Oct 12, 2006 -- Datamonitor

 

Financial institutions are increasingly investing in energy networks, energy suppliers with a captive market and water companies. These investments provide solid if unspectacular returns, though the appetite for lower-risk investments contrasts with the rush to finance projects in wholesale energy, which characterized investment strategies earlier this decade.

The acquisition of Northern Ireland electricity supplier Viridian by Bahrain-based investment group Arcapita is further evidence of the trend of financial institutions becoming increasingly involved in the energy sector via the ownership of regulated assets. These assets include energy and water network infrastructure, as well as those companies with a captive base of customers.

Assets such as water companies, for example, have been the target of investment vehicles, including Thames Water, currently up for sale by German parent company RWE, which could conceivably fall into the control of a private equity firm.

Regulated assets are relatively low-risk and, consequently, the returns they provide are not necessarily the most attractive investment opportunity. They do, however, provide stable and secure returns against which institutions can secure further borrowing.

The trend for private equity groups to become involved in owning infrastructure assets across Europe is one that is set to grow as utilities realize that, if they can gain full and fair access to networks, they are actually non-core activities to the overall success of their business.

Financial institutions seemingly no longer have such an appetite as before to participate in the utilities sector via project financing of wholesale generation assets. The returns of these projects should, on paper, be more appealing than those of regulated assets. However, investors are perhaps still mindful of losses incurred during the downturn in the commodity cycle which depressed electricity prices and bankrupted many projects in the early part of this decade.

Levels of acquisition of regulated assets ought to be largely immune to the commodity cycle, which impacts much more heavily on investments decisions in retailers and wholesalers. However, given the nature of the returns, the main protagonists are likely to continue to be infrastructure and pension funds.

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