Energy networks M&A What are the implications for the EU? Matteo Di Castelnuovo IEFE Bocconi 1 Agenda • Why do energy networks matter? • Institutional framework • Recent M&A activities in energy networks • Data analysis • Conclusions 2 Why do energy networks matter? - 1 • Good timing for hosting such an event on energy infrastructures, as opposed to 15 years ago! • Today networks are known to be the pillars of the architecture in the European Energy Union. • Infrastructures have been playing an increasingly relevant role in the market in terms of what they are required to provide • More capacity (e.g. physical and virtual capacity) • More technology (e.g. smart grids, reverse flow) • More services (e.g. capacity market, hubs). 3 Why do energy networks matter? - 2 • Their importance is bound to increase due to EC’s targets for its climate and energy policies, which will require them to raise investments. • However, EU energy infrastructures face increasing financial pressure from the evolution in the market • E.g. lower regulatory incentives, lower demand, higher consumer bills, distributed generation, etc. • In Italy network costs account for 18% in a typical gas bill of 1150 Euros and an electricity bill of 530 Euros. • Thus, should we care about who own these energy networks? 4 Institutional framework: Energy Policy Trilemma Economic Efficiency Climate Security Change of Supply Energy networks 5 Institutional framework: «Ad hoc» packages Economic Efficiency Climate Security Change of Supply Energy networks Infras. Package Third Package 6 Institutional framework: «Ad hoc» Packages - 1 1. Infrastructure Package (2013): “Modernise and expand Europe’s energy infrastructure […] interconnect networks across borders” • Investment required up to 2020 in electricity and gas network infrastructures estimated at about EUR 200 billion (100 bn electricity, 40 bn smart grids and 70 bn gas) • Projects of Common Interest (PCI), based on priority corridors, with faster permit procedure and eligible for EUR 9.1 billion of EU funding (Connecting Europe Facility). 2. Third Energy Package (2009): separation of production/supply from networks • Three models with different extents of separation: • ISO (Independent System Operator) • ITO (Independent Transmission Operator) • OU (Ownership Unbundling), the “strongest”(e.g. Snam Rete Gas) 7 Institutional framework: «Ad hoc» Packages - 2 • Following the introduction of the Third Package there has been a considerable increase in the number of acquisitions of European energy network companies. • These changes in networks’ ownership involve both power and gas, located onshore or offshore, at transmission or distribution level. • Acquisitions have been carried out not only by traditional stakeholders of the energy sectors (e.g. TSO), but also by investors coming from the financial world, such as pension funds and sovereign wealth funds. • Given the crucial relevance of the energy infrastructure in the EU integrated market, these changes appear to be relevant. 8 Market evolution 9 Recent M&A activities in energy networks - 1 • In 2011 Fluxys, the Belgian gas transmission system operator (TSO), bought ENI’s stakes in the TENP (Germany) and Transitgas (Switzerland) gas pipelines for a purchase price of approximately € 860 million. • In July 2014 China State Grid acquired 35% of CDP Reti for €2.1 billion. • China State Grid is not a new player in the European energy market: in 2012 its subsidiary SGCC purchased 25% of REN, the Portuguese power and gas grid company, from the Portuguese government for approximately € 390 million. In the same deal, the Oman sovereign wealth fund (SWF), acquired 15% of REN. 10 Recent M&A activities in energy networks - 2 • In July 2013 the consortium composed by Snam (45%), the Singapore SWF GIC (35%) and EDF (20%) bought TIGF from Total for €2.4 billion. In January 2015 Crédit Agricole purchased 10% from the consortium. • In 2012 a consortium of financial institutions (Macquarie, British Columbia Investment, Abu Dhabi Investment and MEAG Munich) bought Open Grid Europe, a German gas transport network owned by E.ON for €3.2 billion. • In 2010 E.On sold E.On Rete, its gas distribution company in Italy, to a consortium composed of the Italian investment fund F2i Sgr and Axa Private Equity, for € 290 million. 11 Cross ownership: TSOs and PXs Eurex Baltic TSOs Statnett Svenska K. Fingrid Energinet Various EGEX ECC Nord Pool EEX ECC N2EX Generators EPEX EDF Powernext RTE TenneT Nasdaq APX Group Elia APX NL APX UK Belpex 12 Top ten ACQUIRERS by deal value Electricity and gas, transmission and distribution networks Breakdown of total value. Source: Zaphyr, BvD. 13 Years: 2008-2015 Top ten ACQUIRERS by deal value Electricity and gas, transmission and distribution networks Breakdown of total deal value. Source: Zaphyr, BvD. 14 Years: 2008-2015 Top ten TARGETS by deal value Electricity and gas, transmission and distribution networks Breakdown of total deal value. Source: Zaphyr, BvD. 15 Years: 2008-2015 Top ten TARGETS by deal value Electricity and gas, transmission and distribution networks Breakdown of total deal value. Source: Zaphyr, BvD. 16 Years: 2008-2015 Deal value by COUNTRY Electricity and gas, transmission and distribution networks Breakdown of total deal value. Source: Zaphyr, BvD. 17 Years: 2008-2015 Deal value and number of deals by COUNTRY Country (target) Number of deals Aggregate deal value (mil EUR) Belgium 16 6,929 Czech Republic 5 3,654 Denmark 3 1,059 Estonia 1 78 Finland 6 2,305 France 18 5,164 Germany 11 6,674 Greece 2 459 Hungary 1 137 Ireland 1 10 Italy 82 21,297 Lithuania 1 1 Luxembourg 1 801 Netherlands 3 1,312 Norway 1 54 Portugal 19 1,496 Romania 1 43 Russian Federation 7 530 Spain 40 5,607 Sweden 1 1 Turkey 1 422 Ukraine 2 1 United Kingdom 13 3,321 Total 235 61,312 Source: Zaphyr, BvD. Years: 2008-2015 18 Data analysis (2008-2015) - 1 Number of deals per sector (%) Deal value per sector €2.725 6% 5% 27% electricity electricity € 23.534 gas gas € 25.331 46% mixed 49% mixed 67% 19 Data analysis (2008-2015) - 2 Number of deals by acquirer type Deal value by acquirer type (%) €1.892 4% €9.985 20% Network Company 7% Network Company Energy company 37% Energy company 36% € 26.899 € 11.139 Financial player Financial player 54% 22% Other 20% Other 20 Conclusions - 1 • The ownership structure of energy network companies has significantly changed in recent years. • Divestments are mostly triggered by debt reduction and compliance with the Third Package. • New types of owners have emerged, i.e. other network companies and various types of financial players. • Financial players are leading the wave of acquisitions. • Much emphasis has been placed on who should NOT own these assets (e.g. producers). • However, compared to the past, today we • Have EC’s new ambitious targets (e.g. 10% interconnection by 2020) • Know networks' pivotal role in the European Energy Union. 21 Conclusions - 2 • Thus more focus should be directed to these new types of owners. • We are currently investigating how ownership may affect propensity to invest for transmission companies • Unbundling • Different types of owners. • Further research should look into the distribution sector: • Why are many utilities reluctant to sell distribution networks (e.g. EON)? 22.