As 2014 draws to close on what has been a relatively lean year for the region’s utility developer market, one man in the sector who has been exceptionally busy is Lucas Hautvast, the recently appointed regional head of GDF Suez Energy International.

Since Hautvast took up his new position as president and CEO for South Asia, Middle East and Africa in January 2014, the UK/French developer has closed financing on Abu Dhabi’s Mirfa independent water and power project (IWPP) and the Safi independent power project (IPP) in Morocco. It has also started construction on the Al-Zour North IWPP, Kuwait’s first private utility scheme.

“While for new projects, [2014] has been a little disappointing as we haven’t seen any new projects getting to the award stage, it has still been very successful,” says Hautvast. “We have started construction on more than 4,000MW. We do that every year and it is OK,” he adds with a glint in his eye.

Strong position

GDF Suez’s success in picking up two of the last three major private utility schemes awarded in the GCC further consolidated the group’s position at the top of MEED’s GCC developers ranking, with the group now boasting a total equity capacity of 7,906MW, more than double its nearest competitor.

“Outside the GCC, the most interesting market is Egypt. [It] could be investment-ready again”

The group’s dominant position is largely the result of the merger of the UK’s International Power and France’s GDF Suez in 2011, which brought together two of the world’s largest utility providers. While the merger of previously fierce competitors may have seemed a challenge, Hautvast says the integration of both companies in the Middle East has not been difficult.

“I think it has been relatively easy, as we were both successful developers in the region. They both had big portfolios, and were similar companies – the cultures weren’t that different. They had a similar model – both were strong in financial structuring, technical competencies and asset management” says Hautvast.

“So bringing it all together was not that difficult. And we managed to win two out of the three projects tendered after the merger, so we managed to keep our share of the projects coming to the market,” he adds.

The Middle East and North Africa (Mena) region will continue to form a central part of GDF Suez’s growth strategy as part of a wider corporate focus on emerging markets.

“The strategy of GDF Suez is twofold at this moment,” says Hautvast. “The first is to be involved in what we call energy transition in Europe – there is the transition from thermal to renewables, a change in model. The second pillar of the group’s strategy is to grow in emerging markets, and I’d say from that side there are three different regions we are looking at aggressively: the Middle East; South America; and Asia.”

He says that the Middle East is a key growth area for the group. “So we are concentrating a lot of efforts and looking at a lot of opportunities,” he adds.

Key focus

Hautvast identifies Saudi Arabia as the utility market with the most potential in the GCC, and says the wide variety of planned power projects, from conventional to renewable and nuclear energy schemes, will make the kingdom an important area of focus. Following its success with Morocco’s Safi IPP, GDF Suez is also keeping a close eye on other emerging markets beyond the GCC.

“Outside the GCC, the most interesting market is Egypt. We think that it could be on the verge of being investment-ready again,” says Hautvast. “Things seem to have calmed down, and there is a new government working on economic reforms, and part of that is making sure there is sufficient power. They have had blackouts in the past three years, the first for a long time – which is not the most popular thing. So they are working really hard to put gas-fired, solar, coal, wind and nuclear projects onto the table to meet the demand.”

Iran and Iraq could also offer significant opportunities in the coming years, but these markets, Hautvast says, will take longer to be ready for the developer market.

“Longer term, it could be Iran and Iraq: Iran when sanctions are lifted; and Iraq if there is stability. But they will not really kick off in the next year; it will be three years before we probably see any real activity there.”

Regional risks

While the emerging markets of the Mena region will offer significant opportunities for the developer market in the coming decade, they also carry considerable economic, political and security risks.

The long-term nature of utility development contracts increases the exposure of companies such as GDF Suez to market risks, and Hautvast says finding the balance between risk and reward is paramount.

“If you want to win projects, you need to take risks. We take it on a case-by-case basis – we have assets in South America, which are not entirely risk-free countries – but risk free doesn’t exist from that kind of perspective. From an environmental risk point of view, risk should be manageable, so we can protect our people sufficiently.”

“If big local and international banks… are willing to give you a 20-year loan, that means it is OK”

However, Hautvast is quick to point out that security risk is only one element; the second is long-term political and economic stability.

“It takes us 25 years to get our full returns on building a power plant, so we are taking a 25-year bet on the government, and the ability of the government and future governments to stand against a promise made 20 years ago by a previous government. And this is often the much bigger risk,” he says.

“In somewhere like Iraq, there is not only the personal risk, current security risk, but the stability risk. Is there a stable enough government that can make decisions and agreements that are adhered to by a different government in six years time? For me, Iraq is not quite there yet to satisfy the payment risk.”

