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Energy due diligence

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Hemberth Suarez's picture
Founding Managing Partner OGE Legal Services

Hemberth is an attorney and partner at OGE Legal Services. He is a candidate for a Master's Degree in Renewable Energies. He is a specialist in electricity and gas regulation, energy mining law...

  • Member since 2020
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  • Feb 10, 2021
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Due diligence is the detailed analysis performed on an asset or company before acquiring a stake in it or its total ownership, it is used in mergers, acquisitions and ends with comprehensive and specific reports. 

In the case of the electric power and fuel gas sector, it is becoming increasingly important for each report to include a chapter on the opportunities, advantages and challenges that the regulation has for the activity in which the asset or company is located. 

For fuel gas, energy due diligence has allowed the entry of new investors, in these cases more than an inventory of cylinders, stationary tanks, cisterns and kilometers of pipeline; it is strategic to know the scope of the methodology that remunerates the investment. As well as to know which are the payments that by mandate of the regulation of the Commission of Regulation of Electric Energy and Gas have to be assumed during all the time that the activity of the company is being carried out. 

For the electric energy sector and if the acquisition is in respect of a generation plant or a trading company, the regulatory due diligence will allow knowing the impact of owning a centrally dispatched or non-centrally dispatched plant. As one of the revenues will be the sale of energy, it is important to know whether or not the generator has the obligation to bid prices, or can only bid availability. 

In the case of energy due diligence of a generation project, an analysis of the future connection points or interconnection projects is activated. 

Something very important is to have a diagnosis on the compliance of the dispatch, the variable costs that are declared, the price of the energy that was agreed in the energy sale contracts and to compare these data with the historical scarcity price and the energy price in the stock exchange. 

Now, if the regulatory due diligence is against an energy trader and given that there are no physical assets, it is appropriate to put a red flag to the possible regulatory changes in a horizon of at least one year. It is also advisable to have an analysis of the purchase and sale contracts entered into, closing that analysis with an opinion on the energy purchase price structure when it is in contracts or when the energy is purchased on the energy exchange. 

Due diligence is something that has existed and will continue to exist, but for highly regulated industry segments such as electric power and natural gas, energy due diligence should be included. While it is important to know if a power generation plant has a lien, which can be identified from general analysis, it is also important to know the regulations governing the trading of power or gas.

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Matt Chester's picture
Matt Chester on Feb 10, 2021

While it is important to know if a power generation plant has a lien, which can be identified from general analysis, it is also important to know the regulations governing the trading of power or gas.

How can/should those performing due diligence look at the possibility that such regulations may change-- particularly in an example like in the U.S. going from one administration to another that have different views on the fossil fuel industry? 

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