State power firm snapping up grids across Europe

Company's low-key approach welcomed in a sector wary of overseas investment, analysts say

PUBLISHED : Monday, 11 August, 2014, 5:27am
UPDATED : Monday, 11 August, 2014, 5:27am

The European Commission has long wanted the continent's power grids to work in unison for reasons of efficiency and to have secure supplies, so far to little avail.

But a regional power network could soon be a reality, courtesy of the State Grid Corporation of China.

While Europe's utilities have met hostility to cross-border forays and been outbid by infrastructure funds, State Grid, the world's largest utility by revenues, with its deep pockets and reputation for hands-off management, has had an easier ride, buying minority stakes in Portuguese and Italian grid operators and also pursuing designs on Greece and Spain.

If all goes to plan, it would become the first utility to build a major regional electricity grid portfolio, a feat that the commission had hoped Europe's big grid operators would have achieved in the five years since it forced the separation of the grids from power production to increase market competition.

A State Grid official familiar with its overseas strategy said projects abroad typically yielded high single-digit to double-digit returns, compared with low single digits at home.

Its relatively low yield requirements gave it an edge over Western infrastructure funds and European sector peers. State Grid bought 25 per cent of Portuguese grid operator REN in 2012 and last month it entered Italy with a deal to buy 35 per cent of CDP Reti for at least €2.1 billion (HK$21.8 billion).

Patient and discreet, State Grid only invests where it is welcome, shying away from hostile bids, and has seized on the opportunities afforded by privatisations in cash-strapped southern euro zone countries.

Fear of foreign control of electricity networks has been a powerful inhibitor to the integration of EU grids.

Consulting firm Accenture's Jean-Marc Ollagnier, who advises mainland utility companies, said the Chinese were welcome partners as they provided investment and did not usually get involved in operations.

"In general, when a Chinese firm acquires a foreign company, it will leave local management in charge. When a European or US utility buys a stake in a foreign company, you will likely soon have 10 guys who come and tell it what to do," he said.