Utilities Unbundled 12 June 2012

Utilities Unbundled
New perspectives on the power and utilities sector Issue 12 June 2012
Moving markets, moving targets

Keeping the capital flowing for renewable energy Shifting Dodd Frank timeline frustrates implementation planning Chinas utilities building for a billion
Grid interconnection will save up to US$3b in capital investment while delivering more than 5,000MW of energy over 20 years.
Ahmed Ali Al-Ebrahim, Gulf Cooperation Council Interconnection Authority
its clear this is a pivotal time.

Ben van Gils, Ernst & Young
As market dynamics and target geographies change,
Introduction
ongoing Eurozone instability and a major nuclear emergency, creating ripples that will make long-term planning tougher than ever before. Our sector is under continuing pressure to innovate and fund a sustainable energy future, while paying for vital infrastructure renewal and upgrades. But for utilities in the developed West at least constrained balance sheets and higher borrowing costs mean the headwinds are against investment of all kinds. One of the most exposed areas is renewable energy typically an intensely capital-hungry and higher risk endeavor which has, to date, relied heavily on subsidy to make the economics work. But the dynamics of investment are shifting. Dollars are increasingly attracted to renewables development in emerging markets, where the business case is underpinned by strong energy demand so that subsidies are less of a factor. China, Brazil and Chile are among the fast growth markets that are creating stable domestic marketplaces for renewables, because they see cleantech as a strategically important sector of the economy. Meanwhile, under pressure due to nancial austerity, Basel IIIs stricter capital requirements for banks, lower energy demand and cheap shale gas, Western Europe and the US are increasingly concerned about the affordability of renewables. Our lead feature on page 12 explores current funding uncertainties in more detail, asking what can be done to ensure the ongoing ow of capital for clean energy development. The renewables developers we interviewed for this feature are acting with condence and ambition to push their businesses to utility scale, potentially in competition with the big energy players. Their agility in seeking new markets and making fast decisions is a great source of strength. As market dynamics and target geographies change, its clear this is a pivotal time. Utilities are going to have to decide how and where they want to participate in a sector
ncertainty of a completely new order is cascading through the power and utilities sector. The past 18 months have encompassed global recession,
where renewable energy is an increasingly important (and ultimately cost competitive) constituent. In the coming months, Germany will be under close scrutiny to see what impact the countrys energy transformation is having domestically, internationally and on renewables. The decision to switch off nuclear power while retaining clean energy targets is viewed as extreme by some. RWEs Dr. Rolf Martin Schmitz (page 57) gives us a personal view from a utility in the thick of change. Change on the scale Germany is planning isnt possible on a unilateral basis. As the country becomes a net importer of energy, there will have to be more grid interconnection and more energy trading across Europe to balance the effects. Theres an interesting parallel in our report on the Gulf Cooperation Councils pioneering project to link the electricity grid across its six states (page 42). We are just beginning to scratch the surface of many new challenges, and I hope you enjoy reading about some of them in this issue. If you have questions or comments on any topic raised here, our authors would be pleased to hear from you.
Ben van Gils

Global Power & Utilities Leader Ernst & Young Global Power & Utilities Center Dsseldorf, Germany
+ 49 211 9352 21557 ben.van.gils@nl.ey.com
Utilities Unbundled
Issue 12 June 2012
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Cover stories 42
Gulf states deliver pioneering transmission project
Contents
02 06 08 12 Introduction
Market monitor
Update on regional utilities projects
Deals roundup
Q1 2012 deal activity and recent trends
Main feature
Keeping the capital flowing for renewable energy
60
Chinas utilities building for a billion
23 27 29 31
Technology
Rating the attractiveness of renewables markets
Accounting
Europes utilities take multi-billion euro asset impairment hit The new revenue recognition model and current practice US GAAP: tangible benefits handle with care
12
Keeping the capital flowing for renewable energy
39
Shifting Dodd-Frank timeline frustrates implementation planning
04
65
Regional reports 32 36 39
Americas
The Capistrano solution New rules of the environmental game Shifting Dodd-Frank timeline frustrates implementation planning
Ernst & Young Assurance | Tax | Transactions | Advisory

About Ernst & Young
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Australia wired for change
55
Germanys energy transformation, inside and out
42 47 52 55 60 65 68 70
Europe, Middle East, India and Africa (EMEIA)

Gulf states deliver pioneering transmission project Eurozone crisis: utilities prepare for the new normal Time to invest in Turkish energy? Germanys energy transformation, inside and out
About Ernst & Youngs Global Power & Utilities Center
52
Time to invest in Turkish energy?
Asia-Pacic
Chinas utilities building for a billion Australia wired for change
In a world of uncertainty, changing regulatory frameworks and environmental challenges, utility companies need to maintain a secure and reliable supply, while anticipating change and reacting to it quickly. Ernst & Youngs Global Power & Utilities Center brings together a worldwide team of professionals to help you achieve your potential a team with deep technical experience in providing assurance, tax, transaction and advisory services. The Center works to anticipate market trends, identify the implications and develop points of view on relevant industry issues. Ultimately it enables us to help you meet your goals and compete more effectively. Its how Ernst & Young makes a difference. 2012 EYGM Limited. All Rights Reserved.
Comment
Big Data deluge threatens utilities
Hot off the press

The latest Ernst & Young thought leadership and publications
47
Eurozone crisis: utilities prepare for the new normal
EYG No. DX0127 ED 0113
In line with Ernst & Youngs commitment to minimize its impact on the environment, this document has been printed on paper with a high recycled content. This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor. The views of third parties set out in this publication are not necessarily the views of the global Ernst & Young organization or its member firms. Moreover, they should be seen in the context of the time they were made. www.ey.com/powerandutilities
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New rules of the environmental game
32 06
Utilities Unbundled Issue 12 June 2012
06/2012. Artwork by MAS. EMEIA MAS E001.0512
The Capistrano solution
05
Market monitor
Canada
New carbon capture test facility
Government-owned utility SaskPower is partnering with Hitachi to construct a US$60m carbon capture test facility (CCTF) at the Shand Power Station in Saskatchewan. Construction will begin in late 2012 or early 2013. SaskPower will be one of the worlds rst electric utilities to operate a commercial-scale power plant with a fully integrated carbon capture and storage operating system, the Boundary Dam Power Station, currently undergoing a US$1.24b reconstruction.1
UK
Possible pressure on energy prices by mid-decade
The UK energy regulator Ofgem believes the country is likely to lean on gas, rather than renewables and nuclear power, toward the end of the current decade.3 But gas may become increasingly expensive to import to the UK by ship around 2015 and a gas supply squeeze could come at the same time as tightness in the electricity market, with energy costs for consumers rising mid-decade as a result.4
US
New transmission venture formed
American Electric Power (AEP) and Great Plains Energy have formed a joint venture, Transource Energy, to build US$466m of electric transmission projects. AEP will own 86.5% of the new company, which will take over development and construction of two transmission projects. Great Plains Energy has proposed to ship power between Nebraska and Missouri. US utilities are planning to invest from US$240b to US$320b in transmission projects through to 2030.2
Spain
Temporary halt to new renewables and co-generation
Faced with growing scal challenges, the new Spanish Government has put a temporary halt to awarding new feed-in tariff (FIT) contracts from January 2013. The move is expected to have immediate impacts on approximately 4,500MW of wind power and 550MW of solar photovoltaic projects, as well as other technology classes. Spains electricity system decit currently stands at over 24b (US$32b), while declining electricity demand in peninsular Spain has resulted in signicant excess generation capacity.5
1. 2. 3. 4. 5. 6. 7. 8. 9.
SaskPower, Hitachi to develop carbon capture test facility, Energy Weekly News, 6 April 2012, via Dow Jones Factiva, 2012 Energy Weekly News via VerticalNews.com. AEP-Great Plains JV to build US$466m in transmission projects, Dow Jones Business News, 4 April 2012, via Dow Jones Factiva, 2012 Dow Jones & Company, Inc. UK policy climate warms to gas as Ofgem hints at gas-red future, IHS Global Insight Daily Analysis, 19 April 2012, via Dow Jones Factiva, 2012 IHS Global Insight Limited. Living by gaslight, The Times, 19 April 2012, accessed via Factiva, Times Newspapers Limited 2012; Britain at risk of gas and electricity 'squeeze by 2015, The Telegraph Online, 19 April 2012, via Dow Jones Factiva, 2012 Telegraph Media Group Limited. Spain Imposes Temporary Halt to New Renewable Energy and Co-generation Projects, Renewable Energy World, 3 April 2012, 19992012 RenewableEnergyWorld.com. Brazils smart grid market will reach US$36.6b by 2022, Transmission & Distribution World, 5 April 2012, via Dow Jones Factiva, 2012 Penton Business Media. Kenya to build Africas largest wind farm, Daily Nation Kenya, 26 March 2012, via ISI Emerging Markets, 2012 Nation Media Group Limited. Russian government outlines planned energy sector privatizations, IHS Global Insight Daily Analysis, 30 March 2012, via Dow Jones Factiva, 2012 IHS Global Insight Limited. Interview-MRSK to open Russias electric grid to EU rms, Reuters News, 20 February 2012, via Dow Jones Factiva, 2012 Reuters Limited.
Brazil
US$36.6b smart grid investment by 2022
Brazils smart grid market will grow signicantly as the country upgrades infrastructure prior to the 2014 World Cup and 2016 Summer Olympics. Regulations are expected in 2013 to drive advanced metering installations nationwide. Electricity regulator ANEEL is targeting deployment of 63 million smart meters by 2021. Utilities are experimenting with full-scale smart-city concepts, leveraging applications including home area networks and distributed renewable generation.6
10. China sees soaring shale-gas output, The Wall Street Journal Asia, 19 March 2012, via Dow Jones Factiva, 2012 Dow Jones & Company, Inc. 11. In power, FM works on fuel & nancing, Business Standard, 17 March 2012, via Dow Jones Factiva, 2012 Business Standard Ltd. 12. CIL gets decree to ink supply pacts, The Times of India, 4 April 2012, via Dow Jones Factiva, 2012 Bennett, Coleman & Co. Ltd. 13. Japan Still on LNG Buying Spree, International Oil Daily, 21 February 2012, via Dow Jones Factiva, 2012 Energy Intelligence Group Inc. 14. NSW Electricity Network Reforms, NSW Government website, www.trade.nsw.gov.au/energy/electricity/networks/reforms, accessed 27 March 2012, 2012 State of New South Wales through Department of Trade and Investment, Regional Infrastructure and Services.
06
Market monitor
CIS
Russia plans energy privatization
Russia plans to start privatizing its major energy companies in 2012. Electricity transmission system operator, FGC UES, and hydro-electricity generator RusHydro are expected to be part of the privatization plan.8 Regional distribution grid holding company MRSK Holding plans to privatize distribution grids and contract major European utilities to manage the regional companies. The EDF group won a contract to manage a Tomsk regional company in Siberia in March 2011.9
Italy
New carbon tax to fund green energy
Italy plans to introduce a carbon tax with proceeds earmarked for nancing renewable energy production. The countrys new renewable energy law raised its 2020 renewable energy target from 26% of total output to 35%. The new carbon tax is part of scal measures aimed to help boost Italys sluggish economy. They have to be approved by parliament to pass into law.
China
Focus on shale gas
China has released its rst ve-year plan to develop shale gas. The country is targeting 6.5 billion cubic meters (bcm) of shale gas production by 2015 and more than 60 bcm of production by 2020. The plan emphasizes enhanced cooperation with overseas players and will provide scal momentum through price and land subsidies and preferential tax treatment for shale gas development.10
Japan
Nuclear shutdown forces high gas imports
Japan is exploring the possibility of importing liqueed natural gas (LNG) from the US. The near-total nuclear shutdown, after the Great East Japan Earthquake in March 2011, has resulted in increased reliance on gas-red plants to maintain the electricity balance. Japan saw a 28% year-on-year rise in LNG imports for the 12 months ending January 2012.13
India
Budget boosts power sector
India is proposing to waive custom duties on imports of thermal fuels for power generation in the Union Budget for 201213. The Government has approved partial nancing of rupee debt through external commercial borrowings (ECB) for existing power projects and has extended the tax holiday for power companies by one year.11 In April 2012 the Government directed state-owned coal mine Coal India to sign 20-year fuel supply agreements for projects due to be commissioned by 2015.12
Africa
Kenya plans Africas largest wind farm
The Lake Turkana Wind Power project consortium plans to construct a 300MW wind farm in Kenya, with an investment of 585m (US$773m). The project, expected to be Africas biggest wind farm, could be up and running in 2015. Spanish company Isolux Corsan will build a 428km transmission line to link the wind farm to the national grid, funded by loans from the Kenyan and Spanish Governments. The project consortium has a 20-year power purchase agreement (PPA) with public utility company Kenya Power at a cost of 7.52 (US$9.94) per kWh.7
Australia
Creating largest state-owned energy company
The New South Wales (NSW) Government plans to merge the regions three electricity distribution companies. Ausgrid, Endeavour Energy and Essential Energy will become a single state-owned corporation, owning and operating the NSW distribution network. The Government expects the merger to generate more than A$400m (US$414m) cost savings over four years. Savings will fund energy rebates for low-income households and families.14
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Issue 12 June 2012
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roundup
We expect M&A activity to increase in the remainder of 2012, as European utilities and governments dispose of assets to shore up balance sheets. Meanwhile, sovereign investors are snapping up stakes.
Joseph Fontana, Ernst & Young
Deal volumes down; deal values up. What major drivers have inuenced transaction activity over the past half year? Report by Joseph Fontana
Highlights
Deal volumes are down 30% on Q4 2011. Deal values rise 20% on the back of renewed activity in generation. Natural gas prices sink to a 10year low in the US. Europe is divesting while sovereign buyers are securing stakes.
Power and utilities M&A: the big picture

The overall transaction landscape was clouded by global economic uncertainty in the rst quarter of 2012. A slowdown in global power and utility volumes was consistent with overall global M&A volumes. The result is greater focus on existing operations and a dwindling appetite for strategic acquisitions. However, despite a slowdown in deal volumes in the rst quarter of 2012, deal values are up US$4.3b (20%) over the previous quarter, with the generation segment accounting for more than 60% of the increase. Renewables dominate global deal volumes for now. However, they are struggling to compete with gasred generation due to low natural gas prices in North America and the recent pullback in government support or consumer subsidies for wind and solar in both Europe and the US. Consequently, obtaining the all-important power purchase agreement for nancing projects is proving difcult.
08
Deals roundup
commentary
Statistics give us an overarching picture, but how do market trends affect transactions? Europe: a mix of financial discipline and expansion objectives
150
Figure 1. Global power and utility sector M&A activity

150 129 109 76 58.4 40.3 28.8 24.5 28.5 24.4 21.7 26.0 83 91 64 50 100
In Europe, the cash-strapped sector has to privatize and divest non-core assets to strengthen balance sheets and lessen exposure to slow domestic markets. Greece, for instance, hopes to raise US$25b from privatization, with Russian gas conglomerate Gazprom and Eni apparently interested in buying assets. Portugal has already achieved20% 60% of its 5b (US$6.6b) privatization target by selling 40% of power grid operator Redes Energticas Nacionais, 10% SGPS, S.A. (REN) to China State Grid and Oman Oil, as well as a 21% stake in Energias de Portugal (EDP) to stateowned China Three Gorges. This restructuring activity makes Europe the most attractive M&A destination right now, contributing 50% to global deal volumes and 70% to deal values in Q1 2012. Though consolidating at home, some of the large European utilities are looking for growth and earnings stability from transactions in the emerging markets of Eastern Europe and Latin America.
130
121
110
Value (US$b)
100
85
76.9 53.9
50
Q4 2009
Q1 2010
Q2
Q3
Q4
Q1 2011
Q2
Q3
Q4
Q1 2012
Total deal value
Deal volume
Source: Ernst & Young analysis based on Mergermarket data.
Utilities Unbundled
Issue 12 June 2012
Volume
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Asian buyers shop for stakes

