SSE/Airtricity - analysis

So, we know that SSE paid around £1 billion for Airtricity.

The detailed breakdown of the portfolio from SSE's website is:

• The principal assets of Airtricity which SSE will acquire comprise (net of joint venture interests):


• a 308MW (megawatt) portfolio of operating onshore wind farms in Scotland, Northern Ireland and the Republic of Ireland;
  
• a 187MW portfolio of onshore wind farms in Scotland, Northern Ireland and the Republic of Ireland which have full consent and are under construction, and on which €77m had so far been invested by 31 August 2007;


• a further 104MW of onshore wind energy capacity in Scotland, Northern Ireland and the Republic of Ireland which has full consent but is not yet under construction;


• a 50% stake in a 504MW offshore wind farm development, with full consent, at Greater Gabbard off East Anglia. Subject to a final investment decision, construction work on the first phase is expected to start later this year and turbines have been reserved;


• a 288MW offshore wind farm in Germany which has full consent;


• the 483MW onshore wind farm proposed for Clyde, between Biggar and Moffat in southern Scotland, which is at an advanced stage in the consent process;


• a 1,434MW portfolio of other onshore wind energy projects in the UK and Ireland that are in various stages of development but not yet with full consent;


• an option to participate in a 350MW offshore wind farm in Ireland;


• a 1,222MW portfolio of early stage European wind energy development projects in Portugal (587MW) and the Netherlands (635MW; offshore);


• a 6,675MW portfolio of wind energy development projects in China;


• and an electricity supply business providing power to around 35,000 mainly commercial customers in Ireland, with related trading and risk management functions operating in the all-island electricity market.

In summary, it appears that Airtricity's portfolio comprises

308 MW in operation
187 MW onshore in construction on which €77 has already been invested
104 MW consented onshore
540 MW offshore consented
483 MW onshore near consent
1434 MW onshore unconsented
1222 MW in development in Europe
6675 MW in development in China

A rule of thumb for onshore windfarm development used to be around £700,000/MW installed, although recent increases to turbine, steel and associated costs have probably driven this up to £1 million/MW. So perhaps £300 million of the purchase price could be sensibly applied to the producing capacity (unless SSE is paying a premium to capture guaranteed capacity, rather than taking time and planning risk to develop its own portfolio).

If SSE is valuing installed capacity at £1 million/MW, that would make the price for the consented development £190 million (once developed). If our rule of thumb is right, there's a further £130 million or thereabouts to spend, around £60 million of the consideration might relate to this capacity.

In the past, a typical price for a fully consented offshore windfarm has been around £5 million for 100 MW consented. This might be be a sensible place to start with the development assets. This adds up to (generously) 1,000 MW, of which about half is offshore. Let's assume that onshore consented developments are worth £10 million per 100 MW, and the total value of this element of the portfolio around £75 million.

Valuing assets in the development pipeline is very hard: if we assume that they're worth 10% of the consented value, the 8,000 MW of (assumed most onshore) projects would be worth £60 million.

Finally, an electricity supply business with 35,000 customers might be worth...well, the only analogy I could find was a Canadian gas and electricity supply business which sold for C$130 per customer, which would come to around £2 million.

Summarising this analysis, we can find around £500 million of value. So, it must be that either we've woefully underestimated the future value of the development pipeline, or SSE is paying closer to £2 million/MW for installed and productive capacity.

Any way you slice it, this is a useful benchmark. It also gives a clue about how hard developers must consider it to be to drive a material development portfolio to justify a premium like this over ordinary development costs.