1. Conventional European Power Generation Assets: Are they Attractive Targets for Overseas Investors? Presentation to the EPG Strategy Summit, by Martin Giesen, Chairman, Advanced Power AG
26 November 2014

2. The state of the power generation sector in Europe
Overview
The state of the power generation sector in Europe
Why power generation asset ownership will change
What drives the sellers
What drives (overseas) buyers
Hurdles that need to be overcome  
EPG Summit, Amsterdam, 26 November 2014

3. The State of European Power Generation
Since 2007, generators have lost
€500,000,000,000 (= half a trillion)
of market capitalisation
Spark spreads in most European markets remain negative
Dark spreads are positive, but insufficient to generate an acceptable return on investment
Large amounts of generating capacity have been shut down or moth-balled
Governments in key markets are concerned about capacity margins and implementing or considering capacity payments
The ETS is ineffective (not a design flaw, but a misalignment of objectives)
Belief in market structures is shaken
EPG Summit, Amsterdam, 26 November 2014

4. The Causes Recession Subsidised renewables
Demand destruction and low growth potential
Subsidised renewables
A large part of conventional generation has been pushed out of the merit order
Conventional over-build in the “good times”
Some markets (e.g. Spain and the Netherlands) have experienced significant overbuild
EPG Summit, Amsterdam, 26 November 2014

5. Why Ownership Will Change
Before (the financial crisis and the renewables boom)
Conventional power generation was a necessary part of a balanced utility portfolio
Gas-fired generation was expected to be required to cover mid-merit or base-load demand
European utilities had strong balance sheets and disposed of their regulated network subsidiaries
Utility investors were comfortable with utility generation portfolios
After
Gas-fired plants are idle or, at best, operating as peakers
European utilities have weak balance sheets and less regulated activities
Utility investors are even more focused on long-term, stable yields
EPG Summit, Amsterdam, 26 November 2014

6. What Drives the Sellers
European utilities need to bolster their balance sheets, stabilise their income/cash flows and de-risk their activities
They require focus on core markets and more exposure to:
Regulated activities
Long term subsidies (e.g. renewables)
Low risk, relatively stable activities, e.g. retail
They have to decrease their exposure to
Merchant generation assets
Trading and merchant portfolios
Selling generation assets, particularly gas-fired plants, shrinks utility balance sheets and eliminates some merchant exposure
EPG Summit, Amsterdam, 26 November 2014

7. An Example RWE Strategy EPG Summit, Amsterdam, 26 November 2014
Source: RWE March 2014
EPG Summit, Amsterdam, 26 November 2014

8. What Drives the Buyers
Large financial investors, such as pension funds, private equity, hedge funds, take a portfolio approach to risk
To varying degrees, they seek to supplement traditional, passive investments by alternatives
Direct investments in infrastructure assets
Investments which incorporate various degrees of merchant risk
Hedge funds:
high degrees of risk with very high return expectations
Pension funds:
higher returns than traditional investments (e.g. government bonds)
With a “sufficient” return in downside scenarios
EPG Summit, Amsterdam, 26 November 2014

9. What Drives the Overseas Buyers
Overseas investors are seeking geographical and market diversification
Europe remains a suitable target area for many international infrastructure investors
There is a recovery “story” in some European markets
Many investors already have exposure to renewables in Europe and believe they know the markets
A number of recent transactions (e.g. UK, France, Portugal) are beginning to establish transaction and pricing histories
EPG Summit, Amsterdam, 26 November 2014

10. Hurdles that Need to be Overcome
Price!
Origination: Matching of targets and investors requires detailed knowledge of both – the potential assets as well as the objectives of potential investors
Transaction: The assets are large and complex, hence, the transactions will be bespoke and may require “out-of-the-box” thinking
Asset Management: In most cases, the existing, strategic owners will step completely out of the asset. Overseas investors will require teams and knowledge to manage the assets going forward
EPG Summit, Amsterdam, 26 November 2014

11. Summary
Conventional generation in Europe has become risky merchant generation
European utilities are forced to dispose of risky conventional generation assets, particularly in non-core areas
Financial investors are seeking yield and adding some merchant exposure to their portfolios – also in Europe
Price expectations are becoming aligned
Qualified support is required for origination, transaction and asset management
EPG Summit, Amsterdam, 26 November 2014