Power industry deals interview: Weak pound yet to impact M&As

Jack Unwin 16 September 2019 (Last Updated September 13th, 2019 14:53)

An interview with management consultancy firm Berkeley Research Group’s managing director Neil Cornelius on the key issues driving mergers & acquisitions in the UK power sector.

Power industry deals interview: Weak pound yet to impact M&As
Oil and gas companies are making moves into the UK energy market.

Recent figures by GlobalData show that Q2 2019 power industry deals stood at over $31bn, an 85% increase on Q1 in 2019.

This is worldwide however, so how did the UK factor into the world power market? Power Technology spoke to the Berkeley Research Group’s managing director Neil Cornelius about what kind of deals taking place in the UK in 2019, why oil companies are broadening their horizons in the energy sector and whether the UK is still an attractive place to invest.

Jack Unwin (JU): What were the key trends in the UK power sector in the last few months?

Neil Cornelius (NC): Historically, the UK energy market has been vertically integrated between energy production and energy retail. Companies that sell electricity and gas to houses have owned a portfolio of different generating plants so they create some of the power themselves and traded with each other if one of them is producing more power than they need.

The regulator introduced a number of regulations that were intended to make it easier for new entrants to come into the market without having all of the separate elements of a vertically integrated supply chain. That along with the character of the new technologies coming into the market, offshore and onshore wind along with solar power have fundamentally changed the competitive dynamic of the market and now we are in the process of seeing the phasing down of the vertically integrated model.

JU: What were the most significant deals in the UK energy industry in the last few months?

NC: A number of the transactions that have taken place are companies moving away from the vertically integrated model and specialising in certain areas of the market.

In some cases companies on the energy production side have decided to focus solely on renewables. For example Scottish Power sold its non-renewable generation portfolio to Drax, so its production portfolio is now 100% wind.

One trend that is driving actual transactions is the amount of profit pressure there is on the energy retail side for the big six suppliers.

We’ve seen this in the attempted merger between SSE and Npower, which didn’t come to fruition because in the process of carrying it out market performance deteriorated on the retail side of Npower, particularly with the introduction of the retail price cap by Ofgem.

This caused problems for that particular merger but actually strengthened the strategic case for mergers happening, because of the economies of scale and having more customers helps companies to survive in a more competitive, lower-priced environment.

Also some of the major oil companies who haven’t traditionally been interested in the retail energy market or retail electricity and gas markets taking positions within it in anticipation of the market evolution.

For instance, Shell has bought First Utility, whilst it and BP is making investments in electric vehicle charging. So there are strategic relationships between oil companies and energy suppliers in recognition of the increasing importance of electricity within the raw energy supply mix which is raising interest from non-traditional companies.

JU: Has the weakening pound had any impact on the market?

NC: I haven’t seen that mentioned as a factor in any major transaction, it’s too early for that to show.

It does affect many aspects of the energy sector because the major fuel markets are dollar-denominated, so the cost of the input fuel in the UK’s power stations will have risen, which will drive up electricity prices and may have an impact on the attractiveness into renewables.

JU: Is the UK still seen as an attractive place to invest?

NC: I think it is seen as an attractive place to invest. The UK has always had a very good, stable and respected regulation regime for overseeing the operations of the energy markets. I see no reason why anybody would expect that that is going to change.

Ironically the biggest regulation issue currently is European legislation, because the state aid legislation was used to overturn the previous approval given to the UK capacity mechanism, and all the capacity contracts had been awarded and the anticipated revenue streams were disrupted.