Power investment outlook subdued

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Wednesday 28 August 2013 — Investment appetite in the Australian power generation sector will remain subdued until there is greater political and regulatory certainty and stability, according to EY.

EY’s latest global quarterly Power transactions and trends report, shows that while volumes remained flat, a handful of mega dales during Q2 2013 sparked a 30% rise in M&A value globally to US$33.0b.

Outbound Chinese investment was a feature of Q2 deals, including China’s State Grid Corporation moving into the Australian power sector with its partial purchase of Singapore Power’s Australian distribution and transmission assets.

However, EY Oceania Power & Utilities Leader Matt Rennie says significant deal demand is focussed on power infrastructure assets and the broader M&A outlook in the Australian market is subdued, particularly for generation assets and renewable energy investment.

Rennie says competition restrictions, merchant, regulatory and political uncertainty are all impacting M&A.

“In the medium term the expected privatisation of the NSW transmission and distribution assets will draw strong investor interest. The Queensland Government has also indicated they are looking at innovative ways of funding very significant forecast capital expenditure which could involve participation by the private sector,” say Rennie.

“This asset class is viewed as infrastructure rather than a pure utilities play and thus brings in a much deeper capital pool,” says Rennie. “However in the short term, policy uncertainty in regard to Renewable Energy Targets (RET) and carbon pricing will limit investment in power generation.”

“In addition, recent Australian Energy Market Operator (AEMO) data on future generation capacity requirements indicates medium term demand for new base load generation - a key M&A driver - will remain subdued. This has implications on the attractiveness of the NSW generation assets currently being marketed.”

RET target may not be met

Rennie says RET and carbon pricing have gone from being a potential driver of alternative energy investment to a “nuisance levy”.

“At the current rate of investment Australia will not achieve the 20% RET in absolute terms and the current debate demonstrates that the utilities community has sharply divergent views on the appropriateness of the target and the likely regulatory landscape.”

In EY’s latest Renewable energy country attractiveness index, released today, Australia has fallen two places to sixth place. The report notes this is partly due to stronger performances by Japan and the UK but “also reflects the impact of political infighting on Australia’s decarbonisation agenda”.

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Contact details:

Megan Ball
Ernst & Young Australia
Tel: +61 2 8295 6427