As Europe divests and asset values soften, sovereign investors from cash-rich economies are snapping up acquisitions. Chinas growing presence in the European market got a further boost when China Investment Corporation (CIC), the China-based sovereign wealth fund, acquired an 8.68% stake in Thames Water Utilities Limited, the UK-based water and wastewater services company. Japanese utilities are acquiring stakes in natural gas projects worldwide. Tokyo Gas, Japans largest natural gas provider, plans to invest close to US$4b over the next eight years into acquiring LNG assets globally. It is reported that Mitsubishi is looking at acquiring North American gas assets, with the aim of liquefying and exporting to East Asia. This is one to watch going forward. More deals are anticipated between the European countries trying to combat austerity through divestment and the sovereign wealth funds seeking to capitalize on demand for energy at favorable acquisition prices. Watch out, too, for more minority stakes in foreign utilities. Asian buyers make cautious investors, seeking an understanding of how the business operates before committing to a larger share.
Natural gas prices trouble utilities in US

North America is witnessing what many believe is a longterm shift in the countrys natural gas market. Natural gas prices have dropped a staggering 86% from US$13.31/mmbtu in July 2008 to US$1.87/mmbtu on 18 April 2012 the lowest price in a decade. Technological advances in horizontal drilling and hydraulic fracking techniques are opening up immense shale reserves. This, combined with the fourth-warmest winter on record, has created the perfect storm for sustained depressed natural gas prices. While natural gas is cheap and abundant in the US, Japan is witnessing a sharp increase in the price of imported LNG. The price is driven up by huge demand resulting from the wind-down in nuclear generation postFukushima and the move to gas-red generation. This pull from the Far East is tending to support gas prices in continental Europe. In the US, buyers are eager to pick up power plants at low prices, whereas sellers, barring those in distressed situations or coming to the end of a private equity term, are hanging onto their assets in anticipation of better times.
10
Deals roundup
US utilities with large generation businesses are keen to shrink their exposure to price volatility, while being sufficiently well positioned to resume activities if and when gas prices revive. They are buying up regulated utilities with stable earnings profiles and opportunities for growth. Their reward, at least for now, is superior total shareholder return compared with those overly exposed to merchant generation. As the economy improves, we may see money rotate out of the sector into high-yielding investments, or up the risk curve within the sector, for instance, toward merchant generators.
The effects of low gas prices are felt along the value chain and into the wider economy. Chemical companies are halting plans to move offshore and are remaining in the US where natural gas prices are depressed.
Generation assets dominate M&A
Generation is the outright M&A success story this quarter. It contributed 63% (US$16.5b) to global deal value and included four of the top 10 deals. The trend signifies utilities renewed focus on opportunistic acquisitions and on diversifying the fuel mix, after a relatively slow last quarter in 2011.
Figure 2. Global power and utilities snapshot
Global
Number of deals Q4 2011 Q1 2012 64 15 10 23 16
Value (US$b) Q4 2011 21.70 1.10 11.30 5.60 3.70 Q1 2012 26.00 16.50 3.70 4.00 1.80 Total Generation T&D Renewables Others Europe Number of deals Q4 2011 51 2 11 23 15 Q1 2012 31 4 7 14 6 Value (US$b) Q4 2011 10.90 0.60 2.50 4.70 3.10 Q1 2012 18.30 12.60 1.70 2.20 1.80
Total Generation T&D Renewables Others
91 8 24 36 23
Americas
Number of deals Q4 2011 Q1 2012 20 5 3 6 6
Value (US$b) Q4 2011 5.30 0.40 4.70 0.10 0.10 Q1 2012 4.10 0.45 2.00 1.60 0.05 Total Generation T&D Renewables Others Asia Pacific Number of deals Q4 2011 24 2 6 10 6 Q1 2012 10 4 0 3 3 Value (US$b) Q4 2011 5.40 0.04 4.00 0.70 0.70 Q1 2012 3.50 3.40 0.00 0.10
Total Generation T&D Renewables Others
16 4 7 3 2
Joseph Fontana
Americas Power & Utilities Leader Global Power & Utilities Transaction Advisory Services Leader New York, US
+ 1 212 773 3382 joseph.fontana@ey.com
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Keeping the capital f lowing for renewable energy

Traditional sources of funding for renewable energy may be harder to come by in the wake of nancial austerity, Basel IIIs stricter capital requirements and cheap shale gas. How can the sector keep the capital owing? Report by Joseph Fontana, Ben Warren and Matt Rennie
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Main feature
ver the past decade, the contribution of renewables to the global energy mix has grown rapidly as politicians and the public have supported the rationale for low carbon energy. Policy targets around the world call for this growth to be maintained. But the renewables sector is currently being buffeted by some serious headwinds. Anemic economic growth has put downward pressure on power prices in many OECD nations, while austerity measures around Europe and the emergence of cheap shale gas in North America bring additional regional challenges. With utilities capital expenditure budgets under pressure, concerns about value for money and affordability have inuenced their ability to invest in renewables. Meanwhile, investment dollars are diverting to developing markets, which see clean energy as strategically important. In this article, we talk to four people with fresh perspectives on market movements, funding issues and how to keep capital owing into the sector: Dr. Eddie OConnor is targeting relationships with Chinese investors to open up opportunities in South America for his company, Mainstream Renewable Power. Randolph Mann, at US independent power producer Edison Mission Energy, has created a new way to tap into funds from entities that have largely avoided renewables investment until now. Professor Paul Simshauser is coming to grips with the likely impact of a new carbon tax at major Australian utility AGL, the countrys largest renewables developer. Rob Grant, CEO of leading renewable energy company Pacific Hydro, is focusing successfully on opportunities in the key emerging economies of Brazil and Chile.
We also explore aspirations at China Three Gorges, the state-owned utility whose recent high prole investment into Europe is a typical example of Chinese global ambition in the sector (see case study, page 21).
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The current investment climate

IEA says US$6t investment needed
The latest International Energy Agency (IEA) estimates suggest that the world needs a US$6t investment in renewable electricity capacity to 2035 (see Figure 1).15 Global investment in clean energy reached a record level of US$260b in 2011. The good news is that this was an increase of 5% from 2010. But the rate of increase is much slower than in previous years. Figures for the rst quarter of 2012 show new nancial investment in clean energy is at its weakest since the depths of the global nancial crisis in 2009.16 This suggests that current economic headwinds are affecting investment levels, at least in the West.
Figure 1. IEA New Policies Scenario estimate of renewables spending to 2035

Wind
Hydro
Solar PV
Biomass
Other renewables
Indicates US$5.8t total spending needed on renewable sources wind, hydro, biomass, solar photovoltaic (PV), geothermal, concentrated solar power and marine. 2.5
0.0 0.5 1.0 1.5 2.0 US$t Source: Ernst & Young analysis based on data from IEA World Energy Outlook 2011, OECD/IEA, 2011.
European Union investment at a six-year low

Investor condence in renewables, a capital-intensive business with often lengthy timeframes for project delivery, relies heavily on perceptions of the stability of investment frameworks. At the European Union (EU) level, a commitment to emissions goals and renewables targets remains, and the big European utilities are still planning to invest billions of dollars over the next ve years. But at a time when capital expenditure (capex) programs should arguably be ramping up to meet EU policy goals, utilities have had to curtail their investment ambitions, under severe pressure to strengthen balance sheets and protect credit ratings.
Eurozone instability, retrenchment by European banks and reduced energy demand caused new nancial investment in renewable energy across Europe to drop to US$38.9b in 2011 the third annual drop since 2008 and the lowest level seen since 2006.17 Europes problems have affected markets elsewhere. In the US, many of the tax equity investors supporting renewables projects have traditionally been European banks, which have drastically curtailed their lending operations in the US. Pacic Hydro CEO Rob Grant notes a similar impact: Most of our lenders in South America are European banks because of their understanding of renewables markets but thats winding back, because of the economic and nancial problems in Europe.
15. Based on the New Policies Scenario in the IEA World Energy Outlook 2011, OECD/IEA, 2011. Assumes that countries will take action on the policy commitments and plans already announced to tackle energy-related challenges. 16. Global Trends in Clean Energy Investment, presentation at the Clean Energy Ministerial in London, Bloomberg New Energy Finance, 25 April 2012, Bloomberg New Energy Finance, 2012. 17. ibid.
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Main feature
Randolph Mann is a leader of Edison Mission Energys growth strategy in the wind energy sector. Active in the wind industry since 1998, he has played a lead role in more than US$3b of wind project investments totalling some 2,000MW.
Randolph P. Mann
Vice President, Development Edison Mission Energy
Uncertainties in the US
Meanwhile, the closure of stimulus programs and the election cycle are causing uncertainty in the US. Last year, the country led the world in renewables investment.18 But ARRA19 stimulus money for wind projects expired at the end of 2011, and as things stand, production tax credits are due to nish at the end of 2012. Projects already in the pipeline will be completed, but we could then see a sharp drop in investment potentially inamed by a rush to get projects nished before nancial support measures end. Regardless of whether new nancial support materializes, the emergence of plentiful shale gas creates more pressure. By helping to drive down power prices, the abundance of shale gas has made it far more difcult to sign power purchase agreements (PPAs) for renewables projects, essential in attracting debt nance. As AGLs Professor Simshauser points out: [PPAs are] quite crucial ... banks are not wildly enthusiastic about taking commodity price risks. They take enough risks being involved in the project. What they really want is for an organization to write a long-dated power purchase agreement that roughly matches the tenor of the nance.
Headwinds against the US industry include cheap gas, the pending expiration of production tax credits, and a slowdown in growth of electricity demand across the country stemming from the recession.
Randolph Mann, Edison Mission Energy
18. The US invested US$56b in 2011. Source: Bloomberg New Energy Finance press release: Solar surge drives record clean energy investment in 2011, 12 January 2012. 19. American Recovery and Reinvestment Act of 2009.
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Issue 12 June 2012
Sector still attractive in the long term

Despite these factors, our contributors all agree on the long-term attractiveness of the renewables sector. Reduction of carbon dioxide emissions is still considered a priority by global policymakers. Individual countries are still committing to renewables in their long-term energy policy.20 Dr. OConnor of Mainstream Renewables comments: The world is on a one-off transition to sustainability. Simshauser agrees: We know, fundamentally, that we have to go down that low emissions path. However, there is widespread debate over the affordability of renewables in times of austerity. To continue to benet from subsidy mechanisms, Simshauser says the sector must deliver projects in as lean and cost-effective manner as possible and communicate this effectively. OConnor agrees and is adamant that there is a strong story to tell to investors. We have to frame the debate in real terms, not in screaming lurid headlines, he says. He thinks companies need to do a better job of communicating to stakeholders the true value of
renewables projects within energy systems. Capital costs are not the whole story; there are positive economic and systemic benets. Renewables projects promote security of supply and, potentially, long-term price certainty for generation.
Energy decit in emerging markets creates strong prospects

Its clear that the underlying environment for investment in renewables is typically far more favorable in emerging markets. This is underpinned by strong economic growth prospects, leading to growing demand for power. Underlying electricity demand is a key factor for investors evaluating the attractiveness of specic national markets. Grant highlights that in the South American markets where Pacic Hydro operates, per capita use of electricity is typically just one-third that of Australia and Europe. Industrial demand for power in South America continues to grow, led by Brazil and Chile, but at the same time he points to strong prospects for growth in residential demand.
Rob Grant
Chief Executive Officer Pacific Hydro
Rob Grant joined Pacic Hydro in 1996 as Project Development Manager, becoming Chief Executive Ofcer in July 2005 following the acquisition of Pacic Hydro by IFM. He is a member of the Australian Governments Council on Australia Latin America Relations (COALAR) and was Chairman of the Clean Energy Council in Australia from 2008 to 2011.
20. To date, 96 countries still have a clean energy support policy. Source: Bloomberg New Energy Finance: Clean Energy Ministerial presentation 25 April 2012, Bloomberg New Energy Finance, 2012.
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Main feature
Grant sees the same process happening in China: As the middle class is growing, they are installing new appliances, new fridges, new TVs, new computers for the rst time. Thats providing incremental demand, as well as the industrial capacity thats coming on. Energy decit makes the renewables sectors in emerging markets far less dependent on subsidy elements to make individual projects economic. Coupled with strong renewable resources, renewable energy looks like a highly competitive option to satisfy the demand for power. This is increasingly reected in the local appetite to fund renewables projects. While European banks may be retreating from project nance for renewables in South America, Grant points to growing comfort levels and a new local source of backing: We are nding that the amount of renewables development in South America is creating strong interest from well capitalized local banks keen to get into this sector.
Basel III set to rein back project nance

The retreat of the big European banks to date the main providers of debt nance for the renewables sector globally can be blamed principally on Europes nancial problems. But tighter bank regulation now being put in place could turn the retreat from project nance into something far more permanent than a temporary response to the Eurozone crisis.
In Europe, a downturn in the economic environment flows through to a downturn in demand for electricity ... whereas in South America we have an energy deficit.
Rob Grant, Pacic Hydro
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Basel III could make long-term project finance not a terribly appealing place for banks to park money, given the capital reserves they need to hold back when they lend.
Professor Paul Simshauser, AGL
Basel III21 aims to introduce new capital and liquidity requirements on a consistent global basis. This will put greater pressure on banks balance sheets and constrain their ability to lend. In general, the longer the maturity and the greater the idiosyncratic risk associated with a transaction, the larger the increase in costs under Basel III. There is a growing awareness that long-term project nancing might be impacted more than other areas of banking. Simshauser cautions that this may have a direct impact on the market for funding renewables projects: Basel III could make long-term project nance not a terribly appealing place for banks to park money, given the capital reserves they need to hold back when they lend. The big Australian banks are solid machines, but this situation makes me wonder whether banks will still want to play in project nance. Who knows, they might decide they are better off lending short-term, not long-term, and leave it to the pension funds.
Prof. Paul Simshauser

Chief Economist & Group Head of Corporate Affairs, AGL
Paul Simshauser joined AGL in 2008 and has overall responsibility for regulated pricing, economic policy and sustainability, energy regulation, government affairs, media and corporate communications, and emerging technology. He has more than 20 years of experience in the energy industry and held senior executive positions at Stanwell, NewGen Power and Babcock & Brown.
Keeping capital flowing

We asked our contributors to comment on new approaches that would help to secure investment in renewables projects. Their responses included nding new sources of capital and strategic partners to share risk and introduce new equity into projects, nding new ways to structure projects to attract capital and moving assets off the balance sheet.
21. A global regulatory standard on bank capital adequacy, stress testing and market liquidity risk, with capital adequacy requirements due to be phased in from 2013 and liquidity requirements due to be introduced in 2015.
18
Main feature
Looking to China and the Far East

China, Taiwan and Korea are all deploying renewables technology in domestic markets on a massive scale and targeting growth overseas. Last year, one in two wind turbines deployed across the globe was installed in China. Even if the Chinese economy is slowing down, it is not slowing as much as the rest of the world. Chinese utilities and banks backed by a signicant amount of state capital have global ambitions and the cash to achieve them (see our China Three Gorges case study, page 21). Mainstream Renewable Power has actively sought to build strong relationships with the Chinese, most recently partnering with Chinese turbine manufacturer Goldwind Science & Technology to develop a wind farm in Chile. OConnor explains that a key attraction of the partnership was the access it gave them to Chinese banks: Good Chinese companies are going to dominate this space in particular companies like Goldwind, which has bought high quality German technology.
When these companies come to the West, they bring their banks with them. We have very strong relationships with the biggest of Chinese banks who are backing our projects. We went to China and set up meetings with all the important banks and OEMs and have just recently appointed a Chinese member to our board. Its a fundamental part of our strategy to interact with the Chinese.
Could the sector access new sources of debt funding?

