Solar power clouds Australia's $10 bln sale of "poles and wires"

HK Electric Investments

30/07/2014 22:00

* New South Wales wants $10 bln for 49 pct of electricity 
network 
    * Solar energy use skyrocketing as power bills rise 
    * Hong Kong billionaire Li Ka-shing's firms may be 
interested 
 
    By Byron Kaye 
    SYDNEY, July 31 (Reuters) - Sun-drenched Australia's growing 
love of solar power is casting a long shadow over its biggest 
privatisation in two decades and the second-biggest sale ever of 
a state asset. 
    Rooftop solar installations are booming and on-grid energy 
use is falling just as the government of New South Wales state 
prepares to offer a 49 percent stake in its electricity 
distribution network for around $10 billion, likely to one or 
more strategic investors. 
    New South Wales, or NSW, which includes Sydney, is 
Australia's most populous state and the sale of the stake in 
Networks NSW will be a marker for the country's plans to 
privatise about A$130 billion ($122 billion) worth of state 
infrastructure within the next few years to pare debt and pay 
for capital works.  
    The government appears to be pricing the network's three 
"poles and wires" grids at full value, energy experts said, 
despite the increasing use of solar energy and capital 
expenditure of at least A$15 billion over the past five years to 
accommodate increases in electricity volumes that never came. 
The expenditure, agreed with the Australian Energy Regulator,  
has pushed up household energy bills, making alternative power 
sources more appealing. 
    Some of the experts are calling for hefty writedowns before 
the NSW Network's businesses are sold. 
    "The days of having a relatively predictable, low single 
digit growth path, they're gone," said Standard & Poor's credit 
analyst Richard Creed, referring to energy volumes. 
    "Any buyer of these companies is going to need to take a 
view on how the regulator is going to manage this volume risk. 
That's probably within the next 5 to 10 years."  
    Networks NSW and the office of NSW state premier Mike Baird 
did not respond to calls requesting comment.  
    The state government has mandated UBS AG  UBSN.VX  and 
Deutsche Bank AG  DBKGn.DE  to study how best to sell the assets 
and has said it will proceed with the sale if it wins an 
election in March 2015.  
    The grid sale would be the biggest Australian privatisation  
since Telstra Corp Ltd  TLS.AX  raised A$14 billion on the stock 
market in 1997. Like Networks NSW, Telstra began life as a 
public company with years of stagnant revenue as the rise in 
mobile telecommunications led to customers quitting land lines. 
    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 
    GRAPHIC: The draw of solar power in Australia: 
                                http://link.reuters.com/teg52w 
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> 
     
    STILL ATTRACTIVE 
    Cheung Kong Infrastructure Holdings Ltd  1038.HK  (CKI) and 
Power Assets Holdings Ltd  0006.HK , both investment arms of 
Hong Kong billionaire Li Ka-shing, State Grid of China Corp 
 STGRD.UL  and various pension and sovereign funds are likely to 
be attracted, analysts said. 
    CKI declined comment, while Power Assets did not reply to 
e-mails seeking response. State Grid of China was not available 
for comment. 
    "It's a different environment than what it was in the past, 
with new technology and more electricity being produced by solar 
and other renewable sources," said Anoop Chaudhry, head of 
Asia-Pacific power and utilities at Barclays  BARC.L . 
    "Some of that hasn't played out, so it's hard to get a grasp 
on what the full impact might be. As a result, there is 
additional risk that may come into play which needs to be 
factored in while valuing these businesses," Chaudhry said.  
    "But beyond that, these are still very attractive 
businesses," he added. 
    One of the networks up for sale, Ausgrid, reported a return 
on equity of 23 percent in 2013. In the private sector, listed 
gas pipeline owner Envestra produced return on equity of 15.1 
percent in 2013, according to Thomson Reuters data.         
    Profits at the electricity networks have been growing thanks 
to the regulated price increases but actual usage volumes have 
been mostly been flat or falling, analysts said. 
    Australians have been flocking to solar, angered by soaring 
power bills and encouraged by cheaper and better solar and 
battery technology as well as generous installation subsidies.  
    Since 2009, rooftop solar installations in Australia have 
jumped 1,200 percent with 1.3 million homes or about one-sixth 
the country's 23 million people now relying on rooftop 
photovoltaic power for some portion of their energy supply. 
One-fifth of this capacity is in NSW, only second behind sunnier 
Queensland, a state that accounts for 35 percent.  
    In the same time, the three NSW public electricity networks 
up for sale, Transgrid, Ausgrid and Endeavour Energy, roughly 
doubled household energy bills to match the increased capital 
expenditure. 
    Even UBS, which has the mandate to study the privatisation 
of the assets, has raised its concerns about the future of the 
industry. In May, the investment bank predicted it would be as 
cheap for Australians to run electricity off the grid as on it 
from 2018. 
    A Commonwealth Scientific and Industrial Research 
Organisation report suggests one third of Australian households 
may get their power entirely off the grid within two decades, up 
from little over 1 percent now.     
    Endeavour Energy says use of its network fell 8.2 percent 
between 2009 and 2013, due to mild summers and winters and 
"rapid uptake of solar across the network". It also cited 
"reduced electricity use in response to high prices". 
    It still got approval to spend A$3 billion on a network 
upgrade, up 37 percent on the previous half-decade. 
    "These guys have so incredibly over-egged their assets to 
expand them for demand which never arose," said Bruce Mountain, 
a former Australian Competition and Consumer Commission energy 
consultant who now advises governments and large firms on energy 
policy. 
 
    "THE INTERNET OF POWER" 
    Traditional energy companies are floundering even more in 
Germany, Europe's biggest solar user. 
    According to German energy giant RWE AG  RWEG.DE , which in 
2013 blamed plant closures caused by solar demand for its first 
annual loss in 60 years, it and the three other energy giants - 
E.ON  EONGn.DE , Vattenfall  VATN.UL  and EnBW  EBKG.DE  - have 
seen 70 percent of their combined market value wiped off since 
2007. 
    The power networks in Australia are now hoping they can stay 
in business if households use the grid as a conduit for selling 
back or trading unused power. The partial privatisation could  
help bring that about. 
    Selling the network was a "fantastic opportunity for the new 
owners to be incentivised to modernise the networks" by 
introducing power-trading technology and time-of-use metering, 
UBS energy analyst David Leitch said. 
    As is, Leitch added, the networks "basically have next to no 
acknowledgement or desire to be involved in the new utility 
world that I see". 
    ($1 = 1.0656 Australian Dollars) 
 
 (Additional reporting by Vera Eckert in FRANKFURT, Charlie Zhu, 
Donny Kwok and Denny Thomas in HONG KONG; Editing by Lincoln 
Feast and Raju Gopalakrishnan) 
 ((byron.kaye@thomsonreuters.com)(+612 9373 1815)(Reuters 
Messaging: Reuters Messaging: 
byron.kaye.thomsonreuters.com@reuters.net)) 
 
Keywords: AUSTRALIA UTILITIES/SALE