% of the time against the natural direction, i.e. from the higher to the lower price market. After more effective cooperation and regulation was put into place ('After the I-SEM' went live), the picture changed drastically, with commercial flows now following the price differential 96% of the time. Quantifying this welfare benefit is not easy: according to one estimate by ACER, the economic added value of having market coupling with implicit capacity allocation on the GB-Ireland border (1GW) amounts to around €110 million annually.

Europe’s aim is to achieve interconnection of at least 10% of their installed electricity production capacity by 2020. As it stands, seventeen countries are on track to reach that target by 2020, or have already reached it.

On the UK side, the region currently has a total capacity of around 5GW connected with mainland Europe (France, the Netherlands, Ireland, Belgium), corresponding to roughly 5% of UK’s installed capacity. In comparison with other EU countries, this ratio is on the low end; however, the UK is playing catch-up and has 10 interconnections scheduled for commissioning in the next four years.

Brexit

It's clear that the UK’s withdrawal from the EU will have an impact on electricity markets co-operation. The question which remains is how large will the impact will be? To provide a forecast for this, analysts at Sia Partners ran a modelling exercise with two scenarios in mind. After leaving the European bloc, the UK will have to make agreements with European countries, similar to how Switzerland and Norway currently operate. Norway has a deal with a relatively high level of integration with the EU’s internal energy market, while Switzerland stands at the other end of the spectrum, with the country excluded from several market coupling initiatives (e.g. MRC, XBID) and from implicit capacity allocation with any other EU member state.

“If Brexit leads to a construction which is similar to the Swiss deal, where UK’s electricity borders are uncoupled from its neighbouring countries, then there will be a major loss of welfare.”
– Sia Partners

If the UK follows in the footsteps of Norway, then the consequences of Brexit could be muted. According to Sia Partners’ calculations, the economic loss would be minimised in the mid-term, with only operational challenges expected. For example, the implementation of pan-European projects, such as XBID, could run into delays in the UK. The EU currently has 7 of such interconnection projects scheduled for completion before 2022.

“In case a Norwegian style deal is struck, the UK will lose its decision power related to EU energy policy but it would allow keeping the benefits linked to the internal energy market not only for itself but also for Ireland and continental Europe,” the researchers state.

If, however, a Swiss deal is struck, then the projected costs could range between €500 million to €1 billion. An expected 60% of this loss will be borne by the UK, 16% by France, and 8% by Belgium, the isle of Ireland and the Netherlands. The researchers concluded that if Brexit leads to a construction which is similar to the Swiss deal, where UK’s electricity borders are uncoupled from its neighbouring countries, “then there will be a major loss of welfare.”