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Merger creates undisputed king of wind power assets -- Around 10% of world wind capacity moves into Iberdrola ownership

For the first time, wind power assets are playing a major role in a significant utility merger. A bid by Spanish Iberdrola for the UK's ScottishPower gathers over 7000 MW of wind plant capacity into a single portfolio along with about 13,000 MW of wind projects under development on both sides of the Atlantic Ocean and in Asia. The deal will make Iberdrola the biggest owner of operating wind power assets by far, most of which are in Spain, the United States and Britain.

Iberdrola describes wind power's role as "a key driving force" in the planned EUR 17.2 billion merger, which will make it the third largest utility in Europe, after Germany's E.ON and France's EDF, with a total operating capacity of 36.6 GW. Iberdrola is Spain's second largest utility and already vies with America's FPL Energy as owner of the world's biggest wind power portfolio. ScottishPower is the seventh largest utility in Britain and is a major player in the British wind market. Most of its wind power assets, however, are in the United States, where it owns American power company PPM Energy, the second largest owner of wind farms in the US after FPL.

For the merger to go-ahead, 75% of ScottishPower shareholders must agree to the offer in a vote scheduled for the "first term of 2007," according to Iberdrola. The deal, which requires the approval of European and US antitrust authorities, will create an unrivalled wind power industry giant "now and into the future," says Iberdrola. The company is confident the ScottishPower board will advise its shareholders to approve the merger. Iberdrola aims to finalise the purchase by April.

If all goes to plan, Iberdrola will own more than 7000 MW of wind plant, with about 1400 MW of that currently in construction (table). That is more wind power than operated in any single country barring the US, Spain and Germany. All but about 400 MW of Iberdrola's operational wind plant assets are in Spain, with the remainder in Greece, Germany, France, Portugal, Brazil and the United States. ScottishPower owns 370 MW of operational wind stations in the UK and Ireland, plus 340 MW in construction, and through PPM, 2083 MW in the US, of which 446 MW is in construction. ScottishPower says its project pipeline in Britain and Ireland amounts to 1500 MW. PPM says it will have at least 3500 MW online in the US by 2010.

Of the 13 GW of projects that Iberdrola says are in various stages of development in the combined wind portfolio, 6140 MW are in Spain, 2260 MW in the UK and 5000 MW in the rest of the world, largely in the US. PPM, however, indicates that may be a conservative tally. Unofficially, it confirms reports of 9000 MW of potential development on its books.

Synergies and horizons

Iberdrola states that Scottish Power's "wind power know-how is fundamental" to the deal "especially in siting, supplies, construction and marketing." The financial, operational and management synergies of the merger "will save EUR 190 million annually in wind activities in USA and UK," states the company in an internal memo. That is a deal more than the EUR 130 million figure that Iberdrola is quoting for public consumption.

Using wind power as a springboard into the US electricity market is a strategy Iberdrola has already successfully followed. Earlier this year, it bought two wind project developers in the US, Community Energy and Midwest Renewable Energy Corporation, with combined rights to 3800 MW of projects, over 400 MW of that near to construction.

As part owner of Gamesa, Spain's leading wind turbine maker, Iberdrola at the same time secured 2700 MW of Gamesa machines to fulfil its US order portfolio, much of which will be made at Gamesa's new turbine factory in Pennsylvania. With global demand for wind turbines outstripping supply, this new access to Gamesa hardware is a clear benefit for PPM, which is looking to realise a considerable project pipeline, agrees the company's Jan Johnson.

"The merger is certainly something to be excited about. It goes to show consolidation and internationalisation. And culturally, it could be a very good fit as we both have very aggressive goals," she says. ScottishPower recently secured 300 MW of turbines for its US projects, but from outside the Iberdrola empire. GE Energy got the order.

PPM Energy began as a spin-off from PacifiCorp in 2002 with 12 employees and since grew to a staff of over 500 working in both wind and natural gas development. Half year profits were up £10 million on the previous year, to EUR 68 million. In announcing PPM's results, Scottish Power specifically cited wind development as partly responsible for the profit growth.

Back in Britain, Iberdrola not only picks up the country's largest onshore wind development, the flagship 322 MW Whitelee project, but it will also enter the offshore wind business with the 500 MW Duddon Sands project, developed by Scottish Power together with Danish utility Elsam and Japanese wind developer Eurus. Iberdrola's current wind assets in the UK are limited to its purchase last year of 22.5 MW, now building, from British developers AMEC Wind Energy and West Coast Energy.

Looking ahead

Iberdrola recently set a 7 GW renewables target for 2009 and a 10 GW target for 2011, mainly from wind power. "International expansion is key to reaching the target," it says. The utility has opened offices in a range of European countries as well as in Pennsylvania, Mexico and Brazil. In addition to the US wind purchases, it bought 694 MW of wind project rights in France last year. In Greece it has a stake in 214 MW of operating plant, mainly through its 49.9% ownership of Greek developer Rokas, and it has a scattering of assets and projects in Germany, Italy and Portugal. The utility is also active in the emerging east European wind markets, with 220 MW developing in Poland, permits to build 150 MW in Estonia and project rights on 96 MW in Hungary.

In Latin America, Iberdrola owns a 50 MW wind plant in Brazil and is waiting for the final permit to build 102 MW in Mexico. In China, it has rights to develop at least 1000 MW in Shandong province.

Defending the deal

The risk now is a competing bid for ScottishPower. Iberdrola hopes its offer, widely considered to be generous, will serve as a deterrent. ScottishPower shareholders will receive £4 per share, plus £3.65 worth of new shares in Iberdrola. Iberdrola says that will give ScottishPower shareholders a 21.4% stake in the resulting merged company.

The Spanish utility also confirms it has given assurances to the Scottish Executive that it will retain the commercial name and headquarters of ScottishPower and that it does not intend to shed any of its assets. Given Scottish elections next year, that may help mitigate voters' wounded national pride, fuelled by Scottish National Party criticism that the deal brings no benefits to the country. Not so, says ScottishPower's CEO, Philip Bowman, arguing the deal "avoids the negative consequences for employees that other possible takeover bids could involve." The merger "will enable ScottishPower to expand in an increasingly competitive global market," he adds.

Meanwhile, Iberdrola has asked the European Commission to fast track approval. As assurance against unfair competition, the utility has presented the EC with a breakdown of assets, showing them to lie mainly in different national markets with only moderate overlap. A similar case is likely to be put to the Federal Energy Regulatory Commission in the US regarding ScottishPower's affiliate PPM.

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