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REN: Fresh injection of funds to help spearhead projects [free access]

July 1, 2012

Portugal's energy sector is witnessing significant changesas a result of the financial bail-out package agreed with the European Commission (EC), European Central Bank (ECB) and the International Monetary Fund (IMF). One of the key aspects of this has been the recent privatisation of the country's state-owned transmission utility, Redes Energeticas Nacionais (REN). In February 2012, China’s biggest power network company, State Grid Corporation of China (SGCC), and Oman Oil Company together bought a 40 per cent stake in REN from the Portugal government. SGCC paid USD573 million for a 25 per cent stake in REN, while Oman Oil Company paid USD205 million for a 15 per cent share.

 

Post the stake sale, SGCC is REN's biggest shareholder with a 25 per cent equity stake. The privatisation move comes at a time when the Portugal economy faces a severe slowdown with its GDP reporting a 1.6 per cent contraction in 2011. For SGCC, this is a strategic step. REN's wide electricity network with stable operations and a strong management team are expected to help expand SGCC’spresence in the international power sector. REN's acquisition is SGCC's third overseas investment after the ones in the Philippines and Brazil.

 

For REN, a key advantage is expected to be the huge injection of funds. A funding commitment of EUR1 billion through a Chinese financial institution to meet REN's capex and refinancing needs is a part of the agreement between the two sides. Further, REN and SGCC will also explore expansion opportunities in Angola and Mozambique through two joint ventures. The agreement with Oman Oil, according to REN, will open up prospects for providing services in the Gulf region.

 

In this context, we take a look at the current operations of REN and its future outlook.

 

Transmission operations

REN is the sole transmission company in Portugal and holds the concession for the National Electricity Transmission Grid (RNT) for a 50-year period. As of December 2011, its transmission network comprised 8,371 km of line length with 33,777 MVA of transformer capacity. REN's transmission network has grown at a compound annual growth rate (CAGR) of about 3.6 per cent since 2006.

 

Almost 42 per cent of its transmission network is at the 220 kV voltage level. There are 126 transmission lines totalling 3,492 km at this voltage. At the 400 kV level, there are 55 lines totallinga line length of 2,236 km. At the 150 kV voltage level, there are 275 lines with a total length of 2,643 km.

 

Between 2006 and 2011, the transformer capacity has recorded a CAGR of almost 9.8 per cent. The utility increased its transformer capacityby 3,572 MVA or 12 per cent during 2011. The utility's transmission infrastructure also comprises 65 transformer substations and 13 switching stations.

 

For facilitating power exchange between Portugal and Spain, the transmission grids of both countries have been interconnected at several locations. There is one interconnectionat the 130 kV level, (between Minho and Galicia), three at the 220 kV level (in Douro) and five at the 400 kV level (two between Minho and Galicia, one in Douro, one in Tagus, and one between Alentejo and Estremadura).

 

Table 1: Transmission line length (km)

Voltage (kV) 

2006 

2007 

2008 

2009 

2010 

2011

400

1,507

1,588

1,589

1,609

1,973

2,236

220

3,080

3,177

3,257

3,289

3,467

3,492

150

2,413

2,661

2,667

2,671

2,609

2,643

Total 

7,000 

7,426 

7,513 

7,569 

8,049 

8,371

Annual growth rate (%)

-

6.1

1.2

0.7

6.3

4.0

Source: REN

 

Table 2: Transformer capacity (MVA)

 

2006

2007

2008

2009

2010

2011

Capacity

21,135

23,097

26,194

28,235

30,205

33,777

Annual growth rate (%)

-

9.3

13.4

7.8

7.0

11.8

Source: REN

 

Financials

 

The electricity business (which includes transmission operations) contributes almost 70 per cent to the REN Group's revenues, while the natural gas business contributes the remaining. The other revenues from the electricity segment have reported a mixed trend in the last three years. Between 2009 and 2010, these declined from EUR711.2 million to EUR631 million due to the behaviour of non-recurring items. However, in 2011, these increased marginally (by 0.3 per cent)to stand at EUR632.7 million.

 

In 2011, the earnings before interest and taxes (EBIT) from the electricity segment increased by 19.4 per cent to EUR200.1 million from EUR167.5 million in 2010. The earnings before interest, taxes, depreciation and amortisation (EBITDA) rose by 14.3 per cent from EUR289.8 million to EUR331.3 million in the same period. Among other reasons, the improvement in EBITDA was attributable to the reductions in the operational expenditures by 14.4 per cent from EUR69 million in 2010 to EUR59 million in 2011 in the electricity business. 

 

Capex investments by REN have slowed down in the last few years owing to the declining demand from key infrastructure segments. From EUR355.3 million in 2009, the capex invested in the electricity business declined to EUR294 million in 2010 and EUR267.9 million in 2011. REN expects the slowdown in the level of investment to continue in 2012-13 as well. 