Institutional investors are still committed to the sector. Pension and infrastructure funds want long-term, predictable cash ows, and they see renewables projects as tting this criterion. But could they be persuaded to step in as a new source of debt funding, if banks step back? Simshauser says it remains to be seen: Pension funds are a very good match with the sector and yes, they get involved in equity, but will they get involved in debt? Traditionally, pension and infrastructure funds invest at a corporate level. It would be a step change if you could get them to invest in debt instead basically, to take the role the banks have taken up to now. But they would have to be investing in a different way to what they have done in the past, funding specic projects and making loans rather than purely investing in equity and taking shares. That would be new.
Good Chinese companies are going to dominate this space and when they come to the West, they bring their banks with them.
Dr. Eddie OConnor, Mainstream Renewable Power
Financial engineering attracts pension fund investment

Efcient nancing structures can have a major impact on the overall cost of renewables projects, because they are so capital intensive. Randolph Manns team at EME recently developed a new way to attract pension fund money to a wind farm spinoff, using a highly innovative nancing structure (see The Capistrano solution, page 32). He explains: Pensions and sovereign wealth funds have large, deep pools of capital and a strong investment appetite but it took a unique structure for us to unlock the opportunity and create an investment vehicle that worked well for pension capital. EME has a long history of innovative nancial transactions. But this really was starting from a clean sheet of paper to brainstorm the right approach and the right structure. We talked with a series of different investors, to gure out which combination we could put together that would create the best t, because everyone wanted something slightly different. The deal was highly complex and took 18 months to close: Bringing in long-horizon, patient capital has allowed us to recycle our capital faster and redeploy it into new growth opportunities and other uses, says Mann.
Dr. Eddie OConnor

Founder and Chief Executive Mainstream Renewable Power
Eddie OConnor founded Mainstream Renewable Power in 2008. The company develops, builds and operates renewable energy plants in collaboration with strategic partners, operating in the US, Europe, Chile, Canada, China and South Africa. He was previously Founder and Chief Executive of Airtricity, which was sold to E.ON and Scottish & Southern Energy in 2008. He has worked in the utility sector since 1970 and is Secretary of the European Wind Energy Association.
Utilities Unbundled
Issue 12 June 2012
19
Changing ownership models

The renewables sector can draw on a history of recycling capital to ensure that assets end up in appropriate hands. The UK has seen utilities in equity partnership with long-term nancial investors for example, in the case of offshore wind farms now under development. This spreads risk, while allowing utilities balance sheets to stretch further. Utilities may come increasingly to sell their ownership of operational projects, effectively disaggregating renewables generation assets from the core business and balance sheet. This model is already familiar in Australia. AGL has a track record of developing renewables assets and selling them on, explains Simshauser: Theres no need to own the asset. We control operation and management and retain the offtake rights, but sell the asset itself. Happy investors sit back with an asset that is giving them a stable, long return at a reasonable running yield.
Competition to buy these assets is strong. Buyers tend to be infrastructure players. Changing ownership models are also leading to the creation of new asset classes to attract non-traditional investment. For example, offshore windfarms cost billions to build. Add on the transmission infrastructure and they cost billions more. In the UK, rather than expecting utilities to nance this transmission infrastructure, energy regulator Ofgem created a new asset class of offshore transmission and awarded licences to own it through a competitive regime. The business is structured to look like a regulated asset, offering long-term, low risk, low cost capital to appeal to investors (for more detail, see Utilities Unbundled issue 9, December 2010). Ofgem has just announced the appointment of a preferred bidder for the rst project in the second round of tenders to own and operate offshore links for the Lincs project. We can expect to see this trend continue.
20
Main feature
Cost competitiveness should tilt balance to investment

Maturer technologies, like solar PV and onshore wind, are becoming increasingly cost competitive with fossil fuels in many locations, as the cost of technology falls and the supply chain matures. This is leading to the emergence of new business models where the technology is not dependent on feed-in tariffs, green certicates or other government support. As an example, Grant explains that South American countries, including Brazil and Chile, offer abundant natural resources, a strong business case for investing in renewables underpinned by growing demand for energy and less dependence on subsidy to make the economics work. Because of these factors, Brazil is procuring wind at some of the most competitive costs globally, below current prices for conventional power. It has driven costs
down aggressively through a competitive tendering process. This is an approach that could yet jump national boundaries. Ultimately, reaching grid parity will be what guarantees that renewables can attract funding. This could be closer than many people recognize, with onshore wind power in China and solar PV around Europe and in the US forecast by some commentators to become competitive with retail electricity prices within the next two years. But until that point is reached, Mann believes: We need to keep on innovating to drive down the cost of renewable energy, so that it can more effectively compete in more markets ... And that innovation runs the gamut from the technology, to the operations, to construction, to nancing. Simshauser agrees: When you have got that public debate going on rising electricity prices, anything thats actually adding excess cost will become a legislative
Case study
China Three Gorges: Now is the time to go global

China Three Gorges Corporation (CTG), a Chinese state-owned hydropower company with 21.8GW installed capacity, is actively expanding its global operations while building a comprehensive renewable energy portfolio.
On his appointment as Chairman of CTG in early 2010, Guangjing Cao conrmed CTGs global ambitions: Now is the time for Chinese companies to go global when outbound investment in developed countries is at rock bottom.22 CTG has already invested heavily in more than 28 countries and expects its overseas business to generate one third of total future prot.23 Discussing long-term objectives at the 2012 annual general meeting, Cao said: During Chinas 12th ve-year plan period [201115], our overseas investments will mainly focus on small- and medium-sized renewable energy projects requiring less capital and shorter construction times, while offering high returns.24 CTGs acquisition of a 21.35% stake in Energias de Portugal (EDP) for 2.7b (US$3.4b) in December 2011 is the most signicant development in its efforts to establish a leading global position in renewable energy. The partnership with EDP, the leading Portuguese electricity generator, distributor and supplier, gives CTG access to key locations, including Portugal, Europe, North America and Brazil. Both companies are now better positioned to explore new markets, including Africa, where they maintain complementary interests. Links with EDP Renovveis (EDPR), the worlds third largest wind power company, could prove a powerful strategic advantage in enabling CTG to develop its global wind power business. EDPR is active in 11 countries including Brazil, where it owns three wind farms including the countrys largest.25 The relationship with EDP should also help CTG to accelerate the global spread of its renewable industry value chain.26 Sector analysts expect the CTG-owned associate Goldwind Science & Technology Co. to seize opportunities to increase global exports of wind power turbines. And EDPs involvement in hydropower projects in Brazil could enable CTG to export advanced hydropower technology and management skills learned at Chinas Three Gorges Dam, the worlds largest hydropower plant. This highly stable and protable hydropower business provides the liquidity to nance CTGs aggressive expansion plans.27 By 2015, the company expects to more than double its installed capacity to 55GW, including overseas projects under construction or completed (5GW). Cao declares that We are committed to expanding our hydropower business and establishing our global leadership in renewable energy.28 CTGs rapid growth and declared ambition underline the fact that China is ready to play a much larger role in the global renewable energy market, while securing its future as a low-carbon economy.
22. Establishing Chinas Hydropower Standards, China Three Gorges Magazine, January 2011. 23. ibid. 24. CTG 2012 Corporate Report by Guangjing Cao, CTGs 2012 annual meeting, February 2012; http://www.ctg.com.cn/xwzx/news.php?mnewsid=57034&mtext= accessed 15 March 2012. 25. Tramanda, which has 70MWh of installed capacity. 26. China Three Gorges Corporation Wins Bidding for a 21.35% Stake in EDP, Company News, December 2011, http://www.ctg.com.cn/xwzx/news. php?mnewsid=55759 accessed 15 March 2012. 27. It reported more than RMB10b (US$1.6b) in cash and a net prot margin of 36.5% as of 31 December 2010. 28. Establishing Chinas Hydropower Standards, China Three Gorges Magazine, January 2011.
Utilities Unbundled
Issue 12 June 2012
21
Main feature
target If you want renewable energy to be successful and financially sustainable, you cant leave money on the table. You have to install market disciplines and try and get the best outcomes from a physical, financial and economic cost perspective.
Strong projects, run by companies with a track record of success, will continue to attract funding its survival of the fittest. The question is: can the sector achieve global targets for sustainable transition to a low carbon world just on the basis of the projects that survive?
Conclusion: unlocking a renewable future
All of our contributors agree that strong projects, run by companies with a track record of success, will continue to attract funding. In other words, its a case of survival of the fittest. The question is, can the sector achieve global targets for sustainable transition to a low carbon world just on the basis of the projects that survive? And if not, how will it attract money to do more? Energy companies clearly need to tap deeper into sources of non-bank funding. But although institutional investors understand equity investment, they dont yet understand how to invest on a project-finance basis. Persuading them to try may be one of the critical success factors for the sector, as Simshauser says: The big question is will the pension funds actually start getting involved in debt? Given Basel III, [project developers will be saying to themselves] If I want to keep doing what Im doing, I need to get talking and get them interested in playing in this space. In the short term, investment levels over the next couple of years are not likely to reach the record high of 2011. But if new sources of capital continue to come forward, together with Chinas banks and utilities and if the Eurozone crisis and Basel III dont deter European banks from investing for too long then the sector has
a good chance of attracting the money it needs. Further progress in driving down the costs of individual renewable technology to the point of parity with traditional sources will increase the chances of unlocking a renewable future. For Grant, the overriding focus has to be on creating long-term value: We have seen how, when subsidies get too generous or the market is too hot, a lot of people are just in for the quick turn. They can do the industry a great deal of harm. They dont spend the time and effort to create long-term value: they just want short-term opportunity. Investors might invest in that once but that would probably be it. OConnor also thinks we need to take the long view, underpinned by imaginative policy: Markets respond in a short-term way I dont know that theyre very good at looking between 2020 and 2030 and taking decisions now. Its politics that leads in this area and thought leadership that really matters. Renewable energy has always been a hotbed of innovation. To continue growing in scale and fulfil its potential, the sector will need to draw on that heritage to unlock new means of accessing funding in the future.
Joseph Fontana
Ben Warren
Environmental Finance London, UK
+ 44 20 7951 6024 bwarren@uk.ey.com
Matt Rennie
Power & Utilities Leader, Oceania Brisbane, Australia
+ 61 7 3011 3239 matthew.rennie@au.ey.com
22
Technology
Rating the attractiveness of renewables markets

Renewable energy faces a challenging year, with investment dipping sharply in the rst quarter of 2012 but long-term prospects still appear to be sound. In the rst of a new series, Ben Warren reports on key developments in the worlds leading renewables markets
Utilities Unbundled
Issue 12 June 2012
23
The big picture

Clean energy investment falls sharply in Q1 2012 Renewed commitment in emerging clean energy markets contrasts with policy uncertainty in developed countries Consolidation drives M&A activity up 41% in Q1 2012 but new asset finance is down 30% on previous quarter
Figure 1. New nancial investment in clean energy

60 50 40
nvestment in clean energy is at its weakest in three years (see Figure 1) with new nancial investment down 28% from Q4 2011 to US$26.7b. This dip reects scal challenges in Europe, increased competition from Asian manufacturers, growth in shale gas and the end of key stimulus programs in the EU and the US (see our lead article, page 12). But while these factors are resulting in destabilizing uncertainty over public policy support for renewables in developed economies, a number of developing countries are introducing new incentive mechanisms and national energy strategies that favor the sector.
Comparing top country results

These new dynamics are clearly highlighted in the results of the latest Ernst & Young Renewable energy country attractiveness indices. Our quarterly report compares the attractiveness of renewable energy markets, infrastructure and suitability for individual technologies across 40 countries. Figure 2 (page 25) shows comparative scores for Q1 2012 across all technologies. While rankings at the top of the index remain unchanged, all of the top ve countries China, the US, Germany, India and Italy dropped points during Q1 2012. Insufcient access to the grid continues to stie growth in Chinas wind sector, while a boom-bust pattern has returned to the US as a result of uncertainty over the expiry of key stimulus programs. In Germany and Italy, grid challenges and tariff cuts have reduced shortterm attractiveness, while in India, the end of a key tax break incentive is likely to dampen wind sector growth through 2012. Japan bucked the trend in the established markets with a higher score for Q1 2012, following an announcement of favorable feed-in tariff (FIT) levels to encourage additional investment from July 2012.
US$b
30 20 10 0
Q1 Q2 2009
Q3
Q4
Q1 Q2 2010
Q3
Q4
Q1 Q2 2011
Q3
Q4
Q1 2012
Source: Ernst & Young analysis based on data from Bloomberg New Energy Finance29.
Activity in emerging markets

For the second year running, the majority of new global wind installations were outside the OECD, with new markets in Latin America, Africa and Asia driving market growth. Asia Pacic continued to eclipse other regions in terms of wind installations and growth, mainly driven by China and India. Developers traditionally focused on the US have aggressively turned their attention to Canada and Latin America in particular Mexico as a hedge against expected weakness in the US market. Latin Americas strong economic growth and electricity demand continue to fuel renewable energy activity, particularly wind adoption. However, this is unlikely to make up for weakening demand in the developed world. (continued top of page 26)
29. Global Trends in Clean Energy Investment, presentation at the Clean Energy Ministerial in London, Bloomberg New Energy Finance, 25 April 2012, 2012 Bloomberg New Energy Finance. Total new nancial investment in clean energy includes asset nance, public markets and VC/PE. It excludes corporate and government R&D and small distributed capacity. Not adjusted for re-invested equity.
24
Technology
Figure 2. All renewables index May 2012
Rank1
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 26 28 29 30 31 32 33 34 35 36 37 38 39 40 (1) (2) (3) (4) (5) (6) (7) (8) (9) (13) (10) (12) (11) (14) (16) (15) (18) (17) (19) (20) (21) (22) (23) (24) (26) (31) (25) (27) (30) (28) (29) (32) (33) (34) (35) (36) (37) (39) (38) (40)
Market
China US3 Germany India Italy UK France Canada Brazil Japan Australia Sweden Spain Romania Poland South Korea South Africa Greece Portugal Belgium Mexico Netherlands Denmark Ireland Morocco Austria4 Taiwan Norway Turkey Ukraine Egypt Finland New Zealand Tunisia Bulgaria Israel Argentina Chile Hungary4 Czech Republic4
All renewables
70.4 67.5 65.1 65.0 57.5 55.8 55.7 53.4 50.4 50.3 49.5 49.2 48.4 47.7 46.7 46.6 45.3 44.6 44.3 44.2 43.9 42.5 42.2 42.1 41.3 40.5 40.5 40.2 40.0 39.8 39.7 39.6 39.5 36.8 36.4 36.3 34.9 34.4 34.0 32.8
Wind index
77 65 68 65 58 64 58 63 53 48 49 55 47 53 54 47 49 45 45 51 45 48 46 52 39 36 43 48 42 39 42 46 47 36 36 33 37 36 34 34
Onshore wind
78 68 65 71 60 61 59 66 55 49 51 55 50 56 56 46 52 48 48 49 46 49 44 52 42 40 44 49 44 41 44 48 50 38 39 37 40 39 37 38
Offshore wind
70 56 79 42 49 80 54 46 40 41 38 53 36 39 42 53 36 33 35 57 40 47 58 50 26 0 38 45 32 27 31 39 37 27 24 14 22 24 0 0
Solar index Solar PV

