Grid shift
Underneath the calls for a huge expansion in the output of the electricity sector, a shift is occurring from new generation to new transmission and networks. The marketplace is adapting to high interest rates and inflation. Networks provide a stable return in unstable markets.
This week Iberdrola is to unveil its latest strategic investment plan to 2031. The Spanish company is expected to up its target for its regulated asset base networks to €90bn by 2031, a remarkable doubling from last year when it stood at €45bn. The main drivers will be investment in the UK and the US, which will get €26bn and €20bn.
Networks are likely to get €9bn per annum over the next five years, up from €5bn in the past five years. Ironically, particularly given the April 28 blackout, spending in Spain could fall although this suggestion could simply be part of an ongoing negotiation between a utility and its regulator.
The company raised €5bn in new equity earlier this year to fund its capex programme. In addition, it could raise further funds from asset sales although the market has slowed. One immediate consequence of its new approach is the fact it has farmed down a 50% stake in the £4.5bn 1.4GW East Anglia 3 offshore wind farm scheme and raised a £3.2bn project financing on the asset. Up until now such generation investments had been funded on balance sheet.
Electrification is a buzzword in the energy circles these days. But adding more electrons has become more challenging. There is a definitive push to add new renewables in the US right now as Trump's "Big Beautiful Bill" has set a deadline for sponsors to obtain tax credits. Elsewhere the focus has shifted to network capacity.
In Germany, economy and energy minister Katherina Reiche said that as renewables subsidies are being replaced. "We must eliminate network bottlenecks before new capacity is added," she said.
Her boss, chancellor Friedrich Merz said: "My guess is that we can do a little less in terms of expansion. And that will, of course, trigger significant changes in costs."
“We want to place the issue of security of supply in the context of grid expansion, the expansion of renewable energies, digitalisation and the ramp-up of hydrogen," he added.
That said, while Germany plans massive investment in its networks, Dutch operator TenneT is still seeking to offload its German arm. You would have thought the investment climate would be good for an entity such as TenneT Germany but the need for new equity has been a key issue in the selloff.
Funding network capacity has become essential. Germany is due to spend €25bn per annum on its transmission system operators (TSO), Benelux €15bn and the UK, €14bn. The distribution system operators (DSO) could spend up to two times more giving an overall annual spend in those countries alone of more than €100bn. And even that might not cure bottlenecks.
Overhanging the nuts and bolts of the grid system, there are huge ambitions to add generation capacity. Data centre developments driven by AI are said to require vast amounts of new power, notwithstanding the equally critical need for vast amounts of water. And that is just the start.
But that is for the future. Power demand has actually not altered that much over the past decade. Instead factors such as closing down nuclear power stations in Germany has altered the power mix, leading to a surge in renewables, resulting in a new focus on networks to cope.
Right now a week does not seem to go by without a large-scale portfolio of renewable power generation developments being put on the market. It is tough out there if you are a developer. The bellwether of the renewables industry Orsted has stated its farmdown model is no longer de rigueur. Finance chief Trond Westlie told Reuters after the company's US$9.5bn rights issue launched, "farmdowns have been a very profitable way when returns have been good and interest rates low. That has changed."
For the project finance industry the shift is not that welcome. Transmission assets tend to be financed on utility balance sheets. Just this week Amprion in Germany, recently boosted by RWE and Apollo equity, upped its corporate loan to €3.2bn and raised a €1.5bn bond while Redeia in Spain raised a €500m bond.
Single asset interconnectors and transmission lines are being project financed but not on a regular basis. Instead deals such as the £1.35bn corporate transmission project loan financing for Iberdrola's Scottish Power, via National Wealth Fund, Bank of America, Lloyds and NatWest, is the norm.
Generation assets tend to be financed via limited recourse debt. There is still plenty of demand for new generation but a shift has occurred. Generation plus the now necessary battery storage add-on is still around but networks are the thing.
