Portugal's EDP springboard for China Three Gorges investment abroad

PARIS (Reuters) - Utility Energias de Portugal (EDP) and its shareholder China Three Gorges (CTG) have set up a joint venture to develop hydro-electric projects in South America and Africa, part of a partnership being watched across the industry as a model for Chinese investment in renewables abroad.

The 50-50 joint venture, called Hydroglobal, is studying hydropower projects in Peru and other Latin American countries outside Brazil, as well as in Portuguese-speaking Africa, notably Mozambique.

EDP chief executive Antonio Mexia told Reuters that in the next 12 months EDP will also invest 1.2 billion to 1.3 billion euros ($1.4-1.5 billion) in projects that CTG will participate in with 300 million to 400 million euros through co-investment or by buying minority stakes.

The Chinese funding is part of a commitment to invest 2 billion euros in EDP-led projects that CTG agreed to when it bought a 21 percent stake in the Portuguese firm in 2011 for 2.7 billion euros, outbidding Germany’s E.ON and Brazil’s Eletrbobras.

Mexia said the strategy of “asset rotation” - in which EDP develops projects, sells minority stakes to investors and uses the funds to build more - was central to its plans, particularly in renewables, allowing it to broaden its portfolio.

“It means we can develop lots of new projects,” he said.

EDP is active in 13 markets, including Portugal, Spain, Brazil, the United States, France and Poland.

Mexia said CTG was already near its 2 billion euro target, having agreed to invest some 1.3 billion euros in EDP-led projects, mainly hydro and wind power in Brazil and Portugal. He expects the total to reach 1.7 billion euros by the end of this year and continue further once the target is reached.

“CTG is close to realizing the agreed 2 billion worth of investments and EDP is finding ways to go beyond that with new projects,” he said.

DEDICATED PARTNER

While it is standard practice for utilities to act as developers of wind and solar parks and then sell minority stakes to funds, EDP’s partnership with CTG is unique in that its own shareholder acts as its dedicated investment partner.

This means CTG gets a look-in at an early stage before other potential investors, and EDP reduces its financial risk as it can involve its partner when it makes investment decisions.

The alliance has become an entryway into Europe and Latin America for China Three Gorges, which operates the world’s largest hydropower plant on China’s Yangtze river, and is diversifying into wind and solar and abroad as its domestic hydro market is increasingly saturated.

The partnership is closely watched by other European utilities who view it as a potential model for further Chinese energy and infrastructure investment.

CTG Executive VP Lin Chuxue told China Daily in May that CTG’s investment in EDP had performed well and that CTG - which operates 45.5 gigawatt (GW) of hydropower in China, including 22.5 GW at the Three Gorges - is looking for acquisitions in Latin America and Europe.

He said installed capacity of projects involving CTG overseas investment was 6 GW, which CTG wants to raise to 25 GW over the next few years, notably in Brazil, where it plans to build 3 GW of hydro and wind projects.

Mexia said CTG’s EDP investment is driven by three criteria: access to new markets, investment in CO2-free renewable energy and gaining experience with deregulated energy markets.

However, despite its Chinese partner’s focus on new markets, two thirds of EDP’s new investments in 2015-16 will be in the United States. The rest will primarily go to Italy, France, Brazil and a little bit to Poland. It is also looking into Mexico and Canada.

“We still focus on stable, regulated markets,” he said.

RAMPING UP

Asked whether CTG could increase its stake in EDP, Mexia said the firm has a “standstill and lockup” period until May 2016 during which it cannot increase or decrease its stake.

“After that, they are free to do what they want,” he said.

Utilities specialists say that Chinese utilities are discreetly but actively prospecting for investment in Europe and are eager to get a foot in the door, even through minority stakes that offer relatively little control.

In 2012, State Grid Corporation of China bought 25 percent of Portuguese grid operator REN, and last year it paid 2.1 billion euro for a 35 percent stake in Italy’s CDP Reti, which owns large minority stakes in gas transport group Snam and power grid Terna.

Snam CEO Carlo Malacarne told Reuters this month that, as per company bylaws, the Chinese director on Snam’s board cannot vote on strategic decisions.

“State Grid put down money for a participation without governance,” Malacarne said.

In another Chinese minority participation in an EU energy project, nuclear groups CNNC and CGN are lined up as partners in French firm EDF’s project to build two nuclear plants at Hinkley Point in England.

“Chinese firms know they are not necessarily welcome to take full ownership in some EU countries. But they see a minority stake as a learning phase, with the idea that they can ramp up in the future,” said Compass Lexecon analyst Fabien Roques.