64 73 60 67 59 42 53 40 47 58 53 37 54 40 37 48 42 48 46 36 43 36 35 26 48 44 38 26 39 40 39 25 27 44 37 46 33 34 31 32 66 73 69 69 61 47 56 45 49 62 53 42 53 45 42 51 41 50 47 42 44 41 40 30 47 51 43 30 40 46 39 28 31 44 42 47 36 35 35 36
Solar CSP
47 74 0 55 41 0 29 0 33 27 54 0 58 0 0 29 50 33 35 0 40 0 0 0 54 0 0 0 28 0 44 0 0 48 0 39 17 24 0 0
Biomass/ other
60 62 68 62 52 58 57 50 54 40 43 58 44 45 44 41 36 34 38 39 39 37 46 43 38 51 37 45 35 46 34 53 34 20 35 26 32 29 43 32
Geothermal
51 68 57 45 61 36 34 36 24 47 57 35 27 41 23 36 34 25 25 27 55 21 33 23 21 34 38 31 41 32 24 26 51 27 34 28 27 38 39 23
Infrastructure2
75 62 71 67 55 67 56 66 51 54 47 56 38 46 48 45 49 32 38 50 41 41 52 48 42 51 43 51 37 41 32 47 47 41 39 38 34 42 36 46
Represents increase in All renewables score of more than 0.5 Represents decrease in All renewables score of more than 0.5 Notes:
1. 2. 3. 4. Issue 32 ranking is shown in brackets (adjusted by technology re-weighting in Issue 33, therefore different to published Issue 32 in February 2012). Combines with each set of technology factors to produce the individual technology indices. This indicates US states with renewable portfolio standard (RPS) and favorable renewable energy regimes. Technology weightings have been adjusted for landlocked countries to reect the lack of offshore potential.
Source: Ernst & Young analysis.
Rankings are based on our analysis of:

Technology (65%): for each country, we show six technology indices: onshore wind, offshore wind, solar photovoltaic (PV), solar (CSP), geothermal and biomass, and other resources.30 We perform resource-specific assessments for each index based on power offtake attractiveness, tax climate, grant or soft loan availability, market growth
potential, current installed base, resource quality and project size. Infrastructure (35%): we assess the level of regulatory risk in the electricity market, political support, favorable planning environments, ease of obtaining a grid connection cost-effectively, cheap access to finance and good lending terms.
30. Comprising small hydro and wave and tidal technologies. Energy from waste is not included.
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25
Technology
(continued from page 24)
Other positive changes included countries such as Mexico and Chile announcing new national targets for clean energy generation or reafrming government support through incentive schemes.
Consolidation drives M&A increase

Globally, an estimated US$21.7b worth of renewable energy transactions were completed in Q1 2012, a 41% increase on Q4 2011 (see Figure 3). Renewable M&A activity increased despite, or perhaps because of, continuing difcult economic conditions and diminishing levels of policy support in Europe and the US. New asset nance fell sharply, undermined by wavering political support and a continuing lack of liquidity in the project nancing market, resulting in only US$24.2b raised in Q1 2012. This represents a 30% decline on the previous quarter and a 13% decline from the same period in 2011.
Figure 3. Global energy sector new M&A value and volume of completed deals
100 30
The next 12 months are likely to be characterized by further consolidation in the solar and wind supply chains, with a large number of outbound deals expected from Asia and into Europe. Access to capital will remain the single biggest differentiator for companies in both the technology and infrastructure markets for the foreseeable future.
Grid parity key to long-term success

Its tough to predict the investment outlook for the rest of 2012. Activity is being stimulated by the rapidly improving cost-competitiveness of renewable technologies, but it will be hard for the sector to beat 2011s investment record unless policy and nancing issues in the US and Europe are resolved. This means that the short- to medium-term global sector outlook is generally downbeat. However, as more mature technologies move ever closer to grid parity with traditional energy sources, there is good reason for longer-term optimism. Clean energy technologies, particularly solar PV and onshore wind, continue to fall in price and approach competitiveness with fossil-fuel power. The price of PV modules fell by around 50% during 2011 and now stands 75% lower than three years ago. The price of wind power is set to fall further this year, after the cost of wind turbines fell by 4% thanks to increased competition from Chinese manufacturers and excess supply. Continuing improvements in the sectors economics mean that companies that survive the next few years will be well positioned for the next growth phase in the wind and solar markets.
80
Number of deals
60
40 10 20
Q1 2011
Q2
Q3
Q4
Q1 2012
Solar
Wind
Biomass and waste
Biofuels
Other
Value
Source: Bloomberg New Energy Finance.
Market consolidation was a key theme, particularly in solar and wind, and we expect this to continue as participants attempt to control supply chain costs and access new markets. There was also increasing appetite for energy from waste, as evidenced by a number of businesses entering or expanding in the sector.31 The European market faces signicant challenges with frozen and even declining tariffs, overcapacity in the supply chain and difcult project nance conditions.
Value (US$b)
20
Ben Warren
Environmental Finance London, UK
+ 44 20 7951 6024 bwarren@uk.ey.com
In future editions of Utilities Unbundled, Ben Warren will be reporting on renewable energy trends, hot topics and the impact of technology innovation on the future shape of utility businesses.
31. The biomass and energy from waste sectors transaction volumes were up 40% on Q1 2011.
26
Europes utilities take multi-billion euro asset impairment hit

European utilities generation assets and goodwill have lost value due to the volatile markets, tougher operating conditions and regulatory pressures of the past two years. Report by Louis-Mathieu Perrin
Accounting
he impact of two years financial and economic turbulence is laid bare in the 2010 and 2011 annual reports and accounts of European power and utilities companies. Profitability has continued to suffer, leaving utilities forced to sell off assets and scale back capital expenditure, with some assets being written off altogether. Ernst & Young analysis of the accounts of 16 European utilities32 reveals that almost 17.7b (US$23.4b) was written off balance sheets between 2010 and 2011. A large proportion (58%) of this lost value is concentrated among just three utilities, while only four companies posted impairments of 150m (US$198m) or less.
Where impairment strikes hardest
M&A activity may have left some companies lamenting costly acquisitions, notably those in Southern Europe. Deals concluded at high prices have failed to deliver promised value in the current economic climate, leading to impairments to goodwill. Assets, meanwhile, account for the largest share of lost value, with almost 13.6b (US$18b) written off between 2010 and 2011. Power generation is the most impacted activity, with close to 8.7b (US$10.8b) written off due to weaknesses in power prices and spreads in deregulated markets. Unsurprisingly, given the footprints of the European utilities in question, most (80%) write-downs were in Europe. The biggest share was centered in Southern Europe (33% of total impairments), with continental Western Europe and the Nordic region jointly making up 28%. Unfavorable economic conditions, subdued market fundamentals and regulatory changes have quashed asset values in these areas, whereas other developed and emerging markets recorded significantly better performance.
Assets account for the largest share of lost value, with almost 13.6b (US$18b) written off between 2010 and 2011.
Louis-Mathieu Perrin, Ernst & Young
32. Centrica, CEZ, EDF, EDP, E.ON, Enel, Fortum, Gas Natural, GDF Suez, Iberdrola, RWE, Scottish and Southern, Suez Environment, Vattenfall, Veolia and Verbund.
Utilities Unbundled
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Blame for write-downs
In their 2011 annual reports, utilities give wide-ranging explanations for their impairments. For most, the current economic climate is to blame. Pessimism about long-term power prices and spreads is triggering impairments, with some utilities, notably in the UK, accelerating plant retirements. In addition to subdued market fundamentals, others cite competition from renewables, which pushes loads lower for thermal plants, prompting impairments. Meanwhile, some utilities in continental Western Europe point to uncompetitive long-term oil-indexed gas procurement contracts as a factor contributing to asset write-downs. Increasingly, regulation and national policy are emerging as factors that affect competitiveness and profitability too. In Germany, for instance, the Fukushima incident led to amendments to the Nuclear Energy Act, prompting unplanned shutdowns of nuclear power plants. Meanwhile, reduced government support for renewables projects, due to funding pressures, is also resulting in write-downs.
Meanwhile, energy demand continues to show few signs of increasing, with Southern European markets most adversely impacted. And to top it all, the European sovereign debt crisis continues to cast a shadow over utilities credit ratings. This could, in turn, compromise access to finance, especially in the most impacted countries like Spain and Portugal. This will most likely prompt further scaling back of capital expenditure programs. The gloom and doom seems well entrenched. Utilities have already written off huge chunks of value and halfyear results, due this summer, could possibly evidence further impairments.
For more in-depth analysis of the factors impacting balance sheets at Europes largest power and utility companies, see our latest asset impairment report on www.ey.com/powerandutilities.
Utilities not off the hook yet
Louis-Mathieu Perrin
Assurance Paris, France
European utilities have made significant efforts to clean up their portfolios. This has included divesting unprofitable parts of their businesses and writing down other assets. Utilities have also tightened purse strings on capital intensive plans and scaled back or halted projects. However, since closing their accounts on 31 December 2011, additional risks to asset values have emerged and the situation could deteriorate. In some geographies, chief among the factors compromising ongoing profitability are subdued prices for electricity and gas. While oil prices continue to increase, companies most exposed to the oil-gas spread will continue to suffer.
+ 33 1 4693 4614 louis-mathieu.perrin@fr.ey.com
28
Accounting
n November 2011, the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) (the Boards) issued an updated exposure draft of their converged revenue model. The proposal specifies accounting guidelines for all revenue arising from contracts with customers, so it will affect almost all entities. The proposed model would be applied using five steps: 1. Identify the contract(s) with a customer 2. Identify the separate performance obligations in the contract(s) 3. Determine the transaction price 4. Allocate the transaction price to the separate performance obligations 5. Recognize revenue when, or as, the entity satisfies each performance obligation While the standard will have minimal impact on many transactions within the industry, challenges may arise on certain common transactions. Examples include the accounting for contract modifications, identifying performance obligations and determining standalone selling prices.
The new revenue recognition model and current practice

Moves toward a new model of recognizing revenue may impact some common power and utilities arrangements. Report by Dennis Deutmeyer
with the market price at the time of the modification (i.e., CU75/MWh). Under current practice, Seller would recognize CU6,500,000 of revenue during each of the ten years of the extended contract. Under the proposed model, Seller would generally consider the five additional years to be a separate contract. Thus, Seller would continue to recognize CU5,500,000 of revenue during each of the first five years of the extended contract and then CU7,500,000 of revenue during the last five years of the extended contract.
Timing of revenue recognized from contract modifications may change
Under the Boards proposed model, accounting for contract modifications may change significantly from todays practice. The requirements of the proposed model could ultimately create a revenue profile where revenue is deferred when compared to current practice. The following example demonstrates the potential impact. Seller has a ten year contract to supply 100,000 MWh of energy per year to Customer at a fixed price of CU55/ MWh. After five years, both Seller and Customer agree to extend the contract for an additional five years at a revised fixed price of CU65/MWh for the remaining ten years of the modified contract. The updated pricing is determined by blending the original CU55/MWh price
Utilities Unbundled
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Identifying performance obligations will be important
Key to the proposed model is the identification of separate performance obligations (i.e., deliverables) within a contract. This is important as performance obligations are used in several steps of the model allocation of the transaction price, the timing of revenue recognition and determining onerous contracts. The proposed models assessment of what is a distinct performance obligation, and when these may be bundled together, could result in similar contracts being dealt with differently. For example, applying this step of the model to an energy contract may result in the identification of separate performance obligations based on either the unit of measure (e.g., the individual MWh) or a delivery period (e.g., the energy delivered during a day, a month, a year or the entire term of the contract). These different assessments of performance obligations may change the amount of revenue recognized within a period. A lack of consistency in identifying performance obligations could impact the comparability of financial information within the industry, and we believe that the Boards need to clarify this section of the standard.
Standalone selling price may change timing of revenue recognized
The proposed model requires revenue to be recognized when the performance obligation is transferred to the customer. The amount of revenue recognized would be determined by allocating part of the total transaction price to each performance obligation, based on its respective standalone selling price. The standalone selling price is the price at which an entity sells a good or service on a standalone basis at contract inception. However, the proposed model is unclear on how to determine the standalone selling price in a multi-year fixed price contract. For example, Seller has a two year contract to supply 100,000 MWh of energy per year to Customer at a fixed price of CU65/MWh. As is usually the case, the CU65/MWh price is negotiated based on the unit prices reflected in the forward pricing curve for the energy. When determining the standalone selling price of the performance obligations (assumed to be the energy provided in each month during the contract term), Seller may apply the current spot rate to each months volume,
resulting in revenue being recognized evenly throughout the contract. Alternatively, if Seller determines that the standalone selling price of energy is best reflected by the prices included on the forward curve, this will, usually, result in increasing standalone selling prices over the contract. As the standalone selling prices determine the allocation of the transaction price to performance obligations, this would impact the revenue profile with less revenue being recognized in the earlier periods, and more in later periods of the contract. In summary, we encourage companies to consider the impact these changes may have on their financial statements and discuss the implications with the Audit Committee, the Board and, if necessary, industry analysts.
For more information see our March 2012 publication, The revised revenue recognition proposal power and utilities, available on www.ey.com.
Under the Boards proposed model, accounting for contract modifications may change significantly from todays practice.
Dennis Deutmeyer, Ernst & Young
Dennis J. Deutmeyer
Leader, Power & Utilities Sector, Global IFRS Services London, UK
+ 1 212 773 9199 dennis.deutmeyer@ey.com
30
Accounting
tangible benefits handle with care

Defining and accounting for tangible benefits can be as complex and burdensome as any other key aspect of a major investment so approach the task with care. Report by Derek Purchase
the applicant to demonstrate that the tangible benefits proposed in the application are commensurate with the size and nature of the transaction.
hen regulators are considering an approval for a new license, a business combination or the transfer of ownership of an existing operating license, they sometimes ask for a demonstration of what tangible benefits the public or consumer base will get as a result of the approval. This is a way of protecting the public or other stakeholders. The concept is widely used in the regulatory world but is particularly prevalent in the broadcasting, telecommunications and utilities (electricity and water) sectors. For utilities subject to rate regulation, regulators in many jurisdictions put the onus on the acquirer to demonstrate that the transaction is in the best interest of ratepayers.
Accounting for benefit is highly complex
Regulators often include specific criteria that require the benefits to be directed to projects and initiatives that would not otherwise be undertaken or realized in the absence of the transaction. The applicant has to demonstrate that expenditures proposed as tangible benefits flow predominantly to third parties, such as consumers. A company cannot argue that a planned capital improvement program in say, electricity transmission lines, could be viewed as a tangible benefit to ratepayers if those improvements would be undertaken even if the desired acquisition transaction did not proceed. In the utilities sector, when applying for regulatory approval for an acquisition, the application is commonly required to promise the delivery of some significant tangible benefits, which must be agreed to by the regulator before approval is granted. This benefit can range from 1% to 10% of the deal value, depending on the nature of the approval sought and the size of the deal. The regulator will generally add any assumed debt in the acquisition to the deal value, not just to the net purchase price. Because regulators do not solicit competing applications to transfer ownership, the onus is on
Regulators will pin down specific benefits and they have to be genuine
There are two ways that the cost of the tangible benefits obligation can be accounted for, depending on the characteristics of the benefit: 1. T hey can be expensed in future years as and when they are incurred, in which case they do not form part of the purchase price allocation but are recognized as expenses in the appropriate future periods. 2. A lternatively, they can be recognized as part of the purchase price allocation and capitalized (thereby forming part of the goodwill or intangible assets) if they are: a. paid directly to a third party (and non-refundable) or b. recognized as a liability at the time of closing. It is important for acquirers to consider the implications of this before developing the tangible benefit package submitted to the regulator for approval, if their objective is to have the cost of the tangible benefit package included in the purchase price allocation. In this way, they can structure the tangible benefit package with the appropriate characteristics and criteria to qualify for capitalization. To qualify as part of the purchase price allocation, the benefit characteristics must meet the recognition criteria required by the acquirers basis of accounting (IFRS or US GAAP). For example, if the proposed benefit is in the form of a commitment to undertake future upgrades to network or customer service, or even future rate reductions, these would generally not be considered as meeting the definition of a liability since there has been no obligating event, the amount is not measurable, etc. As such, they would be accounted for as the costs are incurred in future years. However, if the proposed tangible benefits are paid on closing, say in trust to the regulator (non-refundable) for rebates to the customers, then immediate recognition in the purchase price equation could be appropriate. It is also important to consider the tax impacts of each component in the tangible benefit package. They must be assessed separately, as different types of transactions may require different tax treatments. Immediate rebates to customers paid on closing could qualify as a current tax deduction, while future network upgrades are likely to be capitalized for tax (and accounting) when they are actually incurred.
Derek Purchase
Assurance Halifax, Canada
+ 1 902 421 6229 derek.purchase@ca.ey.com
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Edison Mission Energy created a highly innovative nancing structure for its new wind investment deal. Report by Joe Fontana
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Regional reports: Americas
Capistrano solution
U
sually, the innovative aspect of a renewable energy deal is its engineering. But with Edison Mission Energys (EME) latest wind power deal, the nancing and legal structure itself was the main event. The Santa Ana, California-based independent power producer created a unique nancing structure that enables two institutional investors, TIAA-CREF, the teachers pension fund, and CIRI, Cook Inlet Region Inc., a company that benets Alaska Natives who have ties to the Cook Inlet region, to invest in tax credit-nanced wind farms. I think it was, in that way, a path-breaking transaction, says Randolph Mann, Vice President for Development of EME, and a wind industry veteran who helped lead the development of nearly 2,000MW of wind projects. TIAA-CREF and CIRI have made a total commitment of US$460m, which includes an upfront investment of US$238m for three operating wind projects, the 61MW Mountain Wind I project and the 80MW Mountain Wind II project, both located in Wyoming, as well as the 150MW Cedro Hill project in Texas. As EME begins commercial operation of two new wind farms in Nebraska, the outside investors will provide US$140m of additional consideration. Eventually, the new company, Capistrano Wind Partners, may invest in as many as seven wind power projects around the US for a total portfolio of 500MW.
The
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Institutional investors had been inhibited from investing in the US wind energy sector because the tax structure, tax benefits and subsidies are just not effective for that type of capital investor.
Randolph Mann, EME
Attracting institutional investors

