43
European Power Utilities: Juan Camilo RODRIGUEZ Equity Analyst Paris London Frankfurt Montreal New-York Brussels Milan Madrid Toronto Strategy - 2016 Are prices near a bottom?
European Power Utilities:
Juan Camilo RODRIGUEZ Equity Analyst
Paris London Frankfurt Montreal New-York Brussels Milan Madrid Toronto
Strategy - 2016
Are prices near a bottom?
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UTILITIES
Coverage
2
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UTILITIES
General framework
European-listed utility corporations are mainly derived from privatisation
programmes implemented either through IPOs or contracts:
o Underlying assumptions at the time: no sovereign risk, regular growth, positive
inflation, strong and regular cash flow generation, national and international growth
potential, and constantly increasing oil prices.
o Governments’ inability to reduce workforces when needed.
o Regulated contracts and a minimum service required as a “fundamental right”.
Market liberalisation and integration:
o Opening competition to reduce monopolistic power, inefficiencies and high prices.
o European integration to avoid arbitrage opportunities and optimise capabilities
(electricity networks, 2-sided gas pipeline, renewable subsidies, capacity market
remunerations).
Business model challenged:
o The economic model they were built upon no longer holds...
o From massive generation assets to smaller suppliers optimally spread for energy
resources and demand needs.
o Limited adaptability in terms of strategy (long-term binding investments),
governments, EU-required approval and uncontrollable external factors (commodity
prices, policy changes, governmental elections,…).
o The groups that adapt the best to the changing environment should have the
optimal results after all.
Are energy generation stocks still defensive or moral duty only?
Utility companies, even if unprofitable and publicly-owned, will have to be there..
3
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UTILITIES
General Framework: Energy model evolution
4
From centralised to distributed energy Source: Enel, strategic plan presentation
Higher investment for networks required:
Good sites for renewable investment (sources) are far away from the consumption centers
Sou
rce:
Sie
men
s
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UTILITIES
General Framework: Installed power capacity
5
Net capacity additions by energy type
Source: European Wind Energy Association
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UTILITIES
General Framework: Europe is a mature market
6
Source: International Energy Agency
Electricity demand growth current policies: 2011-35
Growth within the sector will come from
emerging countries, networks and
renewables.
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UTILITIES
General Framework: EU capacity changes
7
Net capacity additions by energy type
Source: World Energy Outlook, IEA
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UTILITIES
Stop the myth: Oil does not hurt renewables investment!
8
Clean Energy investment vs WTI Spot prices
Source: BNEF
Oil prices hurt its own industry Oil & Gas capex down 36% in 2015: from $500bn to $321bn
European investment in
2011: 42% $131,7bn
European investment in 2015: 18%
$58,5bn
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UTILITIES
General Framework: Power prices going south
9
Supply measures taken in China to balance falling coal demand and support prices
EnBW CFO: “We do not see any sign of recovery either short- or medium-term”
World average temperatures are increasing:
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UTILITIES
General Framework: Market coupling contracts
10
French generation overcapacity is pushing towards levelized power prices across Europe
Source: EPEX
Source: EDF
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UTILITIES
General Framework: 1 year European power prices
11
Source: Bloomberg / AlphaValue Summer pricing :
Southern countries avoid negative pricing during summer time as peak hours of solar production are balanced by use of AC cooling systems
National Grid revealed that electricity demand did hit a record low this summer (2016)
20,00
25,00
30,00
35,00
40,00
45,00
50,00
55,00
60,00
Germany
France
Italy
UK
Spain
€/MWh
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UTILITIES
The renewable effect: an oversupplied system
Capacity Market
12
D
S
Source: RTE
Source: AlphaValue
Given their priority on the grid, renewable energies are added to the base load, reducing the need for those and increasing
that for peak load assets
Pri
ce (
cost
)
Quantity
French renewable evolution
Source: Drax
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UTILITIES
Renewable effect: Increased intra-day volatility
13
Source: RTE / AlphaValue
At least until utility size batteries are economically feasible
Auction for storage (2016) : 15MW at €150/MWh
Increasing demand for peak assets
Capacity shortage
Oversupply
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UTILITIES
General Framework: But demand is also falling
14
Decreasing correlation between GDP growth and electricity demand in developed economies: Energy efficiency & services.
Source: Australian Energy Market Operator, BNEF
Australian electricity demand: Forecast vs Actual
Source: RTE
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UTILITIES
Additional demand pressure: Energy efficiency to help emissions
15
Lower carbon emissions would mainly come from a decrease in electricity demand!!
