State Grid Corporation of China Eyes Equity Acquisition in Major German Power Grid Operator

On February 9, 2018, German grid operator, 50Hertz Transmission GmbH, endorsed a 20% stake acquisition in the company by the state-owned State Grid Corporation of China.  According to sources, State Grid would purchase this share from current shareholder, Australian investment fund, IFM Investors, which owns 40% in the German company.  IFM’s stake is presently held via a joint venture with Belgian grid operator, Elia, which owns the remaining 60%.  The joint venture operates under the name, Eurogrid International SCRL. 

IFM has reportedly given Elia the right of first refusal on the purchase of the 20% stake.  Public speculation is that, if Elia fails to exercise this option, State Grid could complete the acquisition by this summer.  As one of the four primary German private power transmission operators, 50Hertz services approximately 18 million customers primarily located in northern and eastern Germany, including Hamburg.  This part of the power grid is closely connected to neighboring countries, the Czech Republic, Poland and Denmark.

Industry group, Grid Development Plan, describes the importance of 50Hertz and the power grid operators as, planning and maintaining “Germany’s ultra-high voltage grid” and regulating its grid operations.  They are “responsible for the security and stability of the German power supply system” and “must guarantee the uninterrupted exchange of electricity across all regions using their power lines and also ensure that generation and consumption levels are balanced at all times.”

In August 2016, Australia’s Department of Treasury blocked the sale of controlling shares in AusGrid (Australia’s largest electricity distributor) to State Grid and another Chinese firm, Cheng Kong Infrastructure Holdings.  Regulators cited national security concerns as a primary factor behind its decision, with numerous allegations that State Grid had close ties to the Chinese government, its military-industrial complex, and intelligence services.  The company is also reportedly a contractor to the Chinese People’s Liberation Army (PLA) and is among those companies that have had a Communist Party layer of decision-making authority officially added to its corporate charter.

According to the Epoch Times, “…one of State Grid’s subsidiaries is the China Electric Power Research Institute in Beijing…is a key tester of military enterprise products [and] researches and applies for patents with the [PLA] Research Institute of Chemical Defense.”  The affiliated State Grid Electric Power Research Institute also reportedly carries out joint research with the PLA’s University of Science and Technology and equips the PLA Air Force.

Interestingly, in September 2016, Belgium’s State Security Service warned Brussels against a potential equity acquisition by State Grid in Eandis, a leading energy distribution company in the country.  In that case, intelligence authorities cited similar concerns as those expressed by Australian policymakers.  The deal, however, ultimately went through, as have other significant State Grid investments in Europe, including, for example in Greece (the second largest investment in the country since the bailout).

The response from German regulators to State Grid’s impending acquisition of 50Hertz remains unclear, although, sources close to the deal indicate the company is lobbying heavily to receive political backing and approval.  Berlin has recently taken steps to fortify its screening mechanisms for sensitive foreign takeovers.