The new facility matches the long-term investment needs of institutional investors with the long-term life of a wind farm a natural t, but one that had not been utilized before EME developed this structure. Although pension and endowment investors had sometimes expressed interest in investing in renewables, they had not been able to take advantage of the tax credits that help to make such investments advantageous. They had been really inhibited from investing in the wind energy sector in the US because the tax structure, tax benets and subsidies that support wind energy are just not effective for that particular type of capital investor, Mann says. We concluded that if we could structure a way to join together with those investors, it might be pretty strong coupling an approach to allow Randolph P. Mann Capistrano to realize tax Vice President, Development benets and our ability Edison Mission Energy to develop, build, operate and manage projects, with their desire to have very large-scale investments in renewable energy with long-term, predictable cash ows over 10 to 20-plus years. It was a nice match, Mann says. For the investors, the deal had a number of advantages: We were able to bring together a portfolio of projects that didnt require the investors to participate in development risks or construction risk, and gave them the chance to invest in operating assets. Mann adds that all these assets were already in EMEs portfolio, making it possible to deliver a large-scale vehicle in a relatively short time. Another advantage was EMEs operational experience and scale.
Randolph Mann is a leader of Edison Mission Energys growth strategy in the wind energy sector. Active in the wind industry since 1998, he has played a lead role in more than US$3b of wind project investments totalling some 2,000MW.
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Tough to execute
But as straightforward as that might sound, it was complex to execute. Its a transaction thats relatively simple in terms of the basic idea were putting together a portfolio of wind projects, and we want to bring in preferred equity alongside our sponsor equity but when you pull back the covers, its pretty complicated, Mann says.
Finding the right investors who were able to execute despite shifting market conditions, proved challenging. All in all, the deal took about 18 months to pull together. A future deal might come together more quickly: We feel like we can use this sort of intellectual process and property again to enlarge the vehicle and continue to use it as a growth platform. What makes the Capistrano program unique, according to Mann, is not so much gathering a portfolio of assets but the fact that EME developed all the projects. He explains: If you think about the private equity guys, theyre usually bringing investors into a pool. Then theyre adding more projects or investment opportunities into the vehicle over time. But each of those investments is sponsored by a different company, whereas in this case, we really are the developer, operator and owner of all the projects. Renewable energy faces a number of headwinds at the moment, including the pending expiration of the tax credit program and the current low price of natural gas and its impact on power prices. To continue to grow, Mann believes the industry will need all the innovation it can get, at both the drafting board and the deal table. The Capistrano deal should help: The purpose of this was not just to do a financial transaction and then put it on the shelf. It was really to tap into a source of capital that would help us to fuel continued growth.
Joseph Fontana
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New rules of the environmental game
With two of the most signicant new US emissions rules in decades nearing adoption, American power producers face some signicant challenges. Report by Joe Fontana and Anthony Torrington
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S power generation companies have cut emissions by nearly 70% since 1990, even as energy use climbed by 38% and real GDP rose by 65%.33 But they will soon be asked to do even more. The US Environmental Protection Agency (EPA) is now introducing the Mercury and Air Toxics Standards (MATS) rule to limit mercury, acid gases and other toxic pollution from power plants and the Cross-State Air Pollution Rule (CSAPR or Casper), which requires states to further reduce power plant emissions that contribute to ozone and/or ne particle pollution.
Better than uncertainty

The EPA has issued its nal rule on MATS, but CSAPR has been delayed due to a last minute court decision. For some including NRG Energy (NRG), one of the larger investor-owned power companies in the US, getting certainty around regulations allows the company to effectively plan for change. Its difcult to have an environmental capex plan when you really dont know what you have to do to comply, says Mauricio Gutierrez, COO of NRG. As a publicly traded energy company, the risks of uncertainty are high for NRG: Were not a utility. We dont have the luxury of passing our environmental costs through a rate base to our customers. We live in a pretty Darwinistic world in terms of survival, says Gutierrez. Whatever the nal outcome regarding CSAPR, Gutierrez feels NRG is well prepared to face the future. Earlier state-led initiatives that affected a number of NRGs coal plants had already led the company to accelerate its environmental program. In addition, most of NRGs eet already burns low-sulfur coal, which Gutierrez sees as a competitive advantage in a market that will be further shaped by the clean air regulations.
Mauricio Gutierrez
Chief Operating Officer NRG
After executive roles in commercial operations and trading at NRG, Mauricio Gutierrez took over as the companys COO in 2010 and oversees NRGs plant operations, commercial operations and environmental compliance, as well as the companys Engineering, Procurement and Construction division. Before joining NRG, he was Managing Director for Dynegys Southeast and Texas regions.
We feel that weve already made much of the investment needed to comply with the new requirements. Our coal plants are going to be there while the rest of the less efcient units that havent made those investments will likely have to retire or make very hard choices, says Gutierrez
Its difficult to have an environmental capex plan when you dont know what you have to do to comply.
Mauricio Gutierrez, NRG
Tracking the impact on coal

Other power generation companies are moving ahead as well, in response to the new rules and todays ultra-low natural gas prices, according to Daniel Chartier, Director of Environmental Markets and Air Quality Programs at Edison Electric Institute (EEI) in Washington, D.C. EEI has tracked public announcements indicating that 53GW of coal plant capacity will be retired over the next
33. Source: analysis provided by Edison Electric Institute, based on data from U.S. Department of Energy, Energy Information Administration, U.S. Environmental Protection Agency and U.S. Bureau of Economic Analysis.
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Daniel Chartiers brief at EEI includes pollutant and climate change issues, as well as the design and oversight of environmental markets. Before joining EEI, he served in the US Environmental Protection Agency (EPA).
Daniel Chartier
Director, Environmental Markets and Air Quality Programs Edison Electric Institute
decade, a little less than one sixth of total coal capacity in the US. A number of companies have essentially said, Weve done our compliance planning, we looked at what these air quality and other environmental regulations are going to cost, and the best thing we can do for not only our customers but for our shareholders is to retire that unit today, says Chartier. Flexibility on when companies have to comply with MATS has been an issue. One of EEIs main concerns is that US regulators, including the EPA, are unwilling to take into account the cumulative impact of the many new rules being introduced in the power sector. Chartier points out that labor and parts constraints may sometimes make a retrofit in four or five years time much less expensive than a change in the required three. But others who have already installed the necessary controls argue that an extension penalizes them relative to their competitors.
diversification that makes the electric system more resistant to disruptions. Diversification is one of the most important attributes that we have as an industry. NRG, however, is not abandoning renewables. Instead, it is trying to capitalize on its existing commitments to renewable generation by developing Americas largest portfolio of large-scale solar projects and building up a branded green energy business its Green Mountain Energy subsidiary. I think customers want to have a green product as long as there is not a significant difference in price between traditional power and renewable power. If its within a certain band, people will pay for something that they believe is right as a society, Gutierrez says.
The Edison Electric Institute estimates that coal plants amounting to 53GW of capacity will be retired over the next two years.
Diversity at risk
US power generation may face other forces, too. One of the biggest is that if the non-compliant coal plants retire soon, Gutierrez expects it may lead to more natural gas plants, which are much cheaper to build and run right now than coal or renewables. A low price for gas, he says, trumps every other potential form of generation and makes it not economically viable to build other forms of power generation. If the gas price stays low, this could have a negative impact on Americas power diversity, Gutierrez says: If we now think natural gas is going to be the primary form of generation, we run the risk of losing the fuel
Joseph Fontana
Anthony Torrington
Assurance Partner Iselin, US
+ 1 732 516 4681 anthony.torrington@ey.com
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t has been on the cards for almost two years, yet the regulations that power and utility companies need to address to comply with the Dodd-Frank Act are still being nalized. With some of the most impactful rules yet to be agreed on, companies might be forgiven for thinking that time is on their side. It isnt. Once promulgated, the most affected organizations will have 90 days in which to comply, rising to 270 days for those that will be least impacted.
Shifting Dodd-Frank timeline frustrates implementation planning

To put the required effort into perspective, consider Failure to prepare for that the Act itself runs to around 2,000 pages and that behind-schedule Dodd- each regulation published so far easily reaches into Ninety days is a challenging timeframe in which Frank regulations is not an hundreds. to interpret the requirements, assess the impact and option. Power and utility implement signicant process and technology changes. Companies will have to work with the proposed companies risk potentially regulations and apply the rest as the rules are nalized. severe non-compliance penalties and missed More transparent trading market opportunities. The Dodd-Frank Act gives US regulators additional authority over the nancial industry. It aims to prevent Report by Johnny Molina another nancial crisis by enhancing transparency and providing market stability. Utilities are in the frame because they use over-thecounter (OTC) derivatives (swaps and swaptions) to hedge their commodity exposure, reduce earnings volatility and enhance nancial performance.
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Historically, these OTC derivatives, which are company-to-company contractual agreements, have allowed organizations to customize terms, including credit terms. This enabled organizations with favorable credit ratings to post cash margins only once preagreed exposure thresholds were met, minimizing working capital requirements and fostering liquidity. Dodd-Frank will change that. The Act mandates exchange trading (where an exchange exists) and central clearing, along with commensurate initial margin postings and variation margin postings based on mark-to-market valuations. For utilities, the implications include a potential increase in the costs of transacting; greater urgency in determining eligibility for the enduser exception, thus avoiding central clearing and the associated margin requirements; and concerns about overall market liquidity.
Regulatory compliance
The rule-making process is well behind schedule. Initial legislation was signed in July 2010 with a proposed enactment date of December 2010. Although a number of rules have been nalized, now, well into 2012, important rules that will dene a swap and determine the requirements for the end-user exception have not been nalized. Penalties for non-compliance are also to be determined. However, the most sophisticated market participants face the highest governance and compliance requirements. Swap dealers, for instance, will be expected to appoint a chief compliance ofcer, who may be required to certify, under penalty of law, that compliance reporting is accurate and complete. Market participants have commented, as part of the rule development process, that too-stringent requirements could diminish individuals interest in taking on the role.
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Potential regulatory risks lie in failure to interpret and apply the myriad rules to individual circumstances and tardiness in implementing the governance framework, process and technology changes that are needed to meet compliance deadlines.
What utilities need to do now

Despite uncertain timing, utilities that trade in derivatives cannot afford to wait and see what happens before committing resources. They can build response teams that comprise regulatory and legal minds to unravel the ner details; stakeholders who will implement the changes; and commercial individuals who will transact with the market, to steer their businesses to compliance via draft and nal versions of the rules. For some, however, the onerous requirements of Dodd-Frank will prove too much and the number of market participants could shrink. Some may attempt to put themselves beyond the requirements of the Act by transacting in physical (energy) products rather than on a nancial basis. Others might seek to offset increased costs by engaging in fewer hedging activities. But, much like the regulations themselves, that future state remains to be seen.
Market transformation risk

If penalties for non-compliance are not enough, companies that do not adapt quickly to the evolving regulations will potentially sacrice their ability to operate within the derivatives market and could lose commercial advantage. Certainly, for the most active market participants, failure to adapt is not an option. They could nd themselves precluded from the most liquid trading markets and vulnerable to market price and earnings volatility.
What is a swap dealer?

A major issue holding up Dodd-Frank is the denition of a swap dealer. On 18 April 2012 agreement was nally reached. In the context of the Act, a swap dealer: Holds himself/herself out as a dealer in swaps Makes a market in swaps Regularly enters into swaps with counterparties as an ordinary course of business for own account Engages in any activity causing the person to be commonly known as a dealer or a market-maker in swaps The rule provides de minimis thresholds and allows swap dealers to limit their designation to those parts of the business that engage in swap-dealing activity. Compliance with this rule will be required 60 days after the nal swap denition rule.
Johnny Molina
Financial Accounting Advisory Services Houston, US
+ 1 713 750 1367 johnny.molina@ey.com
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Regional reports: EMEIA
GULF STATES deliver
pioneering transmission project

An unprecedented project linking the electricity grid in six Middle East states unlocks cost savings and signals possibilities for interconnection initiatives worldwide. Jo Rowbotham hears how from the Gulf Cooperation Council Interconnection Authoritys Ahmed Ali Al-Ebrahim
Ahmed Ali Al-Ebrahim
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ore than 20 years in planning, the Gulf Cooperation Councils (GCC) Interconnection Project today links the transmission networks of six Gulf states on one unied grid via overhead lines and submarine cables. Since the ofcial go-ahead in 1999 and the establishment of the GCC Interconnection Authority (GCCIA) in 2001, the project has progressed rapidly to implementation. Bahrain, Kuwait, Saudi Arabia and Qatar interconnected in 2009; the United Arab Emirates (UAE) hooked up in 2011, with Oman currently connected to UAE via a 220kV link that will be upgraded to 400kV (see Figure 1).
The interconnector alone will save countries up to US$3b in capital investment by avoiding the need to build more than 5GW of generation capacity over 20 years.
Ahmed Ali Al-Ebrahim, GCCIA
ow of energy between member states. If there is an outage, it is dealt with imperceptibly.
Latest in technology innovation

The project is not only audacious in concept but also employs the most innovative technologies. Building an entire grid system from scratch means there are no legacy systems to negotiate, explains GCCIAs Ahmed Ali Al-Ebrahim. Its the rst-ever project in the GCC and the Middle East to use High Voltage Direct Current (HVDC) technology. This enables power ows between Saudi Arabia, which operates a 60Hz grid, and the other ve states, which operate at 50Hz. The HVDC substation for Saudi Arabia (see photos, page 45) cost more than US$200m, compared with just US$50m for the others, but is integral to the overall solution. Smart technologies enable real-time decision-making and remote diagnosis of faults. An engineer can pinpoint an issue with a substation in the desert 400 kilometers away, and direct the right crew with the right capabilities to remedy the fault, explains Al-Ebrahim. Security cameras and heat-detection systems also provide alerts and enable preventative action. Today, the connected grid helps to counteract major load shedding, which used to be severe and commonplace. These days, we dont lose a single customer, let alone country, due to the stability of the network and the immediate
Budding energy market