Development of a remuneration model similar to power price payments Demand-Side Response: DSR
Carbon emission expected reductions
Source: IEA
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UTILITIES
A subsidy-driven vicious cycle
16
Over capacity in the market and
renewable priority on the
grid
Pushes power prices down.
Unused conventional
Accelerated closure of
conventional generation
Finance conventional
generation units for future usage
Feed-in-tariffs to cover high
renewable costs
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UTILITIES
General Framework: Changes in subsidy policy
17
• UK removal of climate change levy: affects biomass producers • UK subsidy removal to small PV power producers
• Change in Italian and French subsidies; from feed-in-tariffs to
contracts for difference (CfD): Spot + x.
• Change in German subsidy policy to PV, from feed-in-tariffs to tenders:
Two tenders for 150MW in 2015 were over-subscribed (5 and 3
times).
Clearing prices are falling: €91.7/MWh (04/15/15) and €84.9/MWh (01/08/15).
• From 1 January 2016, onshore wind subsidy cut by 1.2% and 0.5% for
biomass in Germany.
• Lower subsidies for Onshore wind in the UK?
• With costs falling, renewables are getting closer to grid parity.
Source: BNEF
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UTILITIES
General Framework: European renewables
18
Source: ENTSO – European Network of Transmission System Operators for Electricity
Total renewable electricity produced (2014)
At the European level, renewable energy corresponds to 32% of the total production (without hydro it represents 14.4%).
There is still a long way to go to reach the 45% target.
Attributable GW
0
5
10
15
20
25
30
EDP
Iber
dro
la
Enel
Engi
e
EDF
Ve
rbu
nd
E.O
n
Fort
um
RW
E
SSE
Ce
ntr
ica
Dra
x
Hydro
Renewables
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UTILITIES
Renewable Market Evolution
19
Source: Enel
Slowdown on European renewable investment ($bn):
Source: BNEF
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UTILITIES
Renewable Market Evolution: is now going global
20
Source: BNEF
What started as a developed world singularity…..
….. is now turning into a worldwide revolution!
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UTILITIES
And now comes the battery…
21
What started as a developed world singularity…..
And this is only starting…
National Grid announced a 200MW tender of storage capacity to be awarded by end 2016 under the Enhanced frequency response « EFR ». 34 bids for batteries.
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UTILITIES
Renewable Market Evolution: change in network control
22
From a basic base and peak load model…..
….. to forecast and balance!
Source: Energytransition.de
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UTILITIES
German Production: 100% renewable production
23
It was on a Sunday (day with the lowest demand), but clearly shows a lower need for baseload and a higher one for peak assets
On 15/05/2016, for the first time, 100% of the electricity demand needs have been covered by renewable sources
Source: Agora Energiewende
Power prices dropped to -€50/MWh during the same period. Over produced electricity sold via interconnectors
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UTILITIES
A short-term answer to increased volatility: Pumped storage
24
Source: FT
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UTILITIES
Peak production: Gas is back in the game
25
Source: RWE
Source: OECD, NEA
In addition to better spreads (low gas prices), gas assets
have the lowest costs within dispatchable assets
Source: RWE
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UTILITIES
Carbon prices (ETS) may have reached bottom
26
€/CO2 ton
• Greater difference on future permits (2018): 1.78
• EU « Backloading plan»: remove 900m permits through 2018 (reduce by 53% from 1,7bn today)
• Even if companies have an excess supply of carbon permits, they prefer to keep them for future usage rather than sell them (sellers decreased by 9.3% in 6 months)
• This changes the competitive profile of generation assets
• ETS rising due to speculation over a carbon floor in the EU
0
5
10
15
20
25
30
35
2008 2009 2010 2011 2012 2013 2014 2015 2016Source: OECD, NEA
Source: AlphaValue / Bloomberg,
At 85% utilization rate
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UTILITIES
Peak production: UK coal is losing territory
27
Source: UK depratmnet of Energy and climate change
• Renewable electricity generation increased by 51.4% yoy to 25%
• Gas became the main production source for electricity (30.2%)
• Nuclear remained stable at 21.5%
• Accelerated closure of coal-power assets
For the first time, clean dark spreads have turned negative and for 4hrs on May 10th, no electricity was produced by coal-fired plants
Is Germany next? Vattenfall sold €3,4bn worth of lignite assets for €1 (symbolic) to EPH. It had to add a €1,7bn cash injection as these are cash burning assets
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UTILITIES
Peak production: German coal is « out-of-the-money »
28
The negative effects will be greater if there is an increase on ETS prices (as expected)
To maintain the sector « alive » the German government has decided to not include a carbon tax and has included
lignite under the « strategic reserve »
The €23/MWh line is the cash cost for lignite assets
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UTILITIES
Peak production: Hedging is increasing
29
Generators may have missed the rebound as a large production of their production is already hedged
Utilities are bearish on the trend for power prices: the low
price environment is here to stay
Hedging levels indicate that utilities have little confidence on the sustainability of profit margins
Source: ICIS
Source: ICIS
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UTILITIES
LNG is no longer profitable
30
• Narrowed geographical spreads reduce profitability of existing projects
• Global LNG market is already oversupplied (short-term)
• New LNG capacity from US and Australia would put pressure on European gas prices with a more aggressive position by Gazprom.
