Windfalls come down

TOP 1000/ALTERNATIVE ENERGY:IT COMES as no surprise the two alternative energy players on this year's Top 1,000 list are Airtricity – at 276 and SWS Energy – at 909. Both were amongst the first into the business in the early years of this decade and both are actively producing, selling and trading electricity.

British utility, Scottish & Southern Energy (SSE) bought Airtricity’s European business in the early days of 2008. It was the second of two deals that netted €800 million for the company’s biggest shareholder, NTR, and €50 million for its founder Eddie O’Connor.

NTR has gone on to reinvest in the sector, although mainly in the US, and it has switched focus somewhat to include solar power along with wind. Eddie O’Connor is trying to pull off the same trick again by starting an investment vehicle, Mainstream Renewable Power, which is also looking outside Ireland – it has one venture in Chile and it will be including other forms of electricity generation, such as solar.

Venture capitalist Ion Equity owns SWS, which was originally part of a multi-faceted co-op-owned business in west Cork. The company has a straightforward long-term growth strategy based on expanding its wind farms, mainly in the southwest.

It is likely that as it develops further over the medium term, it will turn into an attractive takeover target. Although no one realised it at the time, the SSE/Airticity deal was something of a watershed in the sector, both here and abroad.

The Irish company was largely developing wind farms, and had various sites across Ireland, Britain and western Europe.The €1 billion that SSE paid for its European division is unlikely to be repeated anywhere in the near future as the cost of borrowing has increased. This means that potential buyers are going to pay less, but it does not mean that they will stop buying the right assets.

The availability and cost of credit will also have a big influence on how the industry continues to develop here and abroad. Alternative energy projects with the capacity to produce around 7,000MW of electricity – more than enough to supply the Republic at peak demand in winter – are seeking licences and connections from the Commission for Energy Regulation (CER) and national grid.

Many of these are in the early stages of development and are likely to need to borrow money before they get even close to generating power.

As one observer puts it, some of the proposed wind farms are little more than “fields with a nice view”. Their owners may not have the wherewithal to get them further than this stage.

The reality is that a large number of wind farm developers – there’s little else in the way of alternative energy in Ireland – are simply property developers who are taking a punt that they can get far enough through the tangled regulatory and planning processes to make their fields attractive enough to a bigger player, who will buy them at a profit once it becomes clear that they can be converted to viable businesses.

And in an Irish context, “bigger player” mostly means the State, or at least the utilities that it owns, namely, the ESB, Bord Gais and Bord na Móna. All these companies have ambitions to develop their alternative energy portfolios, and intend doing this by building their own facilities, or buying up those developed by others.

Along with them, Viridian, which owns independent supplier Energia is also building up its alternative energy portfolio. The reality is that ultimately, conventional energy companies will end up with much of the alternative sector as well. This will cut out the very small players, but it will also give the sector the scale it needs to deliver electricity to homes and businesses at reasonable prices.

But utilities, even State-owned utilities, are generally not keen on buying projects that are still very much in the planning stage, and prefer taking on projects that are closer to development, preferably at the point where they are more or less ready to start putting in the hardware they need to start producing power.

The good news for developers is that this approach is likely to change. Earlier this year, Bord Gais chief executive John Mullins said that the company intends buying projects at an earlier stage of development than might have been the case in the past.

The bad news for developers is that companies like Bord Gais will pay a lot less for these businesses, which means that the ultimate payout could be less than what they had hoped for.

The other side of this is that there are too many projects out there looking for licences. The regulator plans projects with the capacity produce 3,900MW of electricity in the current licensing round.

The industry itself, backed by a study commissioned from TNEI, says that this is the wrong approach, and could ultimately cost consumers €400 million more than one based on marrying the merit of individual projects with the most efficient way of developing the national grid.

However, CER chairman Michael Tutty says that the commission’s approach is the fairest, and maintains that the projects which it is planning to licence will meet the Government’s target of generating 40 per cent of the Republic’s energy needs from renewable resources by 2020.

Either way, it looks like the green energy revolution has slowed to something more like evolution. Whatever emerges will be less fragmented than it looks now, and thus much better placed to deliver  both Government targets and a meaningful consumer service.