In early 2020, a pension fund undertook a valuation exercise of its stake in a Spanish utility operating an electricity distribution network and managing a portfolio of approximately 500MW of renewable generation assets (mostly wind farms).

NERA was retained to provide regulatory due diligence services and to produce a long-term forecast for the price in the Iberian wholesale market (MIBEL).

In the power distribution business, NERA elaborated on the key aspects of the recent reform in the building-blocks approach to the calculation of the remuneration approved by the Spanish independent regulator (CNMC) once it assumed authority on the matter. A key feature in terms of value for investors was, naturally, the likely evolution of the rate of return in the following regulatory periods. NERA provided its view based on financial analysis as well as a deep understanding of the criteria applied by European regulators, especially the CNMC. The new components of the building-blocks remuneration (e.g., “COMGES”, the allowance for controllable costs) was also a key focus of the work.

For renewable generation, NERA analysed the regulation concerning the installations owned by the utility (RECORE) and provided a forecast for the price of the Iberian wholesale power market (MIBEL) as well as for the captured price (unitary revenue) of the plants, considering their expected production profile. The forecast was produced with NERA’s proprietary model of simulation of the MIBEL market and with a careful analysis of the key assumptions regarding investment costs, fuel and CO2 allowances prices, and interconnection capacity. The price forecast is key both for the determination of the regulated remuneration under the RECORE regulation and for the market revenues once the entitlement to regulated revenues ends. Greenfield developments in Spain are likely to be delayed until the announced auctions for the installation of new renewable capacity are formally launched.

Another key aspect of regulatory due diligence in Spain, which NERA addressed in this case, is the likely evolution of the financial situation of the settlement system of regulated revenues and costs (the so-called “tariff deficit”). Its long-standing position in the Spanish market allows NERA to provide in-depth knowledge of the regulatory arrangements and their likely evolution.

NERA produced a formal due diligence report with the regulatory and market outlook. The report could potentially be released to investors interested in taking part in a likely M&A operation.