5
7
9
11
13
15
17
19
March-14 August-14 January-15 June-15 November-15
Japan price
LNG costs:HH+5
Source: Engie
$/mbtu €/MWh
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UTILITIES
LNG oversupply is about to get worse
31
• Gazprom is on an agressive strategy to gain / maintain market share (31%) with contract renegotiation (discount);
• Additional pressure on gas prices expected as US LNG would represent 20% of European demand by 2019 (83 bcm);
• Positive effect of price competititon would be felt by european consumers (heating over electricity) and gas-fired production.
Source : BNEF
LNG export capacity by country (MMTPA)
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UTILITIES
US cheap gas casualties – Will Europe follow?
32
• First case was coal: Europe followed. Is Nuclear next?
• 6 nuclear reactors in the US closing due to adverse market conditions and financial problems before regulatory dates. 4 more at risk for an early retirement. (weak demand + renewable integration + low price environment)
• US government looking at ways to ‘stop the bleeding’.
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UTILITIES
Renewables getting closer to unsubsidized models
33
Source: OECD, IEA
Last solar auction results: • Germany: €85/MWh • France : €70/MWh • Peru: €40/MWh • Mexico: €36/MWh • Chile: €29/MWH
“Levelised cost of electricity (LCOE) analysis shows onshore wind to be fully competitive against gas and coal in some
parts of the world, while solar is closing the gap”. BNE
Compared to Hinkley Point C:
Agreed price €112/MWh
Last wind auctions: • €50/MWh (Morocco) • €38/MWh (Chile)
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UTILITIES
Offshore wind: the next investment wave on big projects
34
Source: EWEA
« Each turbine needs foundations, cables to an onshore substation and maintenance, so the more MW you can generate from each turbine, the lower the overall costs per MW » Dong Energy
« Target to drive costs to €100/MWh by 2020» Dong Energy. Latest offshore tender achieved at €165/MWh at Hornsea, UK’s North Sea.
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UTILITIES
What about nuclear?
35
European Nuclear Generation
Company Method UsedNumber of reactors
(majority owned)
Total nuclear attr.
capacity (MW)
Total Nuclear
Provisions (€m)
Provisions per
reactor (€m)
Provisions per
installed MW (€m)
Equity 2014 - net of
hybrids (€m)
EDF Total Private funding 73 74 833,0 44 320,0 607,1 0,59
EDF France Private funding 58 61 130,0 34 060,0 587,2 0,56
RWE Private funding 5 3 926,0 10 367,0 2 073,4 2,64 7 388,0
E.ON Private funding 6 8 555,2 16 567,0 2 761,2 1,94 24 585,0
Fortum Government Fund 2 1 020,0 1 039,0 519,5 1,02 10 864,0
Enel Government Fund 8 3 903,0 5 195,0 649,4 1,33 31 503,0
Engie (GDF) Private funding 7 5 937,9 10 815,0 1 545,0 1,82 47 553,0
Centrica Private funding 0 1 800,0 2 992,0 - 1,66 2 735,0
Nuclear decommissioning - AV coverage
25 096,0
Source: Fortum Annual report
• Never-ending timeline and budget for new projects
• ROI < Capex (safety) requirements
• Inability to compensate for renewable volatility rapidly
• Advanced closure of nuclear assets
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UTILITIES
Nuclear: two diverging strategies
36
0
2
4
6
8
10Decommissioning under the 40yr assumption
Nu
mb
er o
f re
acto
rs
• Discussions over creation of sovereign fund for future storage.
• Increasing concerns over accurate calculation of
decommissioning cost and the proper approach to follow.
