Costa Watt
Events in the Spanish power sector over the past month have left
the market dazed and confused. Barely had bankers and power
sponsors had time to absorb the complexities of the failed merger
between the Spanish power moguls, Endesa and Iberdrola, than
pressure was mounting from a flock of European power companies for
a stake in Hidroélectrica del Cantábrico (Hidrocantábrico), the
smallest domestic power group.
Endesa and Iberdrola's year-long struggle to broker a merger deal, in which Iberdrola would agree to a friendly takeover by its main rival Endesa, ended on February 5. This followed a government announcement a few days before that it would allow the merger but would limit the market share of the two groups.
Three days later and the deal was in tatters.
Had the deal gone through the combined group would have had a market share of 68% in generation and 79% in distribution and supply. Its nearest competitors, Union Electrica Fenosa and Hidrocantábrico, only have 20% in generation and 15% in distribution.
With such a powerful hold on the market, it is little wonder that only days after Endesa and Iberdrola's plans had broken down, the market was speculating on whether a foreign utility such as Germany's Eon ? formed following the merger of Viag and Veba ? would step in to bid for the discarded Iberdrola. Eon denied it was considering bidding for Iberdrola although conceded it was looking at investment opportunities in Spain.
Meanwhile, by the middle of the month, Germany's Energie Baden-Württemberg (EnBW) was poised to drop out of the bidding contest for Hidrocantábrico, after its Spanish partner, Ferroatlántica clashed with the Spanish market regulator. Among the other groups bidding are Germany's RWE and Electricidade de Portugal.
Other would-be bidders for Hidrocantábrico have already been spurned. Among them are its Spanish competitor Union Fenosa ? which had its takeover bid blocked by the Spanish government in May 2000 ? and TXU, the US power group, which tried and failed to take over the company at the start of 2000 together with Electrabel.
And so the battle ? and to some extent the confusion ? continues. But with everything still to play for, independent power developers are playing a confident waiting game.
Of all the western European electricity markets, Spain and Italy hold a strong allure for foreign companies. Both countries are moving quickly towards deregulated markets with governments pushing for increased pricing competition. Both countries also have fast growing demand for electricity. And surprisingly, with the exception of a few hydro and wind projects, the last major Spanish financing for a power project was in 1994 for the $890 million Elcogas 320MW power plant.
Spain has thus become a target not just for European utility conglomerates such as RWE and Eon but also for independent power developers such as AES, Enron, BP Amoco and NRG Energy.
According to Ana Nogales and Karl Nietvelt, analysts at Standard & Poor's, Spain is one of the test markets for IPPs. Consider the facts:
? In the first eight months of 2000, electricity consumption in the country grew 6.6% and the average since 1995 is 5% a year. This comes on the back of a buoyant domestic economy.
? Spain is one of the fastest growing economies in the European Union with a GDP of 3.7% in 1999 and a forecast 3.5% for the next four years.
? Electricity consumption is still below European averages and is perceived to have room to grow.
? Only 3% of the country's total electricity in 1999 was imported. This is partly due to the country's limited interconnector capacity ? between France and Spain, for example, only 1,100MW is carried using existing cables. Plans for further links across the Pyrenees with a capacity of 1,600MW are politically sensitive and limited by geography.
Enron has been quick to establish its turf in Spain. It has been active in the country since 1996 and opened its Madrid office in 1998 to develop project finance, risk management and asset development business. Last year, the company received authorisation from the Spanish government to go ahead with its Arcos de la Frontera power project in southern Spain. The project, which was the first to pass through the government, involves the construction of a 1,200MW combined cycle gas-fired power plant. The majority of the project will be financed on a non-recourse basis. There has been some speculation that Enron will choose to finance the Eu450 million deal with a euro denominated project bond similar to the one the company used on its UK Sutton Bridge project.
Enron also has plans to build a 1,600MW power plant in Catalonia. Located in the Mora la Nova municipality, the project will be a combined cycle gas-fired power plant with an estimated project cost of Pta100 billion ($600 million).
US rival, AES is also working on a deal in Escombreras near Cartagena in Murcia. The project involves the construction of a 1,200MW combined cycle gas turbine project and so far the project has already achieved the necessary approvals.
Both companies are moving cautiously forward, waiting to see how the Spanish power pie is divided up.
