It is well known that the European utilities sector is in desperate need of investment. What may well be surprising for some is the shortage of suitable investment opportunities in regulated utilities.
The water sector needs material investment to repair and maintain ageing networks of pipes and sewers. It also needs capital expenditure to upgrade systems. In the energy sector, a changing generation mix, security of supply concerns and growing demand is driving massive demand for investment in gas and electricity transmission and distribution networks.
Despite the varied drivers for network investment and capital expenditure, in most cases the opportunity to invest is open to only a few, incumbent regulated utilities. However, we see this changing.
Recently, Ofgem set up a new framework relating to the funding of certain offshore transmission networks connecting large offshore windfarms in the UK. The process involved tendering a number of separate transmission projects (Ofto) in a transparent and competitive process. With eight Ofto projects closed to date and another due to close in the coming weeks, around £1.5 billion of funding will have been raised by the end of the year. There is an additional c£1 billion-worth of projects due to be closed in 2014.
The response has been overwhelming. The list of interested investors and capital providers reads like a Who’s Who of the infrastructure world – Mitsubishi, Barclays, Macquarie, Balfour Beatty, UK pension funds and Japanese banks, as well as National Grid. These investors have brought with them new sources of capital, lenders and expertise and, combined with a new revenue model, proven value for money to end users.
Meanwhile other major infrastructure projects are exploring similar models to attract new capital and funding competition. In the UK, there are a number of large projects in the water, gas and electricity sectors and in Germany; Tennet-owned Transpower has its own version of the Oftos. So it would seem introducing competition is a good thing, even when it comes to traditional monopoly businesses.
Daniel Wong, head of power & utilities, infrastructure and real estate, Macquarie Capital Europe