Europe Economy

KKR Looks at Post-Nuclear Future

The end of Europe's love affair with nuclear energy provides fertile ground for the development of other renewable sources of power, according to the head of European infrastructure at private equity house Kohlberg Kravis Roberts (KKR), which has just completed a major deal in the sector.


"Renewables have always been on the agenda of the European governments… Now with the question mark on the future of nuclear, I think that more than ever it's going to be a relevant contribution to the energy mix," Jesus Olmos told in an interview.

The Fukushima nuclear crisis in Japan prompted a widespread re-evaluation of nuclear power in Europe, with Germany announcing a total phase-out of its plants by 2022.

On June 1, KKR announced its first European investment in renewables, entering a joint venture with Sorgenia, an Italian energy company, for the development of onshore wind farms in France.

The deal is based on an enterprise value of 236 million euros ($339 million), and includes both operational assets and assets under construction.

Despite being a relatively small part of the overall energy mix in Europe, onshore wind, at the right scale, can be economically competitive with gas power, Olmos said.

"You need to have a balanced energy portfolio. I don't think that any country can rely on just one source of energy, so we need renewables, we need nuclear wherever it is possible. We will need some coal, some gas, and we will need what we call a fourth fuel, which is energy efficiency… I think that all the energies will have to be considered, but maybe the growth is going to have to be renewables, rather than from other sources of energy," he said.

European governments have committed to generating 20 percent of their energy from renewable sources by 2020. Even France, which generates most of its power from nuclear, will need to invest in the sector, which makes it a potentially lucrative growth area, Olmos said.

"If you compare France with Germany and Spain, the capacity that has been built in onshore wind is very small… because nuclear is so important in France that contributes practically to 80-85 percent of the energy need," he explained. "France will have to meet the 2020 targets as well, so we think that there are going to be lots of opportunities for onshore wind."

Olmos is cooler on the potential for offshore windfarms, which he believes carry too much technology risk.

Infrastructure, for KKR, is defined not as an asset class, but as a risk class, Olmos said. It is designed to provide security of cashflow and act as a countercyclical investment during the current period of economic uncertainty.

"For us, an infrastructure investment should fulfil a number of very well defined characteristics. It should be something physical, something that is not dependent on the evolution of the economy, that has no market risk, that has no commodity risk, that has no volume risk, that has long term stability, long term visibility," he said.

"Because of the risk profile of our investments, we are not that comfortable yet with offshore wind. So we believe that the returns you can get in these assets do not fully justify the technology risk of this business."

He has a similar view in comparing the main technologies behind solar power – solar photovoltaic (PV), which generates electricity using semiconductors, and concentrated solar power (CSP), which used lenses and mirrors to focus light to heat steam and turn turbines.

"We believe that solar PV is a very well proven technology that is improving in efficiency very fast," Olmos said. "For us, CSP is to solar PV the same as offshore wind is to onshore wind. In the case of CSP, we believe it's a difficult technology, complicated… We would chose onshore wind and solar PV and wait for these other technologies."

Olmos likes utilities, power generation companies with existing, long-term power purchasing agreements in place, storage facilities, energy terminals and toll roads. He intends to focus mainly on France, Germany, Italy and Spain for future investments, but will also look at the UK and Poland, despite the currency risks associated with buying outside of the euro zone.

"There are opportunities that we are pursuing," he said. "We are seeing that the European market is a very active market where there is starting to be liquidity of assets. Companies needing equity to fund their programs, also companies selling assets to alleviate their balance sheets."

KKR "would be interested" in privatizations by European governments looking to raise funds by selling off state infrastructure assets, Olmos said, but would not be drawn on specifics.

Southern European countries, including Greece and Portugal, are being pressed to divest their stakes in assets, including ports and other infrastructure, as part of their EU and IMF-mandated austerity packages.