South Beats North at EU Utilities on Money-Making Renewables

  • Spanish, Italian power company EPS forecast to grow next year
  • German utilities dogged by slump in wholesale power prices

Southern European utilities are poised to outperform their northern peers for a second year by relying on wind and solar power instead of dirty coal-fired generation.

Earnings will grow as much as 25 percent in 2016 at Madrid-based EDP Renovaveis SA, and shrink as much as 38 percent at RWE AG in Essen, Germany, according to the median of analyst estimates on Bloomberg. Spain’s Iberdrola SA and Endesa SA were among the 10 best performers in the Stoxx 600 Utilities Index last year, while RWE and U.K.-based coal-plant operator Drax Group Plc were the worst performers.

The biggest utilities in Germany, the pillar of Europe’s economy after the financial crisis when Spain and Italy foundered, are trailing in the switch to renewable energy and the nation has failed to develop grids that deliver power more efficiently. Power prices at the lowest level since 2003 are also adding to the companies’ woes. In Spain, where generators’ earnings are regulated, about a third of Bilbao-based Iberdrola’s capacity is renewables, while for RWE it’s about 8 percent.

“Where are the largest renewable energy companies and the most ambitious plans for smart networks? In southern Europe,” Cosma Panzacchi, an analyst at Sanford C. Bernstein Ltd. in London, said by e-mail. “Investors want limited commodity exposure, limited carbon exposure” and regulated companies, he said.

Earnings of utilities in central and northern Europe will decline by about 7 percent in 2016, hampered by a reliance on conventional coal, gas and nuclear generation, according to Moody’s Investors Services Inc. That contrasts with the south, where returns from renewable energy and grids will keep earnings stable.

Spanish, Italian and Portuguese power companies accounted for about 60 percent of Europe’s total renewable power production at the end of 2014, according to data compiled by Bloomberg Intelligence.

Subsidies have been used to spur the development, with Spain spending about 6 billion euros ($6.4 billion) in 2014 on incentives for renewables, according to an estimate by Bloomberg New Energy Finance. That contrasts with coal-fired plants in Germany, which have to buy additional pollution permits to compensate for burning fossil fuel.

Giants Lagging

Wind and solar power has surged in Germany under its plan to get as much as 60 percent of its electricity from renewables by 2035, compared with about 26 percent now. Most installations are run by smaller companies, while the country’s biggest power producers have been slow to invest. At EON SE, Germany’s biggest utility, renewables made up 16 percent of its total generating capacity in 2014, according to its annual report.

The European Union in 2009 set a target of meeting 20 percent of final energy demand from renewables by the end of the decade. Since then, individual countries have set their own national targets and support programs to aid development of green technologies.

In Germany, electricity from solar and wind has hammered operating hours at conventional plants and driven down wholesale prices because they get priority access to the grid. Year-ahead power fell 14 percent last year to the lowest in more than a decade, according to European Energy Exchange AG data compiled by Bloomberg. The equivalent Spanish contract gained 2.6 percent since trading started in February.

German power for 2017 has dropped 2 percent since the start of the year to 25.80 euros a megawatt hour, EEX data show. The Spanish contract has declined 0.2 percent to 43.93 euros.

EON and RWE responded with plans to split their companies this year. EON on Jan. 1 spun off its conventional power business, trading, exploration and production into a separate company called Uniper. RWE is pooling its renewables, grid and retail operations into a separate company this year.

The restructured businesses still face earnings pressure from the prospect of further declines in power prices and uncertainty over the utilities’ costs in meeting Germany’s pledge to exit nuclear power by 2022 , according to analysts at RBC Capital Markets, which cut RWE to “underperform” on Dec. 17.

RWE, EON, Enel, and EDP declined to comment on their earnings outlooks. Iberdrola didn’t respond to e-mail and phone requests for comment. Andrew Brown, a spokesman for Drax, declined to comment on the company’s outlook, citing regulatory restrictions before its earnings report in February.

The restructuring strategy has worked elsewhere. At Enel Green Power SA, a spinoff of Rome-based utility Enel SpA, analysts forecast that adjusted earnings per share will climb 8 percent, according to data compiled by Bloomberg. Enel plans to buy back the 30 percent of the renewable energy developer it doesn’t already own to tap the quicker growth of the unit. At Energias de Portugal SA’s EDP Renovaveis, EPS is expected to jump by 25 percent.

EPS at EON is forecast to fall 4 percent in 2016, and RWE’s by 38 percent, according to analyst estimates.

“Look at the power price environment in the north compared to the south,” said Martin Young, the managing director of European utilities equity research at RBC Capital markets, who upgraded Iberdrola to outperform on Dec. 11. “Our preference is for businesses that are aligned with the regulatory direction of travel and renewables are something that global politicians are increasingly embracing.”