Wednesday 2 March 2011

Assets Changing Hands Again

The long-running saga of who owns the UK's energy infrastructure continues, as E.on (Germany) sells its electricity distribution grids in the Midlands to PPL (USA). This follows the sale by EDF (France) of its own UK networks to CKI (Hong Kong). A number of C@W readers don't like this kind of free trade in key assets, but then again, others of us think it's just fine. It's been going on since (from memory) 1995, when the first of the privatised Regional Electricity Companies to be gobbled up - SWEB - was taken by Southern Co (USA). I daresay it will continue for years to come.

To me the more interesting aspect is what it betokens at this juncture. And the answer seems to be: the big Euro-oligopolists - EDF, E.on, RWE et al - are having a lean time of it, rising electricity prices notwithstanding. We predicted this back in Jan 2009: they are beset from all sides by the recessionary downturn, oil-indexed gas contracts in a soft gas market, and various other factors summarised well by E.on here.

Our old friend Mr W pointed me at EDF's annual report last week, commenting how thin their profits seem to be on nuclear generation, and how hesitant they sound on future nuke investments.

So - little wonder they need to sell assets of the type that get a decent price when interest rates are low.
As well as shifting their UK distribution assets, they have also offloaded half the French grid to another state-owned entity in order to improve their debt ratio - a neat froggie sleight-of-hand that has their private-sector rivals hopping.

But let's extend this thought process a little further, recalling that Crapper Huhne is looking to these guys to find £200 billion (sic) for power & gas infrastructure investments over the coming years, in pursuit of his mad 'de-carbonisation'. Now we know he's ready & willing to force up electricity prices significantly in order to subsidise them on a lavish scale.

Would it be paranoid to suggest they are clearing their balance-sheets to be able to participate as much as possible in this bonanza ? They are uniquely well-suited to be beneficiaries, as Huhne's schemes are of byzantine complexity which very few companies - in fact, only the incumbents - can really get to grips with.

This would be a neat twist of fate. For years EDF has been exporting nuclear electricity to us and over-paying for our assets, all subidised by the French. Now Huhne is gearing up to repay the compliment. That kind of trade we can do without.



Budgie said...

"A number of C@W readers don't like this kind of free trade in key assets ..."

That's me, then. The reason I don't, is that it is predicated on the peculiar (and transitory) currently fashionable English cultural view that 'jonny foreigner' is a kindly soul who will look out for the English (even at the expense of his own country's interests).

I happen to believe that view is delusional. So does the rest of the world.

Steven_L said...

The thing is ND, even when you try to explain to people why green energy will make their bills go up, they are so brainwashed they think there's no choice.

If public had the same attitude to fiscal consolidation as they have green energy Cameron would be polling 60%.

rwendland said...

The "state-owned entity" that EDF have shifted half the French grid to, is actually the nuclear reactor decommissioning fund that EDF is legally bound to accumulate funds in. A clever move shifting shares rather than cash into it!

It matters less than it might seem as EDF will life extend its old 900 MW reactors to 50 if not 60 years, so decommissioning is further into the future.

I think this relatively cheap life extension will likely in due course make EDF a lot of money - but at the cost of France plc who will have to figure out how to keep Areva going in the absence of lots of replacement new EPR builds in France. Areva will have to keep exporting new nuclear, but when the Chinese start exporting new nucs around 2015 that will be tres tricky!

Nick Drew said...

Mr W: am in France just now & have been told the reason for reporting low profits on French nuke operations is because they fear popular demand for a German-style nuke-tax

encountered a senior EDF exec who laughed himself silly explaining how clever they have been with their 50% transfer of RTE

(all goes to show how little value there is in poring over their books !)

oh, and another gem: Suez are bitterly regretting the acquisition of GdF (which is how they view it), because they are having to bear the cost of GdF's hugely out-of-the-money gas contracts

rwendland said...

I can well believe transfer-pricing games are going on.

But if they shift profits to the supply side of the business don't they risk popular demand saying that supply profits are excessive, and electricity prices should be cut to domestic customers? The game does not seem quite so easy!

rwendland said...

It strikes me that the best chance of making money out of new nuclear is to wait until about 2020 when some Chinese designs get NII clearence, and build some of those. I wonder if that thought has crossed the minds of Horizon Nuclear Power (E.ON UK and RWE npower joint venture) who are currently considering both the EPR and AP1000 designs for the UK?

The Chinese have a large domestic market, that will share out the huge fixed costs of the business. Adding in the low labour costs, extensive heavy engineering base and skills, and cheap capital advantages the Chinese have, I find it difficult to see how others will be able to compete aginst them in new nucs unless political measures are taken.

Had the Areva EPR been a star at birth with on-time on-cost delivery it could have developed a critical sized business ahead of the Chinese. But it looks the ugly duckling at the party now.