Private sector to boost power deals

July 14, 2014 - 1:56:39 am

DOHA: The increasing role of the private sector in both power generation and water could boost opportunities for large-scale transactions in Mena in the future. With market reform in the region gaining momentum as well as utility unbundling, renewables looks to be a fertile growth area in the region, EY’s Power Transactions and Trends report noted yesterday.

A number of Middle East funds, including Qatar’s sovereign wealth fund, are planning to diversify their investments and acquire assets across the globe. Qatar and Kuwait were eyeing the UK utility sector in 2013. Saudi Arabia’s ACWA Power has recently started to internationalise and Abu Dhabi’s quasi-sovereign Masdar Capital is already the owner of several large-scale renewable assets internationally. 

Several other utilities in the Gulf, particularly in Qatar, are known to be interested in establishing independent power plant (IPP) type companies which can compete in international markets for new projects using their substantial capital base and their deep experience of the IPP model. This could have the impact of increasing competition for regulated and renewable assets in Europe, EY’s Power Transactions and Trends report noted yesterday.

“At present, utilities in the Gulf are focusing chiefly on domestic investment. There is a massive need for new power and water capacity, driven by population growth and the increased industrialisation of the region’s economies. The projections for new capacity over the next few years encompass not just generation but basic infrastructure. This demand will open up substantial opportunity for private sector involvement and transactions,” said David Lloyd, Mena Power & Utilities Transactions Leader, EY.

Transaction activity in the GCC is largely based on participation of the private sector in capital projects and commercial undertakings. As markets and competition in power generation becomes more established, growth rather than consolidation is expected to be a dominant driver of activity, and more deals to be done between state-owned businesses and the private sector.

Substantial, and largely inbound, transaction activity is expected in renewables — mainly solar and wind. Several substantial renewable energy programs are in the future pipeline, covering all of the Gulf countries. As this market takes off, extensive use of IPPs is expected, with foreign private sector capital coming in to fund, build and operate renewable energy plants.

“The hydrocarbon-rich countries of the Gulf recognise that their resources and capital may not be limitless, given the massive investment needed in generation and subsidies. There’s definite interest in switching fuel sources and raising capital from the private sector around the IPP model,” said Christian von Tschirschky, Mena Power & Utilities Leader, EY. 

In particular, significant transaction activity based on joint ventures between international and domestic companies is expected, with the international companies contributing their renewables expertise and local partners drawing on their local knowledge of land, regulation, environmental issues and power off-take permitting. 

The Middle East continues to be one of the world’s biggest markets for IPPs, and a number of global independent power companies are active in the region and continually looking at new projects. Institutional investors might consider ways to play in this developing renewable energy market, which will attract companies of all sizes and have significant funding requirements and long-term off-take profiles. However, given how Middle East markets are structured, this is probably more of a long-term play.The Peninsula