Beyond providing emergency backup, this project is designed to create a common energy market so that the lowest-cost generation can be fully utilized.
A bilateral trading system currently gives countries visibility over capacity in other member states and enables them to place bids using yearly, monthly or daily options. This is facilitated by the GCCIA, which then arranges transmission. In time, the system will become more sophisticated, ultimately enabling countries beyond the GCC to balance energy demand and supply.
Figure 1. The interconnection project links the GCC states of Saudi Arabia, Kuwait, the UAE, Qatar, Bahrain and Oman
Kuwait
Iran
Al Zour
Arabian Gulf Al Fadhili
Ghunan
Bahrain Jasra Qatar Doha Salwa Silaa United Arab Emirates Oman
ou -F Al
h ha
MHadah
Gulf of Oman
Saudi Arabia
Source: gccia.com.sa
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The Al Fadhili HVDC back to back station in Saudi Arabia by day (left) and at night (bottom right).
Benefits of collaboration
The rst phase cost around US$1.2b and was nanced by GCC governments. Shareholdings are proportionate to the anticipated savings and economic benets that each state will derive. The interconnector alone will save countries up to US$3b in capital investment by avoiding the need to build more than 5GW of generation capacity over 20 years. Operational and fuel efciency savings across the system will amount to at least US$300m, based on feasibility estimates to 2028. Even without signicant economic benets and energy security, Al-Ebrahim believes this is a good strategic project for the region. It has the backing of GCC leaders and the support of electricity and energy ministers of the Gulf states to share in a united generation capability. Though the shareholdings vary, each country has equal representation on the GCCIA board, with the chairmanship rotating every three years, so that no single country drives this initiative.
Ahmed Ali Al-Ebrahim

Director, System Operations & Maintenance and Market Operations, Gulf Cooperation Council Interconnection Authority (GCCIA)
Ahmed Ali Al-Ebrahim joined the GCCIA project in 2007 with more than 20 years experience in the power sector. Formerly, he managed the control center at the Electricity and Water Authority in Bahrain and, as CEO of Sintegro International, an infrastructure and facilities management consultancy rm for large-scale real estate developments.
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Also on the agenda is greater exploitation of renewable resources, such as wind and solar. The GCCIA is an active participant in the EU-GCC Clean Energy Network, exploring opportunities to seek renewable energy initiatives in the GCC, says Al-Ebrahim. Increased interconnection should allow greater renewables penetration without affecting system stability. In addition, building new baseload generation plants, such as nuclear, becomes more economically feasible when it can be shared across a larger GCC market.
Toward a more interconnected future

Al-Ebrahim believes that energy interconnection in the Gulf states could be just the start. The GCCIA aims to promote power trading within and beyond the GCCIA countries to optimize fuel resources. Interconnection with other grids, such as the Egypt, Jordan, Iraq, Lebanon, Syria and Turkey (EJILST) grid, or the Maghreb Arab grid, will create opportunities to export surplus power to other regions. This market would encourage energy interchange to meet seasonal demand diversity across regions. But it is not just about energy. By thinking ahead, the GCCIA deliberately built an additional 80% telecommunications capacity into the grid. Deals are being struck with telecom companies in the region that will use the interconnectivity lines to deliver better quality and lower-cost services. Broadband connectivity might also be possible. That, however, is the future. The present is all about the seamless ability to avoid power outages by drawing on the resources of a neighboring GCC member state over a unied network. As a top executive at a GCC member states utility said: Just being able to avoid a total or partial shutdown means the interconnection will pay for itself.
Jo Rowbotham
Power & Utilities Advisory Sector Leader Middle East and North Africa Manama, Bahrain
+ 973 1753 5455 jo.rowbotham@bh.ey.com
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Eurozone crisis
utilities prepare for the new normal
The latest Eurozone recession is creating tough conditions for utilities. How can the sector minimize risk and prepare for post-recession success? Report by Mark Gregory and Filippo Gaddo
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or many power and utility companies, surviving the recession and thriving afterwards will depend on minimizing risk in the short term and seeking opportunities for growth, for example outside Europe, in the long term. It is also more important than ever to keep a close eye on government policy: the pressure to keep energy prices affordable is stronger than ever.
Economic trends and what they mean for utilities
In February, the European Commission (EC) announced that the Eurozone had entered its second recession in three years. While this latest recession is considered mild, recovery is likely to be slow and according to our latest forecast, the EUs GDP is expected to shrink by 0.5% this year, followed by a 0.7% rise in 2013.
Figure 1. Forecast of European GDP growth for 2012 and 2013

Germany France Netherlands Eurozone Spain Italy Portugal Greece 7% 6% 5% 4% 3% 2% 1% Yearly GDP growth (%) 0% 1% 2%
In addition, the recent deterioration of the political situation in the Middle East and subsequent rise in oil prices has added to the risks threatening the global economy. While our central projection is for oil prices to remain high in the second half of 2012 and then fall back as tensions ease, there is a significant possibility that the situation could escalate. In this alternative scenario, the Brent crude spot price could rise as high as US$200 a barrel, and although the direct impact on the Eurozone would be smaller than in other developed countries, the indirect effects of reduced global demand and heightened financial tensions would have a significant impact. The tough economic environment has particularly significant consequences for the utility sector. Demand for power, gas and water broadly tracks total output in the economy, although it tends to respond less in downturns/ upturns due to a fixed level of consumption needed by businesses and households. With private and public sector retrenchment continuing in the attempt to reduce levels of indebtedness and with growth in household disposable income falling close to zero in 2012, domestic consumption in the Eurozone is expected to contract by 0.7% in 2012, with business investment also likely to contract by around 1.5%. As a result, we expect demand for both gas and power to be flat or to increase only slightly (less than 0.5%) in 2012 and 2013. Final consumer prices will be kept low due to the political pressure on maintaining affordable prices. A phenomenon that utilities will need to get used to. As more disposable income is spent on energy bills, politicians will become increasingly vocal about the need for utilities to provide fair prices to consumers. The sector is therefore likely to see revenues from the provision of core energy services stagnate in 2012 and only moderately increase in 2013.
The financing challenge
2013
Source: Oxford Economics.
2012
Although the immediate threat of a Euro breakup has been avoided, concerns over sovereign debt, the strength of the banking sector, levels of credit availability and unemployment remain. There is still a fundamental need for transformation in the Eurozone and wider European economies to create the platform for future economic growth. The risk of a credit crunch is real and businesses with an exposure to the Eurozone should stress test their planning against a range of plausible downside scenarios.
Added to these challenges is pressure on utilities to invest in the high capex assets needed to upgrade networks and decarbonize the sector. Estimates of the total investment required over the next 10 years vary as new policies and regulations are introduced, but it is likely to peak at more than 80b (US$106b) per annum over the next five years. If we add this figure to what utilities in the sector need to refinance more than 100b (US$132b) of loans and bonds from 2012 through 2014, it becomes clear that finding these funds would be a stretch even in a bullish market. In the current economic climate, it begins to look highly uncertain. Even utilities whose own credit profile is good cannot score ratings more than two notches above their reference sovereign rating Iberdrolas recent downgrade (from A to BBB+) due to
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How can utilities navigate the new normal?

Manage risks in the short term
In this difcult economic climate, companies will make adjustments to their strategies and positions to minimize exposure to risk. For utilities, the key is to reduce policy exposure through diversifying portfolios while keeping in mind the impact of potential government intervention. Government action may be particularly signicant in these areas: Renewable energy: investment is expected to slow Nuclear energy: strong political backing is needed for the long term Gas: expected to continue as the first choice for new generation, but generators will need to work with policymakers to ensure proper remuneration Policy intervention is more likely in retail and generation markets than for networks, where risk is mitigated by regulation. As utilities increase their scrutiny of risky assets, these may need to be reassessed. It is also important for utilities to assess their exposure to segments and countries that may be more vulnerable to the economic downturn.
Long-term opportunities
While minimizing risk is important, so too is making the most of future opportunities. Now is the time to lay the groundwork for post-recession success. Given the challenging regional economic conditions, tapping into rapidly growing markets outside Europe offers excellent opportunities for utilities. Alliances and deals with utilities from these markets and sovereign wealth funds may be worth exploring. Increased government focus on carbon targets and energy affordability will also increase opportunities for utilities to diversify through energy-efcient products. The growing momentum of the smart grid agenda and the need for a network upgrade will present other opportunities, not only in the network (and therefore in a less risky and regulated market), but also in energy management, energy services and new technology products. This offers opportunities to diversify into new products and services or establish joint ventures with nonenergy companies that have considerable experience in consumer products.
the ongoing deterioration of economic conditions in Spain is a clear example. Ten of the major European utilities have already reduced their medium-term capex target, and we expect more to follow.
Energy and politics

The increasing politicization of energy policy has served to create an additional layer of uncertainty in an already volatile market. Rapid shifts in policies are occurring across Europe, ranging from windfall tax on nuclear operations (Germany, Belgium), a tax on energy companies (Italys Robin Hood tax) to cuts in subsidies for solar photovoltaic (PV) (Spain, Italy, Germany and the UK). These policy changes, driven by governments efforts to reduce public debt, send mixed signals to both utilities and investors because they seem inconsistent with general government policy to incentivize clean energy and meet carbon targets. With this debate set to intensify throughout 2012, we expect political uncertainty to continue to be an issue in European energy markets.
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Paolo Pallotti
Head of Administration, Planning and Control, Infrastructure and Networks Division, Enel
Paolo Pallotti took up his current position at Enel in April 2012, following a three-year period as Head of Strategic Planning and M&A. He previously spent two years in the companys Latin America and Iberia Division, after two years as Head of M&A in the International Division. He currently holds board positions in various companies within the Enel Group. He previously held board positions at energy companies in the Netherlands and Spain within the Group perimeter.
Case study
Eurozone crisis: Enels natural selection

Enel is adapting to the Eurozones new normal by reducing debt and laying the groundwork for future growth. Report by Mark Gregory with Enels Paolo Pallotti and Stefano Risoldi.
Italys largest utilities company, Enel, has inevitably seen impacts from the Eurozone crisis and preceding global economic slowdown. In the period leading up to 2008, the company nalized its international growth including among others the acquisition of Spanish utility Endesa funding its acquisition strategy by debt. Now the environment has signicantly changed. Deteriorating European market fundamentals, including a reduction in power demand and lower margins, are affecting Enels performance (particularly in Spain, Portugal and Italy). Enel has been developing a strategy to address this new normal, comprising internally focused and externally focused actions. The company is nalizing its disposal process to reduce debt, reviewing capital expenditure (partly helped by falling demand) and boosting operational efciency to reduce cash spend and improve working capital. Many of these strategies have been mirrored by other utilities facing similar challenges. The companys multi-layered approach to external factors reects the complex interactions of policy, technology and nancing issues. Enels belief that the current slowdown will not be short-term the utility has reduced its mid-term view of demand means it is looking for growth outside its core markets. The company is looking to rebalance its portfolio to faster growth or higher margin locations including Latin America and Russia. Improvement of Enels technology mix across conventional and new, clean technologies is ongoing. With the aim of fostering current and future growth, the company has established Enel Green Power, whose core activity is sustainable development in the renewables sector. Enel is also playing an active role in the clean technology and innovation sector, including electric mobility, distributed generation, home automation and smart grids. Enel continues to test future strategies by exploring scenarios around movements in commodity prices and GDP evolution. Mergers and acquisitions are unlikely until conditions stabilize.
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Stefano Risoldi
Head of Scenario and Market Analysis Enel
Stefano Risoldi has more than 20 years experience in international energy markets, focusing on nancial and corporate strategy evaluation, macroeconomic analysis, economic and nancial policy in the energy industry, and corporate social responsibility. He specializes in the functioning of international energy markets, including the oil, gas and power sectors, and the development of long-term energy scenarios.
Life after the recession
What to do now
Success in the post-recession market will depend on immediate action. Utilities must take precautionary steps to minimize and manage existing market and policy risks while also identifying and capturing opportunities whether by investing in new technologies such as energy services and smart grids, or in new, rapid-growth markets. Utilities need to take a step-by-step approach to assess risks and opportunities: Analyze the impact of currency movements Update previous investment plans Assess competitor positions Identify the scope to acquire, grow, consolidate or divest Identify the medium-term opportunities beyond the recession Assess the risks of greater coordination of fiscal policy (particularly around taxation) It is also critical for utilities to engage appropriately with key stakeholders and EU governments and institutions, to show how the sector can positively contribute to the recovery. In particular, as the energy sector changes to deliver low-carbon technologies, it can support economic recovery through investment in high value-added products and services, innovation and job creation.
The pressure from the three trends of low demand, politicization of energy and the nancing challenge will continue to squeeze utilities in 2012 and 2013. Despite the gloom about economic short-term prospects, there are some positives for the medium term, mainly due to growth in emerging markets and the potential acceleration of the US recovery after this years presidential election. If a full Euro breakup scenario is avoided, the easing of the Eurozone crisis would lift demand and allow governments room to provide additional support for the low-carbon agenda, relax the stress on energy affordability and relieve pressures on utilities. But the environment is likely to look very different from before the recession. Focus will remain on minimizing costs of achieving the low-carbon economy, on delivering energy efciency and on providing value-added services to customers.
Mark Gregory
Chief Economist London, UK & Ireland
+ 44 20 7951 5890 mgregory@uk.ey.com
Filippo Gaddo
Transaction Advisory Services Economic Advisory team London, UK
+ 44 20 7951 6565 fgaddo@uk.ey.com
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Time to invest in Turkish energy?
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Turkey, the worlds fastest-growing economy, has ambitious energy privatization plans. But are foreign investors condent about the market, and will they buy? Report by Bulent Ozan
fast-growing economy, boosted by ongoing industrialization and population growth, is driving the need for big investments in Turkeys energy sector. With electricity demand currently expected to grow faster than generation, a power supply and investment gap is opening up. The Government is fast-tracking efforts to plug the gap by privatizing the sector, which gives domestic and foreign investors the opportunity to buy into a vibrant market potentially worth billions of US dollars. But previous privatization efforts in Turkey have seen mixed results. So will it work this time, and what opportunities and pitfalls should investors watch for?
Patchy progress to date

Restructuring measures necessary to attract private capital into the Turkish power sector rst began to be addressed almost a decade ago. After a failed attempt in 2006, the rst distribution monopolies were nally privatized two years later. Czech utility CEZ and Austrias Verbund each joined forces with a local Turkish partner early on to buy attractive distribution businesses. Other overseas bidders were apparently put off by uncertainty about future tariff changes. But domestic investors were more condent about the prospects for distribution businesses on sale: prices paid on a per-customer basis have rapidly escalated since 2010. This round of distribution privatizations is ongoing. Some of the heady prices we have seen may lead to a wave of secondary sales, which could be attractive to overseas investors.
Fresh opportunities and possible pitfalls

The Turkish government now envisages a new wave of privatization involving sales of state-owned generation assets and more distribution businesses. These opportunities are again drawing serious interest from the leading European utilities. Pushing for EU accession as soon as possible, Turkey is arguably an even more attractive market now, with solid prospects for economic growth, a stable political framework and well-developed nancial markets.
The Turkish Government envisages a new wave of privatization, involving sales of state-owned generation assets and more distribution businesses.
Generation assets
Most generation assets are still under state ownership and this side of the business could be more attractive to overseas investors. Turkey proposes to privatize close to one-third of total existing capacity. Assets for sale include portfolios of thermal and hydroelectric capacity. In addition, the prospects for greeneld renewables projects have been enhanced recently with the enactment of a separate law framing the incentive regime.
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Strong interest from many leading European utilities is already rumored, but buyers may need to be particularly wary of the following: Actual capacities falling short of nameplate: many generation assets need significant refurbishment to reach nameplate capacity. The watchwords for investors are caveat emptor.34 Off-take: there is no off-take arrangement in the current privatization plan. The Government is reviewing the issue, because investors will need clarity on off-take to secure the best financing terms. Access to fuel sources: rights to fuel sources for privatized assets are not currently guaranteed. We expect key laws clarifying rights to fuel sources to be ratified soon. Until these laws are enacted, investors need to be fully aware of the risks.
Overseas investors will look for strong local partners

