Lifeline Worth Billions Thrown to Utilities After Slump

  • Dividend yield of power grid companies seen set to rise
  • Move to digital age unlocks new businesses for utilities

Electric utilities, hurt by plunging commodity prices and anti-pollution programs, are being thrown a high-tech lifeline.

After losing about half their value since 2007, European power companies are pivoting away from fossil fuels, where profits have all but evaporated amid subsidized competition from renewable energy. By moving electricity grids into the digital age, utilities can get low-risk, government-regulated rates for distributing their power, as well as new revenue from running more efficient networks or providing household battery-storage and electric vehicle systems.

European power networks will spend as much as 62 billion euros ($69 billion) on digitizing grids through 2025, an investment that could almost double utilities’ dividend yields to as much as 9 percent, according to Goldman Sachs Group Inc. Smart-grid expenditure is already up, rising 10 percent worldwide to a record last year, Bloomberg New Energy Finance data show.

“Investing in digitization is highly profitable,” said Alberto De Paoli, chief financial officer of Enel SpA, Europe’s biggest utility by market value, which began installing smart meters in Italy at the turn of the century. “This super cycle is something that we’re already seeing.”

Installing smart meters removes the cost of physically visiting customers. Other benefits include prevention of power theft, allowing trade in surplus renewable generation and better management of supply and demand. Enel’s initial 2 billion-euro investment in smart meters was repaid in four years, the Rome-based company said.

Enel shares were stable at 3.91 euros Tuesday, having gained 0.6 percent this year. That compares with a 24 percent decline in the FTSE MIB Index, which measures the performance of Italian stocks.

The utility would need to spend about 17 billion euros to install smart meters, provide software and upgrade electricity substations in a digital revamp for its 62 million customers from Italy to Brazil, according to Goldman. Such an upgrade would boost the asset base on which governments will allow the utility to make a fixed, or regulated, return.

Those figures are “not so far from reality,” said Enel’s De Paoli. “The future is coming faster than everyone expects.”

Car Power

That future includes allowing customers to offset power costs by trading it. In Denmark and the U.K., Nissan Motor Co. and Enel are testing how electric cars and vans access the grid. Owners can charge batteries in periods of low demand when prices are cheap, and sell power back to the network when rates increase.

Such cutting-edge technology still faces hurdles. In the U.K., government plans to install smart meters in every home and business by 2020 have stuttered amid component delays. Privacy concerns about use of the data generated by the meters and technical glitches also dog progress.

“This may not be the boon that it appears to be at first glance,” James Sprinz, an analyst in New York at Bloomberg New Energy Finance, said by phone. “Europe has struggled to transition from smart-grid pilot projects to actually installing them as normal business practice.”

RWE AG, Germany’s biggest power producer, is splitting off its grid, retail and renewable assets into a company called Innogy, where infrastructure investment will make up more than half of the new unit’s capital spending. The utility estimates that regulated electricity and natural gas assets in Germany rose 9 percent in the latest respective five-year regulatory periods, totaling about 9.7 billion euros in 2015. That growth may be completely eliminated as future government reviews cut guaranteed return rates, in some instances to about 5 percent annually from 7 percent, Innogy has said.

Estimated allowed returns exceed the cost of capital and range from 5.3 percent on a pre-tax basis in France to 6.5 percent in Spain, Alberto Gandolfi, an analyst at Goldman in London, said in an e-mailed research note. “Besides some efficiency gain requirements, costs tend to be a pass through,” he said.

Upward Spiral

So, dividend yields at European utilities are largely “safe” and will advance to 7.4 percent by 2025 from an estimated 4.8 percent this year, Gandolfi said. There’s a “blue sky” chance they will hit 9 percent.

Even as grids fight to stay relevant as low-cost batteries cut the need for centralized networks, utilities that move with the times can thrive, said Jemma Green, chairwoman of Power Ledger Pty Ltd. Her Perth, Australia-based company is starting trials of power trading platforms using blockchain technology, the cloud-based ledger system that’s also grabbing the attention of RWE and Fortum Oyj in Finland. 

“It’s the opposite of the death spiral,” Green, a former environmental risk manager at JPMorgan Chase & Co., said by phone. “I call it the upward spiral. There are opportunities for all the incumbent players.”

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