Financial barometer

Hautvast says that a good barometer for judging the risk of a project is if the project is bankable and finance is available.

“Finance is a very good test. If big local and international banks, European banks, Japanese banks are willing to put in the money and give you a 20-year loan, then that means it is OK; it is not just us going in.”

Due the complexity and long duration of the purchase agreements required to develop power and water projects under IPP/IWPP models, financing is a central part of the developer market. Hautvast says this is the primary factor when deciding which countries to bid for work in.

“Egypt will be an interesting discussion – will the banks finance Egypt’s new power plants? If they will, we are willing to start bidding. We won’t do full finance without the banks – and that’s how we manage our risk.”

Hautvast says GDF Suez prefers to work with local rather than international banks.

“We would prefer to get local banks for every deal, if possible, because it gives you a local dimension if they are part of it. Usually, they are guaranteed by the local government, and if they are lending to you, it gives the status of your project more weight and credibility,” says Hautvast.

“But, of course, not all countries have local banks that are capable of borrowing or lending finance for long-term duration,” he adds.

Emerging project markets such as Egypt will raise a number of questions over whether sufficient finance will be guaranteed. However, as the GCC private power market matures and international financial markets tighten regulations on long-term lending, clients and banks are looking at making the structure for financing major utility schemes less rigid.

Abu Dhabi’s Mirfa IWPP, for which GDF Suez signed the final project agreements earlier this year, is a prime example of a public-private utility scheme that has utilised a more flexible structuring for the financing. A mini-perm loan structure was used, which does not tie down lenders for the entire duration of the project.

“There was some flexibility from Abu Dhabi to allow for that. The advantage is that for the banks, they loan for a shorter period – so they have an option to get out after seven years if they want to,” says Hautvast. “It is an advantage for the banks more than the clients.

Hautvast points to the project bond issue for the Shuweihat 2 power plant in Abu Dhabi as a further example of how financing major utility schemes is becoming more flexible.

“Project bonds is an avenue we will be exploring more, and seeing if we can do it again in the future. It is all about finding the optimal structure that gives us the best chance of winning and the customer the returns and risk-return balance they are looking for,” he says.

“People will look at it post-construction, and once construction risk is out it becomes very stable forecast cash flow. So I think the market will look more at bonds.”

Changing technology

It is not only financing that is changing in the Middle East’s utilities sector. As countries seek to reduce domestic consumption of valuable hydrocarbons and cut gas import bills, governments are pushing ahead with elaborate plans for alternative energy, including renewables and nuclear programmes.

With GDF Suez already an operator of multiple technologies worldwide, from traditional thermal plants to nuclear and renewable solar and wind schemes, the firm is well placed to participate in whichever technology clients choose to pursue.

“The country is the customer. If they say they want a coal plant, or a solar plant, we will follow the customer and participate if the opportunity is right,” says Hautvast. “I can understand why governments choose different options – it is difficult to have the three ideals of sustainability, cost and reliability.”

While Hautvast was surprised when first arriving in the region at how little renewable energy had been deployed, he says that renewables will be one of the key themes of the Mena region’s power sector in 2015 and beyond.

“Whether it is 2015, 16 or 17, I think the renewables programme will happen,” he says. “One day, Saudi Arabia’s KA-Care will make its position clear. In Dubai, there is already the 100MW project, but that is part of a 1,000MW [programme], so there is still 850MW of power to be done. Abu Dhabi, through Masdar, is looking at more projects. Every country is positioning themselves on it, certainly in the next year or two a lot of clarity will come on the subject.”

Another trend Hautvast expects to become more prominent in the coming years is the decoupling of water and power facilities, particularly if nuclear programmes are rolled out on a large scale.

“It’s going to be an important issue – in some countries they need more water capacity and not more power, or the other way round, and what used to be integrated will be separate,” he says. “[Reverse osmosis] water technology is becoming more commercial, and with that technology you can use without linking it to a power plant.”

And not surprisingly, Hautvast’s third main theme for the region’s power sector in the year ahead is the price of oil.

“Low oil is going to change the world, and, of course, change the Middle East. People will do things differently, but how, I don’t yet know,” he says.

Career highlights

January 2014 Appointed CEO and president of GDF Suez Energy International for South Asia, Middle East & Africa

2009 Moved to Bangkok with GDF Suez to become head of strategy and markets & sales for the Middle East, Asia & Africa region.

2008 Appointed chief commercial officer for GDF Suez in the Philippines

2001 Joined GDF Suez in 2001 as commercial director for the Netherlands of the Group’s utility Electrabel

1991 Began career in 1991 with Anglo-Dutch container shipping group P&O Nedlloyd, working in countries including South Korea, Hong Kong, the UK and continental Europe