Jan 28 2016

While 2015 was big, 2016 looms larger

2015 was a big year for Australian renewables and other power corporate transactions, but 2016 could be bigger still, according to a new report published by PwC.

In the global deal rankings, published by PwC, the 99 year lease of New South Wales’ transmission business Transgrid by the NSW government to a consortium of local and international investors ranked 3rd for global power deals behind the sales of Oncor, the Texas transmission business and TECO, a Florida utility with a New Mexico gas business. The Transgrid deal, valued at US$7.4 billion was also second in Asia Pacific deals, exceeded only by the sale of PetroChina’s pipeline business to a consortium of Chinese investors.

The other major Australian transaction reported in the PwC review was China State Power Investment Corporation’s purchase of IFM’s Pacific Hydro business. These and the other Australian transactions contributed to a doubling of total deal activity in the Asia Pacific region, with Chinese companies dominating the buyers’ side.

The 2016 Electricity Gas Australia out later this year will provide a full analysis of recent relevant transactions.

The outlook for 2016

Globally, 2016 deals could be driven by factors such as mid-cap consolidation in the US, ongoing corporate restructuring – particularly in Europe where the German power giants RWE and E.ON have both embarked on a demerger of their conventional generation assets from their renewables and retail businesses – and the attractiveness of regulated assets with their steady returns.

Examples of the latter are the expected sale by the NSW government of 50.4 per cent of two of its distribution businesses, Ausgrid and Endeavour. These may mark the end of energy asset privatisations for a while, given apparent voter sentiment in Queensland, although the West Australian Government has hinted at asset sales. Both these governments, plus Tasmania have several billion dollars’ worth of assets that could be attractive to buyers and relieve pressure on state balance sheets. While market reform is a work in progress in WA, the National Electricity Market states already operate under a national network regulatory framework and generation and retail markets which are essentially neutral to ownership. Accordingly, there would be no disadvantage to energy consumers if such assets ended up in private hands.

Outside of potential privatisations, the likely sources of deals in Australia are:

  • Offloading of gas infrastructure by LNG consortia managing the impacts of low oil prices on their revenue streams
  • Potential pressure on large utilities to pursue an Eon-style demerger of “old” and “new” energy assets

Conversely, further renewables deals now the sector is actively developing projects under the revised Renewable Energy Target are considered less likely according to PwC. Their view is that existing owners will prefer to hold assets. Nonetheless the sector is expected to see significant investment in new projects in the next couple of years, with another consultancy firm this week estimating the value of these at $10 billion[i].

High Water Mark?

PwC Australia’s Mark Coughlin suggested that a “perfect storm” of economic decarbonisation, technical disruption, changing customer behaviour and government policy would result in subdued corporate activity after 2016. As noted above a significant change in government and voter sentiment is likely to be required if the privatisation pipeline is to continue. The risks and uncertainties around government policy and the pace of technological change may also inhibit deal-making.

[i] http://www.smh.com.au/business/renewables-sector-on-verge-of-revival-ey-20160124-gmbxq4.html?skin=text-only

Do you have a question or comment for AEC?

Send an email with your question or comment, and include your name and a short message and we'll get back to you shortly.

Call Us
+61 (3) 9205 3100