 

In 2011, major capex investments undertaken were the installation of the 400/150/60 kV substation at Tavira; the 400 kV overhead lines connecting Portimão, Tavira (in the Algarve) and the Spanish border; as well as gas insulated substations in Prelada and Ermesinde near Porto as well as Zambujal and Fernão Ferro near Lisbon. Further, bond issues constituted the majority source of funding for the company in the past year. Almost EUR1,073 million was raised in 2011 through this source, which constituted roughly 45 per cent of all sources of debt. By the end of 2011, REN Group's consolidated net debt was EUR2,311 million, about 10 per cent higher than in 2010. The electricity business of the group accounted for nearly 61 per cent of the net debt in 2011.

 

Future investments

REN plans to expand the country's transmission network by 1,642 km through the addition of 400 kV lines over the next 10 years. A major focus area for REN's planned investments will be the evacuation of power from upcoming hydro power plants in northern Portugal. Almost 3,200 MW of hydro capacity is expected to come up in the region over the next few years, which willneed to be transported to the southern regions through high voltage transmission lines.

 

Another key focus area for REN will be the integration of renewable energy projects to the grid at the 400 kV voltage level to help evacuate greater amounts of power from existing and new connections. In 2011, about 675 MW of renewable power capacity was added in the country under the special regime generation, led by wind (453 MW) and cogeneration (172 MW) projects.

 

There are two transmission line projects under implementation for facilitating renewable power integration. One of them is the Vila Pouca de Aguiar-Carrapatelo-Estarreja  transmission line project of 278 km line length, proposed to be complete by 2013. The project entails the construction of a double circuit transmission line of 400 kV and 220 kVbetween the substations of Vila Pouca de Aguiar and Carrapatelo. The transmission line will be initially operated only at the 220 kV level. The other project is the 400 kV Guarda–Ferro B–C. Branco–Falagueira transmission line project of 135 km line length, which is expected to be complete by 2015-16.

 

REN's future plans also include projects to improve power supply to distribution networks that cater to large load centres. For this, new 220 kV substationswillbe installed at Valpaços and Alto de S. João and 400 kV substations at Fafe, Feira, Montijo and Fernão Ferro. A new 400 kV line connecting Marateca, Pegões and Fanhões is also planned, which will be complete by 2012. The existing 220 kV transmission line between Carregado and Rio Maior is also planned to be upgraded to the 400 kV level.

 

To further enhance the power exchange capability between Spain and Portugal, a 162 km, 400 kV double circuit transmission line is proposed to be installed in the Minho region. This will connect Viana do Castelo in Portugal with O Covelo and Boborás in Spain. The project is expected to be complete by 2014, and will enhance the exchange capacity to 3.2 GW between the two countries.

 

Overseas transmission line projects are also amongst REN's portfolio of future investments. One of these is being implemented jointly with Mozambique’s transmission utility EDM. The project entails the installation of 1,400 km of high voltage lines to link Mozambique’s central northern grid and southern grid (also known as the CESUL project), which are currently operating as two isolated systems. The project's construction is scheduled to begin in 2014 and be complete by 2017.

 

REN is also part of a large consortium in the MEDGRID project that aims to connect North Africa’s large solar power potential to Europe using subsea cables. The project proposes to construct four or five undersea cables to export 5,000 MW by 2020 at an estimated investment of EUR6 billion. Other members in the consortium include Alstom Grid, Areva, CDC Infraestructuras, Électricité de France, Nexans, Pan Med Trading and Investment, Prysmian, Red Electrica, Siemens, Terna and Abengoa, among others.

 

Conclusion

 

As the exclusive transmission monopoly in Portugal, REN enjoys the advantage of a strong position in the domestic market. However, its operations have not been immune to the weak conditions in the economy. With the completion of privatisation and an infusion of funds, REN should be able to implement most of its planned domestic and international projects.

 

Table 3: Portugal’s key planned transmission line projects

Project

Voltage (kV)

Type

Length (km)

Expected year of commissioning

O Covelo/Boboras (Spain)–Vila Fría/Vila Conde/Recarei (Portugal) 

400 

Double circuit 

50 (Spain), 112 (Portugal) 

2014 

Frades B–Pedralva 1 & 2

400

Double circuit

80

2014

Pedralva–Alfena

400

Double circuit

50

2017

Pedralva–Vila Fria

400

Double circuit

55

2014-15

Frades B–Ribeira de Pena–Feira

400

Double circuit

160

2015-16

Macedo de Cavaleiros–Vila Pouca de Aguiar

400

Double circuit

75

2012

Vila Pouca de Aguiar–Carrapatelo–Estarreja

400

Double circuit

278

2013

Ribeira de Pena–Guarda

400

Double

192

2022

V. Chã B–Arg./Góis–Penela–Paraimo / Batalha

400

Double circuit

105

2015-16

Guarda–Ferro B–C. Branco–Falagueira

400

Double circuit

135

2015-16

Falagueira–Pego

400

Double circuit

40

2014

V.Chã B—Guarda

400

Double circuit

55

2020

Rio Maior–Alm. Bispo–Fanhões

400

Double circuit

71

2016–19

Palmela–F. Ferro–Fanhões

400

Double circuit

25

2012

Marateca–Pegões–Fanhões

400

Double circuit

90

2012

Falagueira–Estremoz–Divor–Pegões

400

Single

circuit

116

2012

Source: European Network of Transmission System Operators for Electricity’s (ENTSO-E) Ten Year Network Development Plan, 2012