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Décembre 2011 PROFITABILITY OF A PRIVATE EQUITY INVESTMENT IN POWER PLANTS IN WESTERN EUROPE This paper is aimed at analysing the profitability for a Private Equity fund to invest in the conventional power sector in Europe and more precisely in a gas-fired power plant in Italy, a coal-fired power plant with Carbon Capture and Storage (“CCS”) in Germany, a nuclear power plant in France, and an hydro power plant in Sweden1. In view of the increasing electricity needs in Europe, it is uncertain whether utilities will be able to face the investment requirements alone. Private Equity funds could provide additional funds either in operating power plants to free up some capital of the utilities or in new power plants projects. However, since the beginning of the liberalisation process in Europe, Private Equity funds have not been very active in conventional power generation whereas they have been very active in the US or in the renewable generation in Europe. Therefore, this paper helps understand why such investments have not been carried out so far by Private Equity funds and if they are likely to happen in the future. First, we have carried out a quantitative analysis to understand the type of profitability Private Equity funds could get from such investments. We have built four financial models (one per power plant) on the basis of the data on electricity generation costs presented in the 2010 edition of the OECD publication Projected Costs of Generating Electricity (“EGC study”). “The study contains data on electricity generating costs for almost 200 power plants in 17 OECD member countries and 4 non-OECD countries. It was conducted under the supervision of the Ad hoc Expert Group on Electricity Generating Costs, which was composed of representatives of the participating OECD member countries, experts from the industry and academia as well as from the European Commission and the International Atomic Energy Agency (IAEA). Experts from Brazil, India and Russia also participated.”2 Based on the financial models, we have carried out a sensitivity analysis showing the impacts on the Internal Rate of Return (“IRR”) of key underlying factors such as electricity prices, fuel prices and carbon prices, load factors and Operation & Maintenance costs (“O&M costs”). Then, we have gone deeper in the analysis through a qualitative discussion on factors that cannot be captured in the financial model but can also impact the investment decision such as the market structure both at a European level and a national level, the regulatory risks, the current electricity prices, fuel prices and carbon prices as well as their possible evolution. The results of this quantitative analysis show that investing in conventional power generation in Europe and more specifically in the four above-mentioned assets is highly challenging and sensitive to the evolution of demand and competition. Therefore, it is impossible to make any general recommendation on which asset a Private Equity fund should invest into given the very specific risk/return profiles of each asset and the fast evolution of demand and competition. However, the sensitivity analysis highlights that among the four assets analysed, the gas investment is probably the first one (among the four) a Private Equity fund willing to make an investment should analyse because it is likely to be the most flexible investment. Indeed, the gas investment is the one for which the IRR can be the most easily improved either through higher revenues or through cost improvement (decrease in fuel prices or carbon prices or improvement of operational performance). Nevertheless, it is also the one that requires the highest market prices to breakeven and to be dispatched. Therefore, it is the most sensitive to demand and prices forecasts - either electricity prices forecasts or gas prices forecasts – and to the competition structure. The qualitative analysis reinforces the conclusion by highlighting that the market structure in Western Europe3 is not the most favourable to Private Equity investments in power generation. In the future, these trends are unlikely to change and Private Equity investments are more likely to be observed in the transmission networks rather than in the generation sector. 1 Please note that in this paper, we have extended the term “conventional” to hydro 2 OECD, Projected Costs of Generating Electricity, 2010 edition, p. 5 3 Please note that, in this paper, we include Italy and Sweden in the generic term “Western Europe” |
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