Gas-fired power plants in the pipeline in northeast U.S. states are expected to attract South Korean institutional investors in search of 5~6% annual returns and keen to diversify away from office building-focused real estate portfolios, according to a newspaper report.
With aged U.S. power facilities in the northeastern states set to be replaced mostly by new gas capacity over the next few years, private lending to power projects is emerging as a safe-haven alternative investment, at a time when tougher regulations restrict lending from banks and higher interest rates dent property asset values.
JB Asset Management Co. Ltd., a unit of a South Korean provincial bank, is tapping domestic insurance companies and pension and savings funds to arrange loans of $150 million to two gas-fired power stations in West Deptford, New Jersey and in Saint Charles, Maryland, the Maeil Business Newspaper reported, citing investment banking sources on Dec. 16. The power projects, which would cost $1.6 billion on aggregate, are expected to provide an annual return of around 5% to loan investors.
KDB KIAMCO, the infrastructure-investing arm of a state-run South Korean banking group, is understood to arrange senior loans of $200 million to a gas-fired power plant near Washington D.C. The investment is part of the $650 million senior loans to be raised for the $1 billion power station which will be operational form 2019. The senior loans are expected to deliver 5~6% returns a year.
“As gas-fired power plants are taking a role as a base power generation facility, the so-called premium power generation market based on demand from the northeastern states of the U.S. is expected to emerge as prime investment targets for domestic institutions,” one of the IB source was quoted as saying.
The PJM energy market, which covers 13 U.S. states in the northeastern regions, is the largest U.S. power market with over 80 gigawatts (GW) electricity traded a year. In the states including Pennsylvania, New Jersey and Maryland, gas-fired combined-cycle power generation facilities with the capacity of 21GW are coming online as aged power stations of the 28GW capacity are set to be phased out by 2019, according to the report.
In November, the Industrial Bank of Korea (IBK) arranged $200 million of project financing for Cricket Valley Energy Center, a combined-cycle natural gas-fired project in New York. Hyundai Life Insurance Co. Ltd., Heungkuk Life Insurance Co. Ltd. and Shinhan Bank participated in the financing.
Separately, KB Asset Management Co. Ltd., a unit of a top South Korean bank, raised $200 million from domestic insurance firms and other financial services companies to lend to Marcus Hook Energy Center in Pennsylvania, which U.S. Starwood Energy Group had acquired.
Expectations about traditional energy markets are rising after President-elect Donald Trump expressed support for fossil fuels such as coal and vowed to expand spending on infrastructure, which would sap demand for clean energy.
There are also concerns about heavy investments in gas generation, as most of new power capacity coming online in the northeastern states will be fueled by natural gas, helped by affordable U.S. shale gas.
“Once the pace of interest rate raises is accelerating, real estate investment through equity ownership, not via loans, cannot help but slow down as a result of falling rates of return,” the newspaper quoted an unnamed pension fund source as saying. “Given the low proportion of infrastructure investments (in alternative assets) of local institutional investors, compared with global pension funds and sovereign wealth funds, investment in this sector will be likely to increase.”
<Edited by Yeonhee Kim>