Despite setbacks, Turkey is showing resilience and a determination to achieve a fully liberalized energy market inside 10 years. It still has work to do to attract foreign investors, but rm foundations are in place: legislation is catching up; PPA arrangements, tariff regulation and renewables incentives are becoming clearer and closer to international norms; the energy trading market is maturing; and the regulator, Energy Market Regulatory Authority (EMRA), has learned from past mistakes. The attractions of a fast-growing economy and high expected power demand make investment in the Turkish energy sector look tempting, despite some negatives on the regulatory side. But foreign buyers would need to make a large capital investment, which they may decide the current high-risk market coupled with uncertain returns doesnt yet justify. The market is complex and foreign investors currently lack the necessary local knowledge to go it alone. For now, they are more likely to consider gaining exposure to the Turkish market by investing in Independent Power Plants (IPPs) or taking stakes in Turkish utility companies.
Distribution
Foreign investors wanting a long-term presence in the Turkish market will undoubtedly look closely at the distribution monopolies. The Government plans to complete the privatization process as soon as possible, and some prized distribution regions are still up for grabs. Secondary purchases of distribution regions that have already been privatized may offer a compelling alternative. These businesses will already have addressed some of the legal issues outstanding at privatization and are likely to have begun the necessary restructuring and change management measures. In either case, a range of issues are likely to warrant signicant attention, including the following: The potential for further legislative change, including changes to PPA conditions, remains a significant risk. Tariff issues remain because prices are still regulated and Turkeys spot market is not yet wholly dependable for investment signals and use in contracts. Legal unbundling of distribution and retailing is scheduled to begin by 2013 and may compound uncertainty for distribution businesses.
34. Buyer beware.
Bulent Ozan
Advisory Services Istanbul, Turkey
+ 90 212 368 5799 bulent.ozan@tr.ey.com
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Germanys energy transformation inside and out
Germanys plan to phase out nuclear power while decarbonizing the electricity sector brings challenge and opportunity for German utilities and neighboring countries. Report by Thomas Kaestner
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ver the next decade, Germany will switch off the nuclear power that supplied a quarter of its needs, while retaining the countrys commitment to cut greenhouse gas emissions. The Government intends to make up the shortfall in generation with renewable power, which accounted for 12% to15% of the generation mix in 2011, and by improving energy efciency. The policy change known in Germany as the Energiewende or energy transformation is an expensive decision for the domestic power sector, bringing dramatic change to business models, investment and ownership of the high-voltage grid.
Ownership of the high-voltage grid

The divestment process began in 2011 and EnBW is currently in the early stages of selling its share.35 To date, discussions on the formation of a German national grid company have been inconclusive. Germanys energy transformation probably means the country will become a net importer of energy. This creates export opportunities for bordering countries including the Netherlands, the Czech Republic and France.
Laszlo Varro joined the IEA in 2011. He previously worked in the private sector as Director for Strategy Development at MOL Group, a publicly quoted integrated energy company. Prior to this, he was the Head of Economics and Price Regulation at the Hungarian Energy Ofce, the national gas and electricity regulator in Hungary.
Business models
Utilities with nuclear interests must manage the phaseout and restructure around new revenue sources. Massive restructuring programs are underway by the Big Four German energy companies. In the future, we may also see an increase in partnerships and joint ventures to capitalize on business opportunities.
Laszlo Varro
Head of Gas Coal and Power IEA
Investment
Germanys state-owned development bank KFW estimates that up to 2020, 250b (US$333b) will be needed for investments to ramp up renewables, provide balancing power for uctuating renewable energy, and build thousands of kilometers of new transmission lines. Laszlo Varro, Head of Gas, Coal and Power at the International Energy Agency, is condent the money can be found: It wont be easy ... there are big costs and real technical difculties. But German energy policy has a track record of attracting very large scale investments into renewables. In fact, he believes that securing permission licenses to build the new network lines will be a bigger challenge than raising capital. While theres an immediate challenge for domestic utilities to nd funding, other nancial investors and foreign utilities considering entering the German market will also need to understand the new risks of the changing environment and the impact on potential investment targets.
However, it also increases Europes need for progress on regulatory and market design to achieve a better integrated, truly exible European electricity market, says Varro: The distinctions between cross border and domestic transmission will be less meaningful in future. We need policy to create a European market for exibility, which can manage volatility in the delivery system.
Thomas Kaestner
Transaction Advisory Services Munich, Germany
+ 49 89 143 311 7544 thomas.kaestner@de.ey.com
35. EnBW AG, one of Germanys Big Four utilities, is 93% owned by the state and a municipality holding.
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An interview with Dr. Rolf Martin Schmitz, Chief Operating Ofcer, RWE
Impacts of Germanys energy transformation

What needs to happen from a regulatory/policy standpoint to work out the replacement of nuclear and to ensure security of supply?
To ensure security of supply, there must be a sufcient quantity of reliable generation capacity in the grid that can be called on at times when the wind isnt blowing and the sun isnt shining. This will only happen if the economic viability of these facilities is provided for. We work on the assumption that the electricity wholesale market will continue to coordinate supply and demand, i.e., that there will be no regulatory intervention in the foreseeable future for example, in the form of premium payments for provision of capacity in an economically viable manner. If there are amendments, they should be part of a market-based system.
Q
A
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Dr. Rolf Martin Schmitz

Chief Operating Officer RWE
Rolf Martin Schmitz joined RWE as a member of the RWE AG Executive Board with effect from 1 May 2009. He was previously CEO of RheinEnergie AG, Cologne, and Managing Director of Stadtwerke Kln from 2006 to 2009. Prior to this, he was CEO of E.ON Kraftwerke GmbH and member of the Board of Thga AG, and he held various top management positions for rhenag Rheinische Energie AG and VEBA AG.
Q
A
Do you expect the European energy market to be robust enough to face the challenges of German load demand?
Residual load in Germany that is, total load less quantities fed in by renewable and must-run facilities has become more volatile. It is consequently up to our neighbors more than ever before to contribute to maintaining the stability of our transmission grid. The most costeffective way of meeting the challenge of these developments is continuing to expand exible generation capacities and expanding the transmission and distribution grids, both at European and German national level.
How are business models changing in light of the energy transformation? Please give us your view on new products and services aimed at retaining or attracting customers.
For us, as one of Europes leading supply companies, efcient use of energy has always been at the heart of our business model not only since the dawn of the new energy era. By offering innovative products and services, we help households and businesses save costs and protect the environment. From electromobility through to building automation with our smart home products, we address the whole spectrum of energy efciency and set new best-in-class product standards.
Q
A
Q
A
What do you see as the other key issues for major German utilities?
Falling margins from conventional generation, full auctioning of CO2 allowances as of 2013, the de-linking of gas trading prices from prices in procurement agreements relating to the oil market and, last but not least, the rapid phasing out of nuclear power in Germany are the main challenges for the energy industry in Europe, Germany in particular. Even the new energy concept itself is an ambitious project where not everything is going according to plan. For example, the delays in connecting offshore wind farms that are under construction are causing problems for the industry and us. The connection date of our Eastern North Sea wind farm could be delayed by as much as 12 months.
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In addition to other aspects, the substantial increase in renewable energies, and specically photovoltaics in Germany, will have side effects on European trading with emission allowances. This reduction in emissions outside the market mechanism caused demand for allowances and consequently their price to plummet,36 reducing the incentive to modernize power station portfolios in Europe.
Q
A
How is the German energy sector financing all of these changes while keeping energy affordable for customers?
Q
A
Are German utilities, including the larger regional utilities, under serious threat from change, e.g., from new entrants in the field of renewable energies or energy efficiency, or from an increase in local generation?
Changes caused by competitors activities are not uncommon in a competitive market: this is something we are familiar with. The new factors are the speed at which everything now has to take place in Germany and that the state is intervening so extensively. Renewable energies do, of course, reduce capacity utilization at existing plants, but energy transformation in Germany also provides opportunities for a company to build up its own new elds of business. This is where I see RWE Innogy taking the lead with investments of around 1b (US$1.25b) each year.37 Other major companies are also moving in this direction.
The costs involved in the energy transformation are consistent with the speed of its introduction. The quicker renewable energies are expanded and existing capacities taken off the market, the more expensive it will be for the national economy. Therefore, the trick will be to maintain a balance between driving forward with substantial changes while making sure not to put excessive nancial pressure on retail and industrial customers. For this reason, it is always imperative to keep an eye on cost efciency in all actions. Too many expensive measures that do not generate or save much energy could otherwise jeopardize acceptance of the energy transformation.
Q
A
How will Germanys actions impact neighboring countries?
Q
A
How much priority are utilities giving to improving energy efficiency? Have we seen proof of a serious commitment to the target of 10% energy saving? Is the lack of a clear policy framework holding utilities back?
With RWE Efzienz, we are expanding our range of e-mobility and smart home services and have clearly identied efciency as a new eld of activity. Efciency products should just like every other product be viable on the market in the long term. We should, therefore, trust market forces in this respect and not always think of regulation.
We live in a European single market that is becoming ever more closely integrated. This can most easily be seen by the fact that for over 70% of hours, electricity prices are the same in Germany and its western neighbors. Consequently, shutting down nuclear capacities and expanding uctuating renewable capacities will undoubtedly have an impact. Some of our neighbors are already complaining that, when winds are strong, electricity from northern Germany oods their grids and that they have to perform re-dispatching measures as a result. Conversely, the missing capacity from nuclear power plants, particularly in southern Germany, exacerbates the bottleneck in France, especially on cold winter days. My wish would be, therefore, to make energy policies as a whole more European. On the one hand, this would help to complete the internal market with all its advantages for customers, and on the other, it would ensure that companies compete with each other on a level playing eld.
36. In the second half of 2011. 37. RWE Innogy plans, builds and operates facilities generating power from renewable energies.
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Chinas utilities
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Regional reports: Asia-Pacic
building for a billion

Chinese gas and water utilities face major challenges from the countrys rapid urbanization. Report by Jarvis Ng
ccording to the World Bank, Chinas urban population share will have increased from about a half to around two-thirds by 2030. Thats the equivalent of a billion urban residents, or an average annual net addition of 13 million people.38 The result will be major pressure on supplies of energy, natural resources and water. Chinas economy is now predominantly based in manufacturing and services, rather than agriculture. Following key economic reforms in 1978, the country has rapidly urbanized, reecting record rural-to-urban migration. The population of Chinas cities increased from 19.4% in 1980 to 51.3% in 2011, exceeding that of rural areas for the rst time.39 The rate of urbanization has signicant consequences for water and gas utilities in the provinces, according to Professor Hao Wang, a Chinese hydrologist and water resources expert and former Vice Chairman of the China Natural Resources Society. The exploding urban population creates serious challenges with much of the municipal infrastructure obsolete, utilities management outdated and environmental issues overlooked, he says.
38. China 2030: Building a Modern, Harmonious, and Creative High-Income Society, World Bank, 2012; 2012 International Bank for Reconstruction and Development/ International Development Association or The World Bank. 39. 2011 China Statistical Yearbook, China National Bureau of Statistics, 2012.
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natural resource decit with more than 20 areas declared depleted.40 According to Zhang, Technology is crucial in discovering new resources, with seawater desalination technology a signicant breakthrough. The State Council forecasts that by 2015 the volume of desalinated seawater recovered will reach 2.2 million to 2.6 million cubic meters per day.41 The country is seeking additional energy sources to meet requirements and is proactively exploring for shale gas and offshore oil and gas elds. The plan is to expand shale gas production from near zero to 6.5 billion cubic meters by 2015.42
Focus on reallocating gas and water resources
With Chinas natural resources scarce in most cities, but plentiful in less populated areas, the Government is prioritizing natural resource reallocation. Currently, the most signicant achievements in water resource allocation include the Three Gorges dam on the Yangtze River, the Xiaolangdi dam on the Professor Hao Wang Yellow River, and the ongoing South-North Head of the Department of Water Water Transfer Projects diverting water Resources, China Institute of Water from well-supplied south west China to Resources and Hydropower Research the water-decient northern provinces, says Professor Boting Zhang, Vice Secretary-General of the Chinese Society of Hydroelectric Engineering. Load uctuations present a China has launched similar gas reallocation projects, such as the transmission of natural gas from western major challenge China to eastern regions. Rapid urbanization requires higher quality standards and However, natural resources reallocation remains modern utility infrastructure systems to meet seasonal challenging and complicated. Acquiring and transmitting peak load uctuations. The possibility of incidents water to cities increases water supply costs and at the occurring increases substantially due to the higher same time exerts pressure on rural irrigation and water population concentration and larger scale of urban water ecology systems, explains Wang. consumption, more complex supply systems, greater
Prior to taking up his current role at the China Institute of Water Resources and Hydropower Research in 2001, Hao Wang was Vice Chairman of the China Natural Resources Society. He led a variety of nationwide projects at ministerial and provincial levels. He also participated in a number of national consulting and international cooperation water resources projects and serves in many government advisory roles.
Vital role for technology

Much remains outstanding to ensure utility suppliers meet demand, with sharp increases projected in urban areas. Technology has a key role to play. China faces a severe
reliance on external resources and bigger risks from different segments of the supply chain, says Wang. Costs due to water pipe failures and accidents are now extraordinarily high.
40. China 2030, The World Bank, February 2012. 41. Suggestions on Accelerating the Development of Seawater Desalination Sector, The State Council, February 2012. 42. Shale Gas Development Plan (20112015), China National Energy Administration, March 2012.
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Bo Xu, a senior engineer at the Economics and Technology Research Institute of the China National Petroleum Corporation, observed in a recent article: The biggest challenges facing urban gas utility companies concern signicant daily and seasonal differences between peak and trough loads.43
Industrialization and urbanization have exerted signicant stress on the environment. For example: Professor Hao Wang, China Institute of Water Resources and Hydropower Research Almost all cities in China face a deteriorating water environment, mainly due to the lack of capacity to The countrys gas and water utilities are, therefore, manage urban and industrial waste water and a decreased under enormous pressure to improve peak load natural water cycle, says Wang. regulation mechanisms, increase supply capacity, Zhang says: A vicious cycle exists as water pollution promote emergency response capability and strengthen signicantly reduces urban water supply However, we safety management. expect that once the eastbound route of the South-North Water Transfer Project opens next year, both the water imbalance and environmental issues will decrease sharply Enabling investment in the Beijing and Tianjin regions. To accelerate infrastructure construction and improve efciency and long-term sustainability, the Chinese Government is progressively enabling private and international investments in the previously state-controlled domestic utilities market, Boting Zhang is chiey though returns will probably be both responsible for external regulated and low. communication for the Chinese Since 2002, several domestic (e.g., Society of Hydroelectric ENN Energy and Sound Group) and Engineering, the largest hydroelectric association foreign (Shell, Tongda Energy and in China. Prior to this role, Veolia) companies have invested in he conducted research in Chinas gas and water utilities sectors. hydropower plant design. However, private companies face probable restrictions as Zhang notes: Completely free capital market should be limited and Professor Boting Zhang fall under government supervision to Deputy Secretary General, promote the public interest. Chinese Society of
The exploding urban population creates serious challenges with much of the municipal infrastructure obsolete, utilities management outdated and environmental issues overlooked.
Dr. Boqiang Lin, member of National Energy Consultation Committee, told foreign investors: The economic return is expected to be low, while further suggesting that joint ventures may be a safer way for foreign investors to access this particular market. According to the Guiding Directory on Industries Open to Foreign Investment published in 2011, Chinese companies must retain a majority stake in gas and water utilities operating in cities with populations exceeding one million.
Environmental impacts
Hydroelectric Engineering
43. City Gas: End Users Need a Right to Be Heard, Nengyuan.com (Energy) News, October 2011, http://news.nengyuan.com/2011/1010/132367403969.html.
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Balancing demand and supply