According to Stuart Lawton, managing director, European corporates at Standard & Poor's, there are three main IPP drivers to consider in Spain. ?First you have to consider the dynamics of the market ? there is more and more demand for power and the economy is growing. At the same time the lack of interconnectors means there is potential for long-term demand for power.? However, the third dynamic ? cost of fuel ? is a downside.
Among the generation projects in the pipeline, most focus on building gas-fired power stations ? in keeping with EU regulations. This can be brought from Magreb in Algeria. Work is in progress on building LNG terminals in Portugal and Spain to bring gas from the Atlantic LNG project in Trinidad. BP Amoco is working with local sponsors Repsol, Iberdrola and the Basque Energy Agency on the construction of a regassification terminal in Bilbao to process the LNG. The plant will import 2.7 billion cubic metres a year.
Much depends on the completion of this terminal, with a number of generating plants reliant on its gas. Until these terminals are in place gas prices in Spain remain prohibitively high for some power developers. ?With gas prices so high, some independent power producers are a bit hesitant about proceeding with their projects,? says Lawton. ?But gas prices are likely to come down. So for these companies it is just matter of drawing breath.?
And while some parts of Spain have been particularly active in developing hydroelectric and wind power projects in the past few years, a number of which have been financed on a non-recourse basis by domestic banks, large-scale projects are likely to rely on gas.
But the overall factor driving IPPs in Spain centres on how the power sector will be carved up. Says one London-based banker: ?What they are wondering is if a foreign player comes in, will this upset the dynamic of the market.? Those companies with a greenfield project are unlikely to build in a volatile market.
However, recent laws and government rulings have made it clear that the government wants all aspects of the electricity market to be open. In addition to the generating projects that have received initial approval, the Spanish government has also approved a number of foreign companies to buy and sell electricity in the domestic market. Among them are Aare-Tessin, Electricite de France, Electrabel, Enron, Office National de l'Electricite, Rede Electrica Nacional and EnBW.
Despite some hesitancy by the government, the generation market is essentially deregulated. Foreign and domestic companies are allowed to build new generation facilities, providing they meet the economic, technical and environmental requirements. So far 31 projects, with a combined capacity of 21GW have received approval from the government. Over half of this relates to projects being developed by Endesa and Iberdrola and, because of this, the government has restricted these two companies from building further capacity for up to five years. Potentially this is good news for foreign developers, but it does not affect the 31 projects approved which means there is a considerable backlog of projects to be financed either on- or off-balance sheet.
Endesa and Iberdrola's year-long struggle to broker a merger deal, in which Iberdrola would agree to a friendly takeover by its main rival Endesa, ended on February 5. This followed a government announcement a few days before that it would allow the merger but would limit the market share of the two groups.
Three days later and the deal was in tatters.
Had the deal gone through the combined group would have had a market share of 68% in generation and 79% in distribution and supply. Its nearest competitors, Union Electrica Fenosa and Hidrocantábrico, only have 20% in generation and 15% in distribution.
With such a powerful hold on the market, it is little wonder that only days after Endesa and Iberdrola's plans had broken down, the market was speculating on whether a foreign utility such as Germany's Eon ? formed following the merger of Viag and Veba ? would step in to bid for the discarded Iberdrola. Eon denied it was considering bidding for Iberdrola although conceded it was looking at investment opportunities in Spain.
Meanwhile, by the middle of the month, Germany's Energie Baden-Württemberg (EnBW) was poised to drop out of the bidding contest for Hidrocantábrico, after its Spanish partner, Ferroatlántica clashed with the Spanish market regulator. Among the other groups bidding are Germany's RWE and Electricidade de Portugal.
Other would-be bidders for Hidrocantábrico have already been spurned. Among them are its Spanish competitor Union Fenosa ? which had its takeover bid blocked by the Spanish government in May 2000 ? and TXU, the US power group, which tried and failed to take over the company at the start of 2000 together with Electrabel.
And so the battle ? and to some extent the confusion ? continues. But with everything still to play for, independent power developers are playing a confident waiting game.
Of all the western European electricity markets, Spain and Italy hold a strong allure for foreign companies. Both countries are moving quickly towards deregulated markets with governments pushing for increased pricing competition. Both countries also have fast growing demand for electricity. And surprisingly, with the exception of a few hydro and wind projects, the last major Spanish financing for a power project was in 1994 for the $890 million Elcogas 320MW power plant.
