Scottish & Southern Energy's import opportunities in the Spanish power market

SS&E in Spain

Wind and Gas: Opening up the Spanish Front for SS&E

The potential for commercial partnerships between Spanish and UK utilities has rarely been more compelling. With additional power transmission interfaces coming online to facilitate increased power trading across the English Channel, companies like Scottish & Southern Energy can become active participants in broader European energy markets or simply hedge their generation portfolio to exploit local subsidy arbitrage opportunities.

Import Strategies

With total net production of 285,681 gigawatt-hours in 2008 (the latest year for which ENTSO-E statistics are available) and domestic consumption of 270,907 gigawatt-hours, Spain is a net exporter of power to Portugal (9,282 gigagwatt-hours in 2008) and Morocco (4,212 gigawatt-hours). Since both of these nations have lower prevailing industrial and consumer power prices than the United Kingdom, Spanish generation interests could sell their output more profitably to British utilities if (1) a willing buyer and (2) transmission capacity to the purchasing utility's domestic customers were available.

Spanish power generators can currently sell power to Portuguese utilities at an international rate premium of up to €0.01 per kilowatt-hour, (Zwanenburg 2009) or to Morocco at a significantly less attractive premium of roughly €0.001 per kilowatt-hour (Enzili 2009, p. 5) compared to what they currently charge domestic industrial customers. This translates into an aggregate incremental profit opportunity of up to $92.8 million annually for Spanish generators who export to Portugal, compared to a somewhat trivial $5.4 million to Morocco. (All calculations are best-case export scenarios that reflect foreign purchases at retail rates; wholesale deals will naturally depress the effective rates and exporter profits.)

However, British retail rates among the highest in Europe and would represent an export premium of up to €0.03 per kilowatt-hour for Spanish power exporters compared to their domestic markets. Thus, Spanish generators could easily be motivated to move their output across the French grid and then across the England-France Interconnector (IFA) to the United Kingdom.

The benefits for an importer are obvious. Estimates of the current levelized cost of generation for UK operators run relatively high; a company like Scotland & Southern Energy could easily expect to pay 10.4p per kilowatt-hour to run an offshore wind farm, for example (Wood MacKenzie 2009, p. 25). Given the fact that Spanish retail prices are 5% lower than this (GBP = .90 EUR), there is room here to broker a mutually attractive wholesale rate that will then give Scotland & Southern the ability to buy bulk power at an incrementally lower cost and then distribute it to its retail customers at higher prevailing UK rates.

Needless to say, these are pure (and thus, somewhat abstract) numbers. Real operating advantages derived from the trade would be reduced somewhat by competitive pricing, shifting subsidy regimes, and other factors. However, in effect, this cross-border trade represents a pure form of the arbitrage characteristics of import/export activity: buy where goods are cheap, sell where they are relatively expensive.

Generation Issues

However, this raises the secondary question of why Scottish & Southern Energy would simply not import power from France, which can generate wholesale power even more cheaply than Spain given its extensive nuclear installed capacity. Beyond the Baltic, French retail electricity rates are among the lowest in Europe; comparing to domestic market prices, a British importer could conceivably buy power from France as a retail industrial customer and still resell it to its own customers at roughly a 40% premium (Zwanenburg 2009).

While cheap and relatively clean, French-generated power is not considered "renewable" or especially desirable in environmentally conscious Scottish markets. Only about 15% of all French wattage derives from non-fossil, non-nuclear sources, compared to 24% for Spain (ENTSO-E 2009, p. 5). Given especially aggressive renewable energy targets in Scotland -- 40% by 2020 (Finnie 2003, p. 1), compared to a 20% target for the overall United Kingdom (Department of Trade and Industry 2006, p. 16) -- it is easy to imagine subsidy regimes that would negate any cost benefit of buying from France.

(In any event, nuclear power is unpopular with the Scottish National Party, which has stated outright that it "does not need and does not want" additional nuclear capacity (Scottish government press release, May 31, 2007). The government would likely take a relatively dim view of attempts to import additional nuclear-generated energy from France, no matter how cheap it is. And in the face of increasing French domestic interest in renewable generation, power derived from non-nuclear sources may not be available for import.)

Partner Choice

Spain's wholesale landscape is relatively concentrated with only a few significant players with the capacity to export significant amounts of power (Matthes, Grashof & Gores 2007, p. 12). Scottish & Southern Energy has recently cultivated a working relationship with the "greenest" of these suppliers, Iberdrola SA, as the two companies (in cooperation with a third partner, GDF Suez SA) develop a 3.5 gigawatt nuclear facility on the Cumbrian Coast.

However, strategically speaking, Iberdrola may already be too close to S&SE's home markets to invite a closer relationship. The company has about 5.2 million retail customers in the United Kingdom as a result of its €17 billion purchase of Scottish Power in 2006, and more recently announced that it will be basing its global wind operation in Glasgow. With a substantial UK distribution footprint of its own, Iberdrola could easily bypass any local partner to simply move its own excess power up to sell through its own channels, bypassing Scottish & Southern Energy entirely.

It may make more sense to pursue a long-term supply arrangement with Iberdrola's primary rival Endesa SA, which has a vested competitive interest in cultivating a Scottish connection on its own behalf. The company also has a diversified conventional hydrocarbon and nuclear generation mix, but has yet to concentrate on alternative technologies; until recently, renewable sources represented roughly 3% of its overall generation profile. Also, while Endesa is much bigger than Scottish & Southern Energy -- as a public company, its market capitalization was about €45 billion, or five times as large as S&SE -- it is also a wholly owned subsidiary of the profoundly indebted Enel S.p.A., which has neither the balance sheet to buy its way into Scotland nor, as yet, any apparent ambition to do so.

II. Export Strategies

It may initially appear that organic opportunities for Scottish & Southern Energy to export to Spain are fairly limited. While a partnership with Endesa could theoretically create chances to feed renewable power back across the pipeline (presumably at a value-added or subsidized price), several factors make this unlikely to develop into anything more than smoothing out incidental supply mix imbalances.

For one thing, while the deregulation of Spanish retail markets has driven interest among the nation's utilities to differentiate themselves and so win overall share, Iberdrola is already competing quite effectively on its renewable power proposition -- it is likely that most Spaniards who want to go green have already done so. Should Endesa require additional renewable capacity to meet demand, it also has the relatively captive resources of its recently announced corporate affiliate Enel Green Power to fall back on, allowing it to keep any value-added green power buying "in the family."

If Scottish & Southern Energy finds it necessary to enter the fast-growing Spanish market, it may be easier to simply buy a small local utility and compete on the ground. This would give the company direct access to the wind-friendly Spanish subsidy regime; so far tightening budgets have not led Madrid to take a less active role in encouraging wind generation. However, this would also expose S&SE to more intense competition with Iberdrola on its home territory and entrenched operational specialty, and so may not be strategically viable.

Instead, the company might look to re-export Spanish power to Ireland across the Moyle interconnector. The strategic position is similar: prevailing Irish industrial power customers pay roughly €0.015 more per kilowatt-hour than their counterparts in the United Kingdom (Zwanenburg 2009) and Moyle can support about 3,942 gigawatt-hours a year of traffic.

Furthermore, Scottish & Southern Energy already has a significant retail presence in Ireland, having completed its acquisition of Dublin-based wind producer Airticity in 2008. While Airticity's existing customer base is still relatively small, it provides a much more viable (and immediate) toehold in a relatively local foreign market (Moyle exits in Northern Ireland, so is still technically British territory; there are not even any currency exchange issues) compared to an ambitious but relatively risky intrusion into a completely alien -- and highly competitive -- Spanish business.

Sources