Chinas developing gas and water utilities sectors will continue to face challenges from urbanization. In future, our main priority will be to guarantee [utilities] supply, says Lin. Our objective is to address the supplyBoqianq Lin is involved in demand disequilibrium affecting water research for Chinas national energy policies and has put resources by region and season, says forward proposals for energy and Zhang. In particular, we can construct power strategies for the countrys more reservoirs to increase impoundment 12th Five-Year Plan. He is a capacity, promote water transfer projects, member of the Global Agenda improve rural irrigation systems, and Councils of the World Economic encourage efcient collaboration between Forum and several national all relevant government authorities. consultation committees. Wang says: We should increase urban drainage management capacity Dr. Boqiang Lin and improve water drainage and supply Member of National Energy Consultation Committee, system efciency Sophisticated National Energy Commission emergency response mechanisms are absolutely necessary. To further improve efciency of the utilities concerned, Wang suggests leveraging economic effects to set reasonable prices. Reasonable pricing mechanisms, including differentiation based on consumption volumes, may motivate utilities and eliminate unnecessary consumption and waste, he says.
Jarvis Ng
Advisory Services Beijing, China
+ 86 10 5815 2835 jarvis.ng@cn.ey.com
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Australia
wired for change

Australias electricity sector is set for the biggest shake-up since competition commenced. The deadline is tight and the changes are vast but opportunities are there too, for distributors and retailers that think beyond compliance. Report by Matt Rennie
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hat will change? Australian electricity retailers and distributors are currently undergoing the single most profound change to regulatory obligations and operational processes since the introduction of customer choice in energy suppliers. From 1 July 2012, all of the countrys energy businesses will be brought into line under a single harmonized national framework. The National Energy Customer Framework (NECF) is driven by the Australian governments aim for consistency and potential efciencies in the countrys energy supply, sale and consumer protection regulations. While customers may not personally witness much change, the NECF will affect all aspects of their contracts with energy suppliers. Everything from initial connection enquiries to billing and disconnection procedures will change, with an emphasis on providing increased consumer protection and better access to information. For utilities, the NECF will bring both new areas of obligation and a large volume of incremental changes to existing obligations. Distributors and retailers will both be signicantly impacted, but typically, distributors will do most of the heavy lifting, dealing with a wide range of new operational requirements. Retailers will need to make smaller incremental changes albeit a lot of them to existing requirements. Changes will occur across all business processes and service channels. The timing of the NECF offers additional challenges. The new framework is being implemented at a time when the sector is already struggling under the weight of concurrent reforms, including carbon pricing, proposed changes to the markets framework for economic
Everything from initial connection enquiries to billing and disconnection will change, with an emphasis on increased consumer protection and better access to information.
Matt Rennie, Ernst & Young
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Distributors and retailers will both be significantly impacted, but typically, distributors will do most of the heavy lifting, dealing with a wide range of new operational requirements.
Matt Rennie, Ernst & Young
regulation and business restructuring. Failure to comply with the NECF is not an option. There are heavy civil penalties (up to US$104,000 per day) and the real risk of damage to reputation by regulators naming and shaming.
Thinking beyond compliance

The second step, assessing the gap between the current capabilities of a business and what it will be required to do under the NECF, is key to successful compliance. Careful analysis of current business processes against the new obligations will identify where changes are required or where new processes need to be established. The third step of the process is where opportunities lie for businesses to take a strategic approach to the new framework. Businesses must ensure they move beyond Day 1 solutions, designed simply to achieve compliance, and instead use the reform process to identify broader business efciencies. Developing these sustainable business processes can give retailers and distributors a competitive edge, particularly in the area of customer relationships. According to Ernst & Youngs global Smart Customer survey (see Hot off the press, page 70), Australian utility customers currently view their distributors and retailers as little better than faceless and distant providers. If the NECF can deliver improved communication and service provision for customers, the sector may start to positively impact perceptions of value and trust. Whether the NECFs uniformity of obligation will provide businesses and investors with increased regulatory certainty and efciency is open to debate. Past major reforms, such as full retail competition, carried signicant implementation costs (the extent of which was not known until the commencement of the reforms) and delivered doubtful benets. There is real danger of this occurring with the NECF, where the network companies haste to ensure a minimum level of compliance by 1 July 2012 may mean opportunities lost for more benecial changes to business processes. Utilities that do not take the time now to properly investigate optimal ways of delivering services may not have the chance again for some time.
Understanding complexity
Successfully adapting to the NECF involves three steps: 1. Understanding the complexity of the NECF requirements as they apply to specic businesses. 2. Assessing the capability of the business to meet the new requirements and identifying where gaps lie. 3. Making the necessary changes to address these gaps, ensure compliance and improve business processes. Step one has perhaps been overlooked by some distributors and retailers that only recently began planning for the NECF. The new framework will bring some enormously complex changes, the details of which are still being negotiated between individual states and the federal government. Many of the requirements will involve signicant changes from current practice. For example, the new obligations require the monitoring, capturing and reporting of a huge amount of data within 24 hours of an NECF breach being identied. In a sector where many services are delivered in the eld or by third-party providers, this has the potential to be extremely onerous. A key challenge for utilities is to understand the complexities of the new framework and identify how it will apply to their business.
Matt Rennie
Power & Utilities Leader, Oceania Brisbane, Australia
+ 61 7 3011 3239 matthew.rennie@au.ey.com
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Big Data deluge threatens utilities

Power and utility companies face a data tsunami. Failure to manage it could be catastrophic for business. What can be done? Report by Keith Harrison
ig Data describes the anticipated but massive increase in the volume and complexity of data under management. Within utilities, it is directly associated with major changes to business models or operations.
Sources of data explosion

The drive toward decarbonization, decentralized operations and energy efciency is responsible for swelling data volumes along the power and utility value chain. This is because in generation, the sector is shifting from centralized management of relatively few largescale thermal or nuclear power plants that are nearing retirement, to a decentralized model that includes, potentially, millions of small renewable generation assets. Each of these new assets has to be monitored and managed which, in turn, increases data volumes. And, of course, renewable generation is largely determined by weather conditions, which creates increased demand for accurate weather forecasting data, too. The impact is felt on the trading oor. It used to be relatively easy to keep track of maintenance schedules,
downtime and outages at a small number of thermal, nuclear and hydro generation plants. However, the rise of a bigger, broader and more diverse range of generation assets is increasing the size and complexity of the portfolio. This means an abundance of data that has to be factored into utility trading decisions. In transmission and distribution, energy efciency and reliability requirements are leading to an increase in intelligent electric devices to monitor and optimize performance. These devices produce data (such as sensors and monitoring equipment) and require data (control units) and sit on both the IT and electrical networks. The retail world is also contributing an ever-increasing volume of data. Meter readings will escalate from, say, once a month, to once every 30 minutes. Thats 48 readings a day, for every meter, each generating data for time-of-use billing and demand-management purposes. Further down the line, the wide-scale adoption of electric vehicles will impose other data demands on already over-burdened utilities. And as other devices and demands come on line, utilities will innovate further, increasing the volume and variety of data.
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IT departments worry that the impact of data explosion has not filtered up to top-level management Utilities have to recognize that Big Data is too big a challenge for IT to sort out singlehandedly.
The risks of not managing data
Every event that occurs within a utility either produces or is informed by data. Properly harnessed, it enables utilities to transform their operations and to seize competitive advantage. However, failure to capture and analyze available data quickly can adversely impact decision-making. In transmission and distribution, for instance, data on asset performance and maintenance inuences plant retirement decisions and directs investment. Misinformed decisions could prove very costly. On the trading oor, power transactions that are inadequately hedged due to poor data analysis or management could result in massive trading losses and, potentially, enormous exposure for the business. On the retail front, data errors in billing and metering results in poor PR, as well as a loss of consumer condence in the brand. Failure to manage ever-growing data volume is potentially catastrophic. So what can be done about it?
Comment
Keith Harrison, Ernst & Young
recognize that Big Data is too big a challenge for IT to sort out single-handedly. Existing business processes are undergoing massive change, and operational management has to participate in handling the Big Data challenges and in understanding rather than ofoading the issues, to enable effective transformation.
A backward step?
Heres a conundrum. Right now, cloud computing is the big new thing for data management in the IT world. It involves shifting masses of data from millions of devices onto a few centralized data centers around the world. It is ITs answer to reducing the costs, complexity and unpredictability of data management. So why, then, are utilities moving in the exact opposite direction? The industry is effectively migrating from a cloud-like structure, where a few large power stations deliver energy right into homes and ofces, to a decentralized and highly distributed set-up for production and supply. Already, there are more than one million separate solar installations in Germany, accounting for in excess of 24GW of installed capacity,44 more than the installed capacity at the worlds largest single power plant, the Three Gorges Dam in China. This is all laudable. Yet every installation comes with its own metering and data management issues. The tradeoff, it seems, is greener energy in return for more data, more complexity and higher costs.
Bringing data under control

In this era of Big Data, the survival of utilities hinges, critically, on its management. However, IT departments worry that the impact of this massive explosion in data has not yet ltered up to top-level management. On a scenario basis, businesses need to start understanding the ongoing data management implications of all current and planned major capital projects and smart initiatives over the next ve to 10 years. This will provide a baseline for ascertaining data load and for prioritizing resources and spending. Businesses also need to gear up for greater convergence between operational technologies (those associated with engineering operations) and IT-run business systems and networks. Both are critical to the evolving industry and traditional organizational boundaries will need to ex. Crucially, utilities have to
Keith Harrison
Lead Analyst, Global Power and Utilities Center Edinburgh, UK
+ 44 7760 991110 kharrison@uk.ey.com
44. Source: BSW-Solar, the German Solar Industry Association.
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off the press

The latest Ernst & Young thought leadership and publications
Global Capital Condence Barometer: Power & Utilities report
The Global Capital Condence Barometer is a unique biannual study of corporate and boardroom condence conducted for Ernst & Young by the Economist Intelligence Unit. This whitepaper presents a snapshot of the latest boardroom trends and capital management practices in power and utility companies from 33 countries, including China, the US, Australia, the UK, Canada, Brazil, India and Russia. www.ey.com/powerandutilities/CCB
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Global research program: the rise of smart customers
Power and utilities companies worldwide are embarking on huge metering and grid infrastructure upgrades to embrace smart technologies. But what do consumers make of the changes? Ernst & Young conducted global research to gain insight into the consumer perspective on smart energy and assess how t the sector is to respond to changing consumer demands. Our reports reveal how a smart energy market could create new competitive threats that will fundamentally change the business model for energy retail. www.ey.com/smart
Power transactions and trends report Q1 2012

Ernst & Youngs quarterly Power transactions and trends report analyzes mergers and acquisitions (M&A) and key market trends in the global power and utilities sector. The report presents a robust analysis of key transaction drivers, market commentary, industry issues impacting M&A activity and the outlook for transactions. www.ey.com/powerandutilities/PTT
Renewable energy country attractiveness indices (CAI) May 2012

This quarterly publication ranks the relative attractiveness of 40 countries renewable energy markets across a selection of technologies. Our May issue reveals a noticeable reduction in the gap between our index scores for developed and emerging markets in the rst quarter of 2012. In the West, public policy support for renewables is being reduced due to scal challenges, while developing countries are introducing new incentive mechanisms and national energy strategies. The May issue also includes a summary of the results of a global energy survey of billion-dollar corporations and features articles on topics including energy efciency, solar trends, ocean energy opportunities and nancial market analysis. www.ey.com/CAI
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Plug in
Plug in presents a compelling mix of Ernst & Young insights and perspectives. We examine current power and utility issues, explore their impact on business models, strategy and operations and address market-specic challenges within a global context. New articles are posted monthly on www.ey.com/ plugin. Every three months, we publish an interactive magazine that can be downloaded as a PDF. www.ey.com/plugin
Hit the ground running: The power and utilities sector faces the Dodd-Frank challenge
This whitepaper summarizes the key requirements and impacts of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), one of the biggest regulatory changes to hit our sector in years. It affects power and utility companies in the over-the-counter derivatives market, who risk potentially severe penalties for non-compliance. Once the rules are enacted, affected organizations will have 90 to 270 days to comply a highly challenging timeframe to interpret requirements, assess their impact and implement signicant process and technology changes. www.ey.com/powerandutilities/DF
What lies beneath? The hidden costs of entering rapid-growth markets

This report is the latest in Ernst & Youngs The Master CFO Series. It examines the CFOs role in relation to rapid-growth market entry, and the true costs of doing so. Based on a survey of 921 CFOs from around the world, the results show that rapid-growth markets are an essential component of growth strategy for many utilities. Our respondents are taking a broad view, looking beyond rst-tier rapid-growth markets to Brazil, Turkey, India and, to a lesser extent, China. In addition to the opportunities, the CFOs we surveyed noted many pitfalls, particularly regarding budget and time blowouts. The importance of building a strong rationale and appropriate structure for the investment highlights the crucial role of the utilities CFO. www.ey.com/cfo/rapid-growth
Rapid-Growth Markets Forecast

Our quarterly Rapid-Growth Markets Forecast analyzes trends and opportunities in 25 fast growth economies, including China, Chile, India, Mexico and Turkey. Our latest edition reports that emerging market economies are still offering good opportunities for companies and investors across a wide range of sectors. But not all regions are enjoying equally solid growth prospects: signicant differences are opening up nationally and regionally, with 3.5% growth foreseen for the Americas, 4.2% for emerging Europe and the Middle East and 7% for Asia. www.ey.com/rapidgrowth
Utilities Unbundled
Issue 12 June 2012
71
Getting all your experts to the same place is good. Getting them all to the right place is better.
Being in the same place doesnt mean much without mutual understanding. Our global teams work closely with yours to help you overcome challenges and grasp opportunities. Find out more at ey.com/ powerandutilities. See More | Collaboration
2012 EYGM Limited. All Rights Reserved.

Utilities Unbundled 12 June 2012

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Utilities Unbundled 12 June 2012

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Moving markets, moving targets

Moving markets, moving targets

its clear this is a pivotal time.

As market dynamics and target geographies change,

Ben van Gils

+ 49 211 9352 21557 ben.van.gils@nl.ey.com

Issue 12 June 2012

Ernst & Young Assurance | Tax | Transactions | Advisory

Australia wired for change

Europe, Middle East, India and Africa (EMEIA)

About Ernst & Youngs Global Power & Utilities Center

Hot off the press

EYG No. DX0127 ED 0113

06/2012. Artwork by MAS. EMEIA MAS E001.0512

The Capistrano solution

Issue 12 June 2012

Power and utilities M&A: the big picture

Figure 1. Global power and utility sector M&A activity

Total deal value

Source: Ernst & Young analysis based on Mergermarket data.

Issue 12 June 2012

Asian buyers shop for stakes

Natural gas prices trouble utilities in US

Generation assets dominate M&A

Figure 2. Global power and utilities snapshot

Number of deals Q4 2011 Q1 2012 64 15 10 23 16

Total Generation T&D Renewables Others

Number of deals Q4 2011 Q1 2012 20 5 3 6 6

Total Generation T&D Renewables Others

+ 1 212 773 3382 joseph.fontana@ey.com

Issue 12 June 2012

Keeping the capital f lowing for renewable energy

Issue 12 June 2012

The current investment climate

Figure 1. IEA New Policies Scenario estimate of renewables spending to 2035

European Union investment at a six-year low

Issue 12 June 2012

Sector still attractive in the long term

Energy decit in emerging markets creates strong prospects

Basel III set to rein back project nance

Issue 12 June 2012

Prof. Paul Simshauser

Keeping capital flowing

Looking to China and the Far East

Could the sector access new sources of debt funding?

Financial engineering attracts pension fund investment

Dr. Eddie OConnor

Issue 12 June 2012

Changing ownership models

Cost competitiveness should tilt balance to investment

China Three Gorges: Now is the time to go global

Issue 12 June 2012

+ 1 212 773 3382 joseph.fontana@ey.com

+ 44 20 7951 6024 bwarren@uk.ey.com

+ 61 7 3011 3239 matthew.rennie@au.ey.com

Rating the attractiveness of renewables markets

Issue 12 June 2012

The big picture

Figure 1. New nancial investment in clean energy

Comparing top country results

Activity in emerging markets

Solar index Solar PV

Source: Ernst & Young analysis.