Utility Week

Utility Week 7th March

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UTILITY WEEK | 7Th - 13Th March 2014 | 21 Finance & Investment T he UK power market has been on a rollercoaster since its privatisation in 1990, moving from a regu- lated model to an essentially non-regulated one, and back to a hybrid model, where regulated assets have their return on capital in effect protected (renewable and new nuclear), while merchant assets on the fringes of the merit order are still going through tough times (gas). The market has gone through at least two phases of serious distressed financial situations (early 2000s and post-2008) and seen a shi in the generation mix, initially geared towards reliable coal and nuclear genera- tion and now increasingly dominated by intermittent renewable power. This increased weight of intermittent renewable generation requires a larger reserve margin, as well as peak and mid-merit generation with greater flex- ibility and speed of reaction. As such, there is a strong case to suggest this critical gas-fired capacity should enjoy similar protections to those of renewable genera- tion and new nuclear capac- ity. Properly implemented, capacity pay- ments should encourage the new build and continuing availability of existing gas-fired capacity, which will help to ensure the stability and reliability of the system in a post-carbon era. But while the government's proposals for the capac- ity market are moving in the right direction, questions remain: are the current government policies fair to all investors in generation; are they contributing to the security of supply and stability of the UK power market; will they deliver their decarbonisation objectives; what will they effectively do to the retail electricity prices that UK consumers pay; and finally, what effect are they likely to have in the UK economy as a whole? Current energy policies are likely to result in a more expensive power market. This should be communicated to consumers as a necessary cost for meeting the UK's energy objectives. At the same time, policies can be intro- duced to improve value for money for consumers through the introduction of renewable tariff tenders, encourage- ment of cheaper and proven technologies and stricter energy efficiency policies. One or all of these could be the key to riding out the next loop of the rollercoaster. Daniel Wong, head of power & utilities, infrastructure and real estate, Macquarie Capital Europe "Capacity payments should encourage the new build and continuing availability of existing gas-fired capacity in the UK power market" Investor view Daniel Wong "Current energy policies are likely to result in a more expensive power market" generation, energy efficiency and smart metering. These businesses engage in a wide range of activities including energy efficiency and monitoring services, demand aggrega- tion and emergency power generators. In 2013, six transactions were made in the intermediary sector, up from five in 2012. The seven-fold increase in deal value in 2013 was predominantly due to the buyout of Inenco by its management and Eon's acqui- sition of Matrix Energy Solutions. With tradi- tional utilities and regulators starting to take notice, interest in these companies will grow. Most of the recent M&A trends identi- fied here are expected to continue into 2014. Utilities will sell operating assets and there is already a pipeline of Asian deals for nuclear assets. Spark spreads are also likely to remain less attractive than dark spreads, which could lead to further gas-fired power plant sales. We therefore enter 2014 expect- ing a number of M&A opportunities across the spectrum of the UK power and utilities sector. James Leigh, partner, Andrew Durrant, partner, and Dan Gambles, director, Deloitte analysis oF m&a dEals in thE uk poWER and utilitiEs sEctoR (basEd on numbER oF tRansactions) Source: MergerMarket. Categories are based on Deloitte analysis Note: 'Intermediaries' refer to consultancy companies in the sector. 'Other' includes deals that do not fit not the any other category, such as gas transportation and coal Nuclear power generation – hydro Biomass/energy-from-waste Solar Other Power generation – gas Energy networks Water and waste Intermediaries Wind 2012 2012 45 40 35 30 25 20 15 10 5 0 33 Number of M&a deals in 2012 40 Number of M&a deals in 2013 +22% Increase Deals in energy networks, Ofto cables, water and waste were down thE big numbERs

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