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Cleantech magazine, a Cleantech Investor publication

Scottish and Southern Energy – Leading the UK’s Renewables Thrust

by Nigel Hawkins

First published in Cleantech magazine, July 2008. Copyright Cleantech Investor Ltd.

The last issue of Cleantech magazine reported on Iberdrola Renovables, the world’s most valuable renewables business. Earlier this month its parent company, Iberdrola SA, hosted a well-attended presentation for analysts at the famous Scottish golf centre of Gleneagles, where it set out some aggressive goals for renewables generation.

In recent years, Iberdrola has invested heavily in renewables, especially in the on-shore Spanish wind sector, where substantial subsidies have been available. Following its expansion overseas, notably into Scotland via its ScottishPower acquisition but also into the US, Iberdrola has become the world leader in renewables generation. Last year, it floated a minority stake of its separated Iberdrola Renovables business.

Within the UK, the most obvious challenger to Iberdrola, in terms of renewables generation, is Scottish and Southern Energy (SSE), whose major competitor in the integrated Scottish electricity market remains ScottishPower.

SSE was one of the last electricity companies to be privatised almost 20 years ago. Unlike virtually all its peers, it has retained its independence, mainly due to its very impressive record of shareholder returns over the period. However, given rising concerns about carbon emissions and in response to the Government’s low carbon economy mantra, SSE has sought to strengthen its long-term market position by becoming the UK’s leading renewables business and top retailer of green energy.

Along with Sweden’s Vattenfall, SSE has historically operated a sizeable hydro-power business, which is due principally to geography and the mountainous terrain in both countries. SSE’s new 100MW hydro-plant at Glendoe, which is close to Loch Ness, continues this trend – it should come on stream next year.

The surge in power prices has materially boosted returns from SSE’s hydro-power plants, most of which have been fully depreciated. However, there are few obvious sites for new hydro-power plants in Scotland; consequently the company has sought to develop other generation sources. For several years, SSE has quietly built up its renewables generation capacity. Most notably, it has constructed various onshore wind-power plants in specified Scottish locations with consistent wind speeds.

It is self-evident that the recent acquisition of Ireland’s Airtricity – except for the US assets that E.On bought separately – has resulted in a step-change in SSE’s renewables generation profile. Indeed, it has converted SSE into a key player in renewables generation as well as giving it a presence in certain overseas markets.

In terms of valuation, SSE paid an Enterprise Value (EV) of over £1 billion for the non-US Airtricity assets; as a result, the company has boosted its British Isles onshore wind capacity by over 300MW.

Currently, renewables account for 20% of SSE’s generation capacity. Previously, despite its hydro-power assets, SSE’s portfolio had been dominated by fossil-fuel plant. Significantly, too, the Scottish and Irish wind-power load factors exceed the English average. SSE is quoting an average load factor for Scotland of 33% and for Ireland of 36%: the English figure is below 30%.

Whilst the generation capacity increases are important, it is Airtricity’s development pipeline that accounted for a substantial part of the acquisition cost. Of course, some of these projects may not materialise. A proportion, though, undoubtedly will come on stream within a few years.

Looking ahead, Airtricity’s overseas assets are particularly relevant. Within the portfolio, SSE acquired wind energy projects in China which amounted to 6,675MW of capacity. These projects are at various stages of development, but they will provide SSE with a strong entry point into a country whose economy is growing strongly and one where massive increases in generation capacity are needed urgently.

In Europe, the recent joint venture agreement with Sweden’s Gotha Vind is set to give SSE further opportunities in the Nordic region, where wind-power and hydro-power generation are both much in evidence.

In a recent presentation for analysts, SSE set out its long-term priorities and, more specifically, its investment plans. Overall, the capex programme is due to rise from £2.6 billion during the last five years to a formidable £6.7 billion over the coming five years – a very pronounced uplift.

The key message was that SSE would be undertaking heavy investment in new generation facilities. Significantly, too, renewables would be a major recipient of this new investment. Out of the projected £6.7 billion, no less than 46% is destined for renewables. Much of the remainder of the enhanced investment programme is earmarked either for power systems expenditure or for gas plant projects, in which SSE is expected to invest despite the current high gas prices.

SSE’s figures indicate that it will be investing over £600 million per year on renewables generation alone. To be sure, this figure may look quite modest alongside the renewables investment programmes announced by both Iberdrola and E.On in recent weeks. But SSE’s financial commitment to renewables also needs to be considered in the context of the many difficulties faced by start-up renewables operations, which have to overcome many challenges, notably raising adequate finance and the continuing problems of securing grid connections.

Financial markets, though, have welcomed the pronounced shift to renewables generation by some of the major players. Iberdrola, E.On and SSE have all seen their share prices outperform those of most of their peer group, a feature that is closely correlated with their degree of ‘green exposure’.

It is also the case that ‘green’ funds have limited high quality investment opportunities – a factor that explains the heavy demand for shares in major generators with rapidly increasing renewables generation plant.

Nigel Hawkins ( This e-mail address is being protected from spam bots, you need JavaScript enabled to view it ) is Director of Nigel Hawkins Associates, which undertakes investment and policy research.

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