Throughout 2015, the momentum for energy reform and unbundling has gathered pace, as more of the world’s governments realize the necessity of opening their energy markets to competition, in order to attract foreign and private investment, either to increase efficiency or to avoid the need to provide future capital. (More information on how reform is shaping utilities investment is in our latest Power transactions and trends report.) While there are a large number of countries either pursuing or engaging in reform, the following three markets are of note, either because of how reforms have progressed to date or how we expect liberalization to unfold over the coming 1-2 years.
Mexico: Steady but sure progress
Background: In the making for more than a decade, Mexico’s energy reforms (which are discussed in more detail on the Mexico spotlight of our energy reform and unbundling microsite) are gaining pace and traction. The country has one of the world’s highest forecast energy demand growth rates, while current electricity costs for industrial users are impacting Mexico’s ability to compete with a revitalized US manufacturing sector. The process of reform is not an easy one: Francisco Salazar, President of energy regulator Comisión Reguladora de Energía (CRE), discussed some of the challenges in a recent issue of Utilities Unbundled, which highlighted the practical difficulties of creating the rules and arrangements required for competition well ahead of market entry.
Current state of play: The opportunities offered by Mexico’s reforms are some of the biggest on offer in the sector globally (with the exception of Africa), with the Mexican Energy Ministry predicting US$62.5b in both public and private investments over three years. As I blogged in April, investors’ interest in Mexico at the moment will increase as clarity improves around critical elements of the new market design. While these details are being worked out, investment will be pensive but this delay is not necessarily a bad thing – extra investor diligence and additional detail around market design will pay off in the long-term for Mexico. Most importantly, the current government has a clear vision for its liberalized energy market, and strong government commitment is one of the greatest predictors of long-term investor confidence and successful reform.
New players in reforming markets do best when partnering with local firms, in order to navigate regulatory and stakeholder arrangements and to access other local alliances. In a recent example, US renewable energy firm Pattern Energy formed a joint venture with Mexico’s Cemex Energia to develop 1,000MW of renewable generation in the country over the next five years. Other deals such as these are already starting to fill the pipeline and we expect more to come.
What next?: Watch for announcements of joint venture investments and deal values to increase once the Mexico Government finalizes the first tranches of market design and as wholesale market arrangements, in particular, become clearer. We expect much of this interest to be in renewables with Mexico aiming to source 35% of its power generation from renewable sources by 2024, although there is room for conventional generation as the fuel mix reacts to market design and cost allocation decisions down the road. Already Denmark’s Vestas Wind Systems has identified Mexico as a key market for expansion.
Turkey: Reforms set to revitalize economy
Background: While the privatization of Turkish electricity and gas distribution segment has been largely completed, privatization of electricity generation assets remains an ongoing process. Turkey recently opened tenders for the privatization of a combined cycle and gas turbine power plant in Aliağa in the Aegean province of İzmir and a gas plant in Bursa in northwestern Turkey.
Current state of play: While Turkey’s electricity unbundling is completed, the Government is now aiming to privatize a total of 29 hydroelectric and gas-turbine powered power plants of the Turkish Electricity Generation Corporation (EÜAŞ), as well as Turkey’s state-run oil company TPAO’s oil distribution unit, TP Petrol Dağıtım, by 2020. Most current interest is in the sale of the Aliağa and Bursa Power Plants, for which final bids will be taken on 1 October and 15 October this year, respectively.
What next?: As well as local players, we expect interest from investors based in Europe, particularly Russia, as well as China and the Gulf nations. Proposed regulatory changes will also attract new players, given Turkey’s ambitious renewables targets: the country aims to meet 30% of its electricity through renewable sources by 2023. The upside does need to be weighed carefully – Turkey’s forecast energy demand growth is not as high as other reforming markets and there are local complexities to be understood. Engaging local advisors and local partnerships may be the wisest strategies for success.
Serbia: One to watch
Background: While Serbia is expected to play an important role in the EU’s energy diversification strategy, its progress to market liberalization has been slow and steady, with just 40% of the country’s electricity market opening to competition over the past two years. Moves are underway to secure support from the International Monetary Fund (IMF) – last year, Serbia’s consolidated budget deficit was 6.6% of GDP – and this is bringing new focus to energy reforms.
Current state of play: The IMF’s recent approval of its second review of Serbia’s US$1.35b economic package looks set to speed up reforms. The Government has announced plans to privatize state-owned enterprises, including infrastructure operators and utilities, by the end of 2015. Moves have been made to unbundle Srbijagas, the country’s state-owned gas utility, and full retail competition for all customers will begin in 2016.
What next?: Despite challenges, including internal tensions and the Greek crisis, Serbia’s overdue reforms will progress quickly – the Government can wait no longer to raise capital and meet IMF conditions. As restructuring of state-owned enterprises brings sought-after regulated assets onto the market, we anticipate strong interest from both utilities and financial investors. Chinese investors, in particular, are already active in Serbia, attracted by the country’s strategic location. We expect to see both utility companies and funds in play once lead advisers start bringing together buy-side consortia.