POWER STRUGGLE Breadth of investment makes SSE strong - and ripe for

0 Comments | Sunday Herald, The, Feb 15, 2009 | by Steven Vass

AS if corporate Scotland did not have enough wounds to lick, last week saw the return of a discomforting rumour: Vattenfall, the Swedish electricity giant, has reportedly been in takeover discussions with Scottish and Southern Energy (SSE), Scotland's largest company.

After a grim few months in which RBS has been semi-nationalised and HBOS and British Energy have disappeared, the prospect of Vattenfall's longboats arriving to complete the plunder will leave many observers wondering how well Scottish business morale could withstand another foreign raid.

Although Vattenfall is refusing to comment - as is Perth-based SSE - there is no shortage of reasons why it might want to buy in to Scotland. The UK's laissez-faire attitude, seemingly undimmed by the credit crunch, means we have the most open electricity sector among the major European powers. Four of the "big six" suppliers are foreign-owned: Germany's E.ON and RWE, which trades as npower; France's EDF, and Spain's Iberdrola, which trades as ScottishPower. That leaves only SSE and Centrica in home hands. Contrast this with the likes of France, Germany, Spain and Italy, where markets are dominated by huge local powers that are often part-state-owned and protected from foreign takeovers.

The reason why Vattenfall is particularly well placed is that the British authorities would probably still forbid any further consolidation between the big six, and the Swedish company is one of very few outsiders with deep enough pockets to do a deal. Although it is only around the same size as SSE, at about GBP11 billion, and makes comparable profits, the ownership restrictions in mainland Europe make it ''harder for British electricity companies to be big acquirers, which hands the initiative to incomers, especially those like Vattenfall that are in part-state-ownership.

SSE is an attractive purchase because it has big and diverse generating capacity through its interests in coal-fired and gas- fired power stations, hydroelectricity, and wind power.

Diversity helps to protect it from problems such as outages, while its 10.5 gigawatt capacity shields it from fluctuations in the wholesale power market more than competitors who need to buy in power to service their customers.

Tina Cook, an electricity analyst at broker Charles Stanley, says: "The thing about SSE is that there's a good balance between the electricity production and retail supply sides, unlike, say, Centrica, which is very strong in supply but not in generation."

SSE is seen as one of the strongest proponents of renewable power through its wind and hydroelectric interests, including its GBP1.1bn acquisition of Ireland's Airtricity last January. That is something it has in common with Vattenfall, which is also big in hydroelectricity, has a foothold in UK offshore wind production with two Kent farms, and has previously called British renewables one of its major priorities.

The attractions of wind, apart from the moral ones, are that producers enjoy government subsidies and raw materials do not need to be burned to produce electricity once your station is up and running. This helps to insulate SSE from variations in the oil price, which in turn affect the prices of coal and gas. On this rationale it starts to make sense that Vattenfall has been advertising for a Scottish-based head of public relations and will raise its profile by being the main sponsor of the All-Energy conference in Aberdeen in May.

Professor David Newbery, director of research at Cambridge University's Electricity Policy Research Group, says that to meet the target of 20per cent of UK energy to be renewable by 2020, a huge amount of investment is needed:

"The government is going to get sufficiently desperate that it will allow consumer prices to rise to a level where anybody that can [provide green power] will make a reasonable return, " he said. "Because most wind power is in Scotland, it makes SSE particularly attractive."

But before anyone locks up their daughters for fear of Nordic raiders, there is an important caveat that makes a swoop on SSE seem less likely. Vattenfall has said its main priority is to buy the Dutch energy group Nuon, which is the subject of a GBP5bn auction in which the Swedes are said to be the front-runners. If press reports are correct, the company would only look to SSE if the Nuon deal fell through.

Some have questioned the logic of prioritising Nuon, given its heavy bias towards gas-fired power stations, but it certainly seemed enough to convince the markets last week. SSE's share price rose by just 1per cent following the takeover news and subsequently lost all of its gains, which in stock market terms amounted to a shrug of the shoulders.

As Steve Hobson, editor of Utility Week magazine, says: "I personally think it's the wrong time for a deal. I can't see Vattenfall overpaying for SSE, but shareholders would be crazy to sell out right now. The stock was worth 25per cent more before the credit crunch."

Yet even if SSE does not receive an offer it can't refuse right now, the speculation raises questions about its ability to stay independent in the medium term. In a sector where behemoths such as E.ON - seven times SSE's size - rule, there is always the risk this firepower gets turned on SSE heartlands like the north of Scotland, the English south coast and south Wales.