OUTLINE This report has been prepared by СЕРА for the Government of Portugal. It provides an analysis of rates of return for particular generating assets in Portugal. The analytical study was carried out in an extremely compressed timeframe, which heavily influenced the approach taken and the scope of the work.
The focus of the analysis has been on the PPAs signed in 1993/4 with private developers and in 1996 with RDP, and the subsequent conversion of the EDP PPAs to the CMEC regime in 2007.
Our analvsis of the risk profile of these assets suggests that they are low risk generating assets which can be compared to European regulated network utility risk. At the request ot the Government, we have focused on returns over the period 2000 - 2010.
We have also commented on returns to European renewables, but due to time restrictions this review has been based on a limited review ot published sources and the outputs of our comparative analysis for Portuguese generators.
Our approach to calculating the return has been to calculate a generic integrated electricity/generation WACC to provide a benchmark against which the PPA/CMEC returns can be compared. The risk-free rate can be computed trom government boiul data, whilst the calculation of the Equity Market Premium is more complex, as there is no agreed approach — we have therefore relied on published works and regulaton' decisions. Asset betas can be derived from observed equity betas and gearing for our data set. For the cost of debt, we have used the debt premium from our data set and combined that with the risk-free rate.
The results of our analysis show that risk-free rates in Portugal fell steadily until around 2007.
Since then they have risen sharply, as is well reported. The Equity Market Premium was considered by many to be relatively high in the early 1990s, before becoming more commonly treated as around 5%. Corporate tax rates were also relatively high in the 1990s. These factors drove a relatively high real pre-tax WACC in the early 1990s which fell sharply such that by 2001 it was heading below 6°b and it remained below that level for an extended period. Although increasing in 2007, it was at that time likely to have been in the 5.5%- 6% range. Headline rates have risen again since then, but a review of the appropriate return for generating assets located in Portugal at a time of sovereign stress has been outside of the scope of this work.
IMPORTANT NOTICE This report has been commissioned by the Ministry of Economy and Employment. However, the views expressed are those of СЕРА alone. СЕРА accepts no liability for use of this report or any information contained therein by any third party. © All rights reserved by Cambridge Economic Poliev Associates Ltd.
5 DE JUNHO DE 2012
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