Even as the perils of one monopolist becomes all too evident in the natural gas market, the British may well be entering into the clutches of another monopolist.
FT reports that the Australian infrastructure fund, Macquarie have teamed up with British Columbia Investment to buy a controlling stake of 60% in the UK National Grid's gas transmission and metering business for £4.2 billion (with £3.8 bn of that coming as debt). It involves taking over 7660 km of pipes transporting gas to heat homes and power industry and electricity generation across Britain, and also has an option to take over the remaining 40% stake of NatGrid. Macquarie, through a consortium of Qatari and Chinese SWFs, already owns Cadent, which runs half of the eight local distribution networks after buying them from Nat Grid for £5.4 bn in 2017.
Some observations:
1. Macquarie appears to have got an attractive deal. It has got control over a very stable and low-risk revenue generating asset with enterprise value of £9.6 bn by putting in just £400 million in equity. It has to make this equity sweat and maximise its returns over the coming years.
2. Macquarie is big into UK utilities infrastructure, having spent about £50 bn on UK utility infrastructure over the past 15 years. It has investments in water, sewerage, electricity, gas, telecoms, airports, and railways. Irrespective of the well-documented problems associated with private equity investments in infrastructure, this is big money and such investors are the biggest sources of mobilising private capital into infrastructure. Given this, it's important to get contract structuring and market regulation right, failing which more of business as usual controversies on debt-loading, investment skimping, asset stripping and dividend payouts will follow.
3. Apart from its gas investments, Macquarie is also bidding with KKR to buy Britain's largest electricity distributor UK Power Networks which transmits electricity to 8.3 m consumers in the south and east of England. Clearly Macquarie is not being put off by scaremongering about fossil fuel assets. It's assessments about the future of energy transition and commercial risks of fossil fuel does not appear to warrant shunning them.
4. The National Grid appears to have been short-sighted in pursuing a strategic policy to exit fossil fuels and invest in renewables. This is not an either or situation, the likes of NatGrid should do both.
It's ironical that even as public companies like NatGrid in UK (and NTPC in India) are exiting fossil fuels, the biggest infra funds are flocking into it. Clearly Macquarie knows what it's getting into. If it thinks fossil fuels continue to be promising enough, don't know what public companies know better to make them shun fossil fuels. This is a reminder for India's power companies to make realistic decisions about their power sector investments and not be led by blind ideologies.
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