Euro­pean in­ter­con­nec­tor de­vel­op­ers face vary­ing risks

Financial Mirror (Cyprus) - - FRONT PAGE -

The risks faced by de­vel­op­ers of new elec­tric­ity in­ter­con­nec­tors in Europe, gen­er­ally the na­tional Trans­mis­sion Sys­tem Op­er­a­tors (TSOs), vary ac­cord­ing to the spe­cific fea­tures of the projects but are, in gen­eral, well mit­i­gated by fac­tors in­clud­ing the reg­u­la­tory cost re­cov­ery mech­a­nism, ac­cord­ing to Moody’s.

“Many of the Euro­pean TSOs will be in­volved in de­vel­op­ing ad­di­tional in­ter­con­nec­tor ca­pac­ity over com­ing years with the Euro­pean Com­mis­sion es­ti­mat­ing that EUR 40 bln of in­vest­ment will be re­quired over the pe­riod to 2020 to meet the tar­get that all mem­ber states have elec­tric­ity in­ter­con­nec­tion ca­pac­ity equiv­a­lent to 10% of gen­er­at­ing ca­pac­ity”, said Phil Cope, a Moody’s an­a­lyst. “The risks faced by the TSOs vary ac­cord­ing to the scale of the in­ter­con­nec­tor in­vest­ment pro­gramme and spe­cific de­vel­op­ment risks but may be mit­i­gated by fac­tors in­clud­ing the cost re­cov­ery mech­a­nism and the TSOs over­all fi­nan­cial strength and flex­i­bil­ity”, added Cope.

The Euro­pean Com­mis­sion be­lieves an in­ter­con­nected Euro­pean en­ergy grid is vi­tal in se­cur­ing en­ergy sup­ply, in­creas­ing com­pe­ti­tion, main­tain­ing af­ford­able elec­tric­ity prices, and meet­ing de­car­bon­i­sa­tion and cli­mate change pol­icy tar­gets. Sig­nif­i­cant in­vest­ment in the de­vel­op­ment of fur­ther elec­tric­ity in­ter­con­nec­tors across Europe is ex­pected to en­able mem­ber states to meet the tar­get for 10% in­ter­con­nec­tor ca­pac­ity. In early 2014, 12 of the 28 mem­ber states in­clud­ing UK, Spain and Italy fell be­low this tar­get.

The Com­mis­sion expects that the 10% tar­get will mainly be reached through the im­ple­men­ta­tion of so-called Projects of Com­mon In­ter­est or PCIs. The first list of PCIs, adopted by the Euro­pean Com­mis­sion in 2013, in­cludes 52 elec­tric­ity in­ter­con­nec­tors, of which 75% are sched­uled to reach com­ple­tion by 2020. Ac­cord­ing to the Com­mis­sion, EUR 40 bln of in­vest­ment will be re­quired to meet the tar­get.

Most in­ter­con­nec­tors will be de­liv­ered by the na­tional TSOs, with the in­vest­ment in­cluded in their reg­u­lated as­set base. Land based in­ter­con­nec­tors are ef­fec­tively ex­ten­sions of ex­ist­ing trans­mis­sion net­works, and un­less their sclae is sig­nif­i­cant rel­a­tive to the ex­ist­ing net­work, or there are other spe­cific de­vel­op­ment chal­lenges, Moody’s would not ex­pect im­ple­men­ta­tion to weigh upon the credit qual­ity of a TSO. In­ter­na­tional sub­sea in­ter­con­nec­tors are, how­ever, po­ten­tially much more chal­leng­ing.

Reg­u­la­tory regimes may off­set con­struc­tion risks and Moody’s views the Ger­man reg­u­la­tory frame­work as most sup­port­ive for in­ter­con­nec­tor in­vest­ment. At the other end of the spec­trum, de­vel­op­ers of reg­u­lated in­ter­con­nec­tor as­sets in Great Bri­tain face much greater ex­po­sure to po­ten­tial de­lay and cost over­runs.

Risks for op­er­a­tional in­ter­con­nec­tors may con­verge with those for reg­u­lated net­works. Many of the Euro­pean reg­u­la­tory regimes pro­vide op­er­a­tors with pro­tec­tion against the risks as­so­ci­ated with rev­enue loss due to both out­ages and fluc­tu­a­tion in con­ges­tion rev­enues. Un­der all reg­u­la­tory frame­works, ex­cept the GB model, fluc­tu­a­tions in net con­ges­tion rev­enue will cause the TSO to un­der or over-re­cover against al­lowed rev­enue in a given year, with the dif­fer­ence re­flected in tar­iffs the next year. By con­trast, un­der the GB model, the de­vel­oper is ex­posed to th­ese fluc­tu­a­tions within the level of the cap and floor, and thus sub­ject to vari­able re­turns. The re­turn within the floor pay­ment is based on a cost of debt in­dex and is thus much lower than the WACC set in on­shore price con­trols, al­though if con­ges­tion rev­enues are high the TSO earns a much higher re­turn.

Ten­neT Hold­ing B.V. (A3 stable), in par­tic­u­lar, has a large in­ter­con­nec­tor in­vest­ment pro­gramme. How­ever, for its devel­op­ments in Ger­many, and in com­mon with TSOs such as Am­prion GmbH (A3 stable) and 50Hertz (owned by Euro­grid GmbH - Baa1 stable), it will ben­e­fit from the favourable reg­u­la­tory regime. Na­tional Grid plc (Baa1 stable), with per­haps Europe’s largest in­ter­con­nec­tor in­vest­ment pro­gramme over the re­main­der of the decade, is less pro­tected against the risk as­so­ci­ated with time and cost over­runs and also faces greater ex­po­sure in cases of op­er­a­tional is­sues. Moody’s notes, how­ever, its planned in­ter­con­nec­tor in­vest­ments are small in the con­text of the group as a whole.

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