Severn Power - Burning more gas we haven't got for electricity we probably won't be able to afford

Carron Energy is a private energy company founded in 2003 by Alex Lambie and Shezad Abedi . It was initially backed by Rutland Fund Partners the UK private equity firm that specialises in turnaround and recovery acquisitions .

How Rutland acquired the Uskmouth power plant for £33 Mn, from the Receivers of AES in 2004 and sold it on to Carron for £125 Mn in 2006 for £125 million and made over four times its investment in 20 months, generating an internal rate of return of 150 percent is a fascinating tale told here.

A Five year secured finance facility of £125m was arranged by Deutsche Bank with Strategic Value Partners and Trafalgar Asset Managers .

The three-year darkspread hedge (balancing the value of power against the cost of coal), agreed with Morgan Stanley will also deliver predictable income, further supporting the value of the funding raised.

The arcane and huge world world of energy wholesaling and trading is inherently risky, fundamentally affected by weather patterns, but also the volatility of those regions which supply oil, gas and to alesser extent coal. One US group, Amaranth Advisors, lost $6bn (£3.19bn) off the back of falling prices of natural gas when they bet the farm (firm) on a rise on natural gas prices and were wiped out - well their investors were.

If energy prices fall (see previous post) as a knock on from the US/EU Credit Crunch as demand is hit, many of these cute energy hedging schemes / carbon trading deals could turn VERY sour, may not seem such a good bet... but what do we know ?

Read about the exotic and risky world here of ,"Dispatchable independent power producer supply contract:", "Variable-quantity options "Fixed price per MWh multiplied by variable amount" - a game which it appears most players, use other people's money, butthose with very strong nerves use their own.

This fascinating article which interestingly enough quotes MrAbedi in a former role as, chief executive of Bright-Spark Energy Risk Consultancy in London, who , " sees the (energy) industry structure changing so quickly in the underlying markets that counterparties need margin to cover non-quantifiable or non-hedgeable risk. £

It also quotes Carlos Blanco, vice-president at FEA, a software firm in California who says, "Exotic options, when properly structured, hedged and understood, provide power market participants with a potent tool, giving them the flexibility to manage and transfer inherent business risks to other parties with natural offsets or different degrees of risk tolerance.”

Which sounds an awful lot like snake oil to some people around here.

It also quotes E-lecTrades Anil Suri, “Over the next few years, innovative deal structures will surface to rationally price and allocate the unique risk of power supply. That just means there are even more exotics to come.”

You bet, and we smell singed wallets in the air. ... a step along the road to selling mortgages on double-wides to Viet vets with a habit.

Having purchased Uskmouth A and B coal-fired power station, on the banks of the River Usk near Newport they set about the plan that AES had to install a gas powered station on the site.

The Department for Business, Enterprise and Regulatory Reform,(DBBA) formerly the Department of Trade and Industry (DTI) (presumably because we have no more Trade and there is very little Industry left to damage or destroy, has given the go-ahead for Severn Power, - a wholly ownwed Carron Energy company to build a new £400 million, 800MW CCGT (Combined Cycle Gas Turbine) power station on the site of Uskmouth A power station - Uskmouth B a 360MW coal fired unit will continue to operate alongside to the proposed CCGT power station.

Site works have already commenced, to prepare the site for building and to create environmental landscaping features that are an integral part of the development. Severn Power is due to start commercial operation in 2010 following a 30 month construction (Siemens are the preferred bidder) period and four months of commissioning.

A gas supply for the new plant will be delivered by extending the local gas distribution network, which is owned by Wales and West Utilities. The pipeline will be connected using the latest below ground horizontal drilling techniques which will mean minimal disruption to the land above it the pipeline route. (it says in the Press release - but one has recall of a horizontal drilling in Iraq to tunnel under the Euphrates which went horribly wrong.)

It was only 15 months ago that Severn Power submitted proposals under the terms of Sections 14 and 36 of the Electricity Act 1989 (as amended) to the Department of Trade and Industry, which then conduct a consultation, including the local authority and other interested bodies. Section 36 covers the application for a permit to build a power station, and Section 14 the burning of gas.

So UK plc closes coal fired power - and build even more gas burning units and place even more national reliance on a product to heat and light our homes and power industry on what is increasing in price, and whose sources of supply we have negligible control.

.. and it's in the hands of folks who engage in darkspread hedging who trebled their money juggling assets from the receivers.

We hope it all works out nicely for them.