Thursday, October 25, 2007

Lighting Up Europe - Are Enel, E.ON & Endesa serious about fighting global warming?


The Russian electricity sector has had a tough time over the past few decades. During the Soviet era, power generation played catch up with the power-hungry heavy industry favored by Soviet planners. The 1990s might have brought a respite, as demand for electricity slumped during economic collapse, but instead, nose-diving customer solvency turned the electricity sector into a Kafkaesque charade of non-payments and barter.

The powerful economic revival gripping Russia since 2000 replaced this set of problems with yet another: Decades of underinvestment in conjunction with price regulation meant that soaring demand for electricity looked set to outstrip capacity. In 2006 alone, electricity consumption in Russia increased by 4.2 percent, more than double the official government forecast, reaching 97 percent of capacity. Electricity monopolist UES anticipates consumption tripling by 2020.

Analysts estimate that between $30-$60 billion of capital investment in the power sector will be required to avert acute electricity shortages within the next five years. According to some estimates, the electricity sector’s total investment requirement from 2007 to 2030 will be at about $350 billion, 1.9 percent of the country’s GDP over the period.

Without this investment, the Soviet-era electricity sector will strangle industrial growth as surely as Moscow’s Soviet-era road network has snarled up the city’s traffic.



And the plan seems to be working – and not just for Russian conglomerates diversifying into the sector. What caused the Russian business world to buzz in 2007 was the arrival of major European energy concerns on the Russian power generation scene, bringing with them not only sizeable war chests for further acquisitions and investment, but extensive know-how in energy markets and state-of-the-art technology.

Refuting the skeptics, in early June 2007, Italian energy giant Enel purchased 25.03 percent of WGC-5 for $1.5 billion, paying a 15 percent premium over the market price. Enel will now spend a further $3.88 billion buying the company’s remaining shares, giving complete control of 5.8 percent of Russia's thermal power generation.

Then in September, Enel’s sparring partner on the European market, Germany’s E.ON, paid $3.9 million for 40 percent of WGC-4.

Following the Russian authorities’ unfriendly behavior to foreign investors in the Sakhalin projects, Russia’s readiness to part with large chunks of its generating assets raised eyebrows – as did foreigners’ readiness to buy them.

If Russia’s willingness was dictated by a looming power shortage, what moved foreign energy giants to get major exposure to such a dilapidated sector of the economy?



With organic growth and European acquisitions equally difficult, Enel and E.ON, in their frantic search for acquisitions, to swallow or be swallowed, have now turned their attention to Russia.

While such spending, according to Derek Weaver, is speculative, there is also a hidden strategic element – connected to gas, not electricity. Both companies’ domestic power generation is heavily dependent on gas, while supply security is looking increasingly shaky. “Gas is ultimately their main interest in Russia,” says Weaver. Both companies are already engaged in gas extraction in Russia – in itself no mean feat. Since reforming the electricity sector will free up gas for export, they are as much partners as competitors of Gazprom in the power sector. They might count on later appreciation of this from the Russian giant, of which E.ON already owns 6 percent. Such appreciation could mean priority status in terms of securing gas supplies, and even favored status as partners in exploiting Russian gas fields.

Here is the full article.