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UTILITY WEEK | 2ND - 8TH OCTOBER 2015 | 19 Finance & Investment A recent European Investment Bank study sug- gested that up to €500 billion a year is required to fund infrastructure projects until 2030. The char- acteristics of infrastructure – long-term, stable, oen inflation-linked investments – have attracted significant capital in the wake of the financial crisis and volatile equity markets. Pension funds, sovereign wealth funds, insurance companies and traditional infrastructure funds have invested significant capital into roads, utili- ties, ports and airports at an increasing rate. The poor state of European governments' balance sheets means this investment needs to continue. Regulation governing returns in the regulated utilities sector has become increasingly tough for infrastructure investors. Investors in Gassled have seen their returns impacted following a surprise ruling by the Norwegian regulator. Renewable investors in Spain and Italy are also suffering from the effects of retrospective regulatory changes. Over recent months shareholders in the UK water and electricity distribution sectors have been hit by tougher than expected price reviews. Investors are likely to characterise these risks borne from independent regulators as regulatory risks. Regulatory or political uncertainty usually leads to investors increasing the price of their capital and in some circumstances, shying away from the opportunities completely. However, the demand for regulated assets remains robust. Pension funds, who are finding it increasingly dif- ficult to find assets to match their liabilities, continue to invest in "core" infrastructure, such as the Thames Tide- way Tunnel, Associated British Ports, Fortum's Swedish distribution network, Madrid Gas and Eon's Spanish distribution businesses. All these have the key invest- ment requirements for infrastructure investors. As core infrastructure assets continue to be acquired by long-term investors, the supply/demand imbalance will continue to drive valuations. Regulatory risk does not deter investors but retroactive and political risk does. If governments and regulators act in a transparent and consistent manner, they will continue to attract private capital to help fund large infrastructure spending. Adam Hain, senior managing director, infrastructure and utilities, Macquarie Capital "Regulatory risk does not deter investors – they are comfortable pricing this – but retroactive and political risk does" Investor view Adam Hain similarly exposed to the risk of a CMA tariff intervention. Meanwhile, Scottish Power is haemorrhaging customers as faulty billing systems caused service standards to take a hit at the same time that independent suppli- ers are increasingly taking market share. EDF EDF's fleet of nuclear reactors has until now served to insulate it from volatility in the gas markets and the rising cost of carbon emis- sions. In fact, the company stands accused of securing windfall profits through the UK's capacity market, which was supposed to focus on new-build gas-fired power rather than existing nuclear units. But its strength as a nuclear developer has recently come into question following the spiralling costs of its Flamanville Euro- pean pressurised reactor (EPR) project in France. Delays are also expected for the Hin- kley project, which has yet to achieve a final investment decision. EDF has admitted that in the current climate it would not be able to afford the investment without help from its Chinese development partners. Although the Chinese will partner with EDF on the Hinkley project, they could soon emerge as a more effective nuclear rival. The Chinese are keen to establish their country as a key nuclear player and in the UK are also expected to develop their own reactor design at a separate site in Essex in order to prove their mettle. 1700 1650 1600 1550 1500 1450 1400 1350 1300 35 30 25 20 15 10 5 1 Sep 2012 1 Sep 2013 1 Sep 2014 28 Sep 2015 SSE SHARE PRICE, 1 SEPTEMBER 2012 - 28 SEPTEMBER 2015 RWE SHARE PRICE, 1 SEPTEMBER 2012 - 28 SEPTEMBER 2015 1 Sep 2012 1 Sep 2013 1 Sep 2014 28 Sep 2015 30% Amount Eon's share price has fallen since the beginning of September £1.5bn Amount being redirected by Cen- trica towards the customer-facing part of its business ➟ Adam Hain is speaking at the Utility Week Congress 2015, taking place from 14 October. Visit www.uw-congress.net