Spain has thus become a target not just for European utility conglomerates such as RWE and Eon but also for independent power developers such as AES, Enron, BP Amoco and NRG Energy.
According to Ana Nogales and Karl Nietvelt, analysts at Standard & Poor's, Spain is one of the test markets for IPPs. Consider the facts:
? In the first eight months of 2000, electricity consumption in the country grew 6.6% and the average since 1995 is 5% a year. This comes on the back of a buoyant domestic economy.
? Spain is one of the fastest growing economies in the European Union with a GDP of 3.7% in 1999 and a forecast 3.5% for the next four years.
? Electricity consumption is still below European averages and is perceived to have room to grow.
? Only 3% of the country's total electricity in 1999 was imported. This is partly due to the country's limited interconnector capacity ? between France and Spain, for example, only 1,100MW is carried using existing cables. Plans for further links across the Pyrenees with a capacity of 1,600MW are politically sensitive and limited by geography.
Enron has been quick to establish its turf in Spain. It has been active in the country since 1996 and opened its Madrid office in 1998 to develop project finance, risk management and asset development business. Last year, the company received authorisation from the Spanish government to go ahead with its Arcos de la Frontera power project in southern Spain. The project, which was the first to pass through the government, involves the construction of a 1,200MW combined cycle gas-fired power plant. The majority of the project will be financed on a non-recourse basis. There has been some speculation that Enron will choose to finance the Eu450 million deal with a euro denominated project bond similar to the one the company used on its UK Sutton Bridge project.
Enron also has plans to build a 1,600MW power plant in Catalonia. Located in the Mora la Nova municipality, the project will be a combined cycle gas-fired power plant with an estimated project cost of Pta100 billion ($600 million).
US rival, AES is also working on a deal in Escombreras near Cartagena in Murcia. The project involves the construction of a 1,200MW combined cycle gas turbine project and so far the project has already achieved the necessary approvals.
Both companies are moving cautiously forward, waiting to see how the Spanish power pie is divided up.
According to Stuart Lawton, managing director, European corporates at Standard & Poor's, there are three main IPP drivers to consider in Spain. ?First you have to consider the dynamics of the market ? there is more and more demand for power and the economy is growing. At the same time the lack of interconnectors means there is potential for long-term demand for power.? However, the third dynamic ? cost of fuel ? is a downside.
Among the generation projects in the pipeline, most focus on building gas-fired power stations ? in keeping with EU regulations. This can be brought from Magreb in Algeria. Work is in progress on building LNG terminals in Portugal and Spain to bring gas from the Atlantic LNG project in Trinidad. BP Amoco is working with local sponsors Repsol, Iberdrola and the Basque Energy Agency on the construction of a regassification terminal in Bilbao to process the LNG. The plant will import 2.7 billion cubic metres a year.
Much depends on the completion of this terminal, with a number of generating plants reliant on its gas. Until these terminals are in place gas prices in Spain remain prohibitively high for some power developers. ?With gas prices so high, some independent power producers are a bit hesitant about proceeding with their projects,? says Lawton. ?But gas prices are likely to come down. So for these companies it is just matter of drawing breath.?
And while some parts of Spain have been particularly active in developing hydroelectric and wind power projects in the past few years, a number of which have been financed on a non-recourse basis by domestic banks, large-scale projects are likely to rely on gas.
But the overall factor driving IPPs in Spain centres on how the power sector will be carved up. Says one London-based banker: ?What they are wondering is if a foreign player comes in, will this upset the dynamic of the market.? Those companies with a greenfield project are unlikely to build in a volatile market.
However, recent laws and government rulings have made it clear that the government wants all aspects of the electricity market to be open. In addition to the generating projects that have received initial approval, the Spanish government has also approved a number of foreign companies to buy and sell electricity in the domestic market. Among them are Aare-Tessin, Electricite de France, Electrabel, Enron, Office National de l'Electricite, Rede Electrica Nacional and EnBW.
Despite some hesitancy by the government, the generation market is essentially deregulated. Foreign and domestic companies are allowed to build new generation facilities, providing they meet the economic, technical and environmental requirements. So far 31 projects, with a combined capacity of 21GW have received approval from the government. Over half of this relates to projects being developed by Endesa and Iberdrola and, because of this, the government has restricted these two companies from building further capacity for up to five years. Potentially this is good news for foreign developers, but it does not affect the 31 projects approved which means there is a considerable backlog of projects to be financed either on- or off-balance sheet.
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