SYDNEY (Reuters) - Sun-drenched Australia's growing love of solar power is casting a long shadow over its biggest privatisation in two decades and the second-biggest sale ever of a state asset.
Rooftop solar installations are booming and on-grid energy use is falling just as the government of New South Wales state prepares to offer a 49 percent stake in its electricity distribution network for around $10 billion, likely to one or more strategic investors.
New South Wales, or NSW, which includes Sydney, is Australia's most populous state and the sale of the stake in Networks NSW will be a marker for the country's plans to privatise about A$130 billion ($122 billion) worth of state infrastructure within the next few years to pare debt and pay for capital works.
The government appears to be pricing the network's three "poles and wires" grids at full value, energy experts said, despite the increasing use of solar energy and capital expenditure of at least A$15 billion over the past five years to accommodate increases in electricity volumes that never came. The expenditure, agreed with the Australian Energy Regulator, has pushed up household energy bills, making alternative power sources more appealing.
Some of the experts are calling for hefty writedowns before the NSW Network's businesses are sold.
"The days of having a relatively predictable, low single digit growth path, they're gone," said Standard & Poor's credit analyst Richard Creed, referring to energy volumes.
"Any buyer of these companies is going to need to take a view on how the regulator is going to manage this volume risk. That's probably within the next 5 to 10 years."
Networks NSW and the office of NSW state premier Mike Baird did not respond to calls requesting comment.
The state government has mandated UBS AG UBSN.VX and Deutsche Bank AG (DBKGn.DE) to study how best to sell the assets and has said it will proceed with the sale if it wins an election in March 2015.
The grid sale would be the biggest Australian privatisation since Telstra Corp Ltd (TLS.AX) raised A$14 billion on the stock market in 1997. Like Networks NSW, Telstra began life as a public company with years of stagnant revenue as the rise in mobile telecommunications led to customers quitting land lines.
Cheung Kong Infrastructure Holdings Ltd (1038.HK) (CKI) and Power Assets Holdings Ltd (0006.HK), both investment arms of Hong Kong billionaire Li Ka-shing, State Grid of China Corp STGRD.UL and various pension and sovereign funds are likely to be attracted, analysts said.
CKI declined comment, while Power Assets did not reply to e-mails seeking response. State Grid of China was not available for comment.
"It's a different environment than what it was in the past, with new technology and more electricity being produced by solar and other renewable sources," said Anoop Chaudhry, head of Asia-Pacific power and utilities at Barclays (BARC.L).
"Some of that hasn't played out, so it's hard to get a grasp on what the full impact might be. As a result, there is additional risk that may come into play which needs to be factored in while valuing these businesses," Chaudhry said.
"But beyond that, these are still very attractive businesses," he added.
One of the networks up for sale, Ausgrid, reported a return on equity of 23 percent in 2013. In the private sector, listed gas pipeline owner Envestra produced return on equity of 15.1 percent in 2013, according to Thomson Reuters data.
Profits at the electricity networks have been growing thanks to the regulated price increases but actual usage volumes have been mostly been flat or falling, analysts said.
Australians have been flocking to solar, angered by soaring power bills and encouraged by cheaper and better solar and battery technology as well as generous installation subsidies.
Since 2009, rooftop solar installations in Australia have jumped 1,200 percent with 1.3 million homes or about one-sixth the country's 23 million people now relying on rooftop photovoltaic power for some portion of their energy supply. One-fifth of this capacity is in NSW, only second behind sunnier Queensland, a state that accounts for 35 percent.
In the same time, the three NSW public electricity networks up for sale, Transgrid, Ausgrid and Endeavour Energy, roughly doubled household energy bills to match the increased capital expenditure.
Even UBS, which has the mandate to study the privatisation of the assets, has raised its concerns about the future of the industry. In May, the investment bank predicted it would be as cheap for Australians to run electricity off the grid as on it from 2018.
A Commonwealth Scientific and Industrial Research Organisation report suggests one third of Australian households may get their power entirely off the grid within two decades, up from little over 1 percent now.
Endeavour Energy says use of its network fell 8.2 percent between 2009 and 2013, due to mild summers and winters and "rapid uptake of solar across the network". It also cited "reduced electricity use in response to high prices".
It still got approval to spend A$3 billion on a network upgrade, up 37 percent on the previous half-decade.
"These guys have so incredibly over-egged their assets to expand them for demand which never arose," said Bruce Mountain, a former Australian Competition and Consumer Commission energy consultant who now advises governments and large firms on energy policy.
Traditional energy companies are floundering even more in Germany, Europe's biggest solar user.
According to German energy giant RWE AG (RWEG.DE), which in 2013 blamed plant closures caused by solar demand for its first annual loss in 60 years, it and the three other energy giants - E.ON (EONGn.DE), Vattenfall [VATN.UL] and EnBW (EBKG.DE) - have seen 70 percent of their combined market value wiped off since 2007.
The power networks in Australia are now hoping they can stay in business if households use the grid as a conduit for selling back or trading unused power. The partial privatisation could help bring that about.
Selling the network was a "fantastic opportunity for the new owners to be incentivised to modernise the networks" by introducing power-trading technology and time-of-use metering, UBS energy analyst David Leitch said.
As is, Leitch added, the networks "basically have next to no acknowledgement or desire to be involved in the new utility world that I see".
Additional reporting by Vera Eckert in FRANKFURT, Charlie Zhu, Donny Kwok and Denny Thomas in HONG KONG; Editing by Lincoln Feast and Raju Gopalakrishnan