• Nuclear loosing attractiveness: advanced closure for economical reasons and expected lifetime of the assets.
• German closure 2017: 1 ; 2019: 1; 2021 : 3; 2022: 3.
French nuclear capacity
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UTILITIES
Exposure to UK market
37
1,6%
22,7%
3,0%
12,7%
4,9% 4,1%
0%
5%
10%
15%
20%
25%
30%
Enel Iberdrola Engie EDF E.On RWE
Sales
Earnings69,9%
100,0%
77,5%
100,0%
0%
20%
40%
60%
80%
100%
National Grid S&SE Centrica Drax
Sales
Earnings
Percentage of total performance (EU) Percentage level performance UK (vs US)
On a weaker pound: positive for National Grid and Centrica ($ revenue),
neutral for Iberdrola (€,£,$), negative for EDF, E.On and RWE
Increase on QE: all utilities should benefit from a lower rate environment (inverse correlation)
Preference for networks rather than generators: no major impact if there is a slowdown in the economy (rates and inflation unchanged)
National Grid, Iberdrola (89%), SSE (50%) vs Centrica (+$), EDF, E.ON ,RWE
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UTILITIES
Attributable capacity (GW)
38
European generation portfolio mix
Natural Gas rather than Coal or Nuclear is the “transition fuel” towards renewable energy
• German proposal to exit lignite completely by 2021 (after capacity market 2017-21) • UK’s proposal to exit coal by 2023
86%
34%
22%
32%
19%
31% 34%
14%
1% 8%
16%
5%
38%
35% 9%
6%
5% 3%
13%
6%
10%
5%
9%
17%
28%
18% 48%
64%
49%
33%
2%
38%
9%
12%
7%
19%
16%
24%
46%
65%
23%
7%
7%
6%
7%
22%
9% 15%
55%
16%
4%
41%
6%
33%
6% 7%
0,00%
20,00%
40,00%
60,00%
80,00%
100,00%
Verbund EDP Iberdrola Enel Engie Centrica Fortum SSE RWE Drax E.On EDF
8,95 22,82 45,46 89,75 83,10 5,77 13,70 10,62 46,90 4,04 45,34 132,63
Other
Nuclear
Coal
Gas (CCGT)
Renewables
Hydro
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UTILITIES
Comparative net debt vs regulated earnings
39
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UTILITIES
Pension risks
40
In 2015 helped by low inflation levels, pension provisions were reduced. But what if inflation finally increases and rates remain low?
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UTILITIES
Credit rating dynamics
41
Rating Perspective Rating Perspective Rating Perspective
Enel BBB BBB stable BBB Positive
Hera BBB BBB Negative BBB Stable
EDP BBB BB+ Stable BB+ Positive
Iberdrola BBB BBB Positive BBB Positive
Engie BBB A Stable A Stable
EDF AA A+ Stable A+ Negative
Verbund BBB BBB+ Stable BBB+ Stable
National Grid BBB BBB+ Stable BBB+ Stable
RWE B BBB+ Stable BBB Negative
E.On BBB A- stable BBB+ Stable
SSE BBB A- Stable A- Negative
Centrica A A- Negative BBB+ Stable
Drax BBB BB Stable BB Stable
Fortum A A- Negative BBB+ Stable
Snam BBB BBB Stable BBB Stable
EVN BBB BBB+ Stable BBB+ Stable
AV Agency changes 2015
In 2016 Moody’s placed on revision for downgrade: Verbund, EDF, Engie, E.On (-), RWE and Centrica; upgraded Iberdrola. A similar path has been followed by S&P.
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UTILITIES
Low rate environment & sector transformation
Top Picks
42
• ENEL
• HERA
• National Grid
• SNAM
• IBERDROLA
• ENGIE?
Worst Picks
• E.ON
• EDF
• DRAX
• RWE?
• High gearing levels with debt renegotiation to lower interest expenses: bottom-line improvement.
• Regulatory parameters already factor in the low
rate environment for the WACC calculation.
• Strong position on networks with an appropriate energy mix.
• Rising exposure to increases in nuclear provisions (currently using a discount of 4.6%!).
• A high pension ratio (above 21%): impact of actuarial changes in pension calculations on shareholders’ equity.
• High percentage of generation from stranded assets (coal and nuclear).
Thank You
43 This publication may not be reproduced or distributed in whole or in part without the prior consent of AlphaValue or its affiliates
UTILITIES
Juan Camilo RODRIGUEZ [email protected]
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