Speaker 1: Hi, I'm Dana Perkins and you're listening to Switch It
Speaker 1: on the bn EF podcast. So today I'm joined by Bocan,
Speaker 1: she is a carbon analyst for BNF, and she's joined
Speaker 1: by Michael Keneffect who's part of our Decentralized Energy team,
Speaker 1: and they're here to talk to me about a recent
Speaker 1: piece of work they did titled European Utility Company Profiles.
Speaker 1: They're going to talk to us about different parts of
Speaker 1: the value chain, generation, networks and retail and where some
Speaker 1: of these strategies are different and which ones are actually
Speaker 1: proving successful. As the energy transition continues full steam ahead,
Speaker 1: what can we learn from the decisions these European utilities
Speaker 1: have made. Now, if you want to read this report,
Speaker 1: it can be found on the Bloomberg terminal at b
Speaker 1: NF Go or at BNF dot com. As a quick reminder,
Speaker 1: BNF does not provide investment or strategy advice, and you
Speaker 1: can hear a more complete disclaimer at the very end
Speaker 1: of the show. But now let's speak with Bo and Michael. Bo. Michael,
Speaker 1: thank you very much for joining today. Thank you, Dana.
Speaker 1: So today we're going to talk about utilities, specifically European utilities.
Speaker 1: And this is a really exciting space at the moment
Speaker 1: because there are a lot of things that I would
Speaker 1: say it's safe to say we're looking at maybe they're
Speaker 1: changing going forward. But before we dive right into what
Speaker 1: b anf is so good at, which is talking about
Speaker 1: the future, let's talk a little bit and lay the
Speaker 1: groundwork for those out there in you know, podcast land,
Speaker 1: wondering what specifically we're talking about when we mean utilities,
Speaker 1: and would you guys kind of break down which part
Speaker 1: of the utility value chain we are looking at when
Speaker 1: we're looking at the company profiles, where you stually look
Speaker 1: at the utube value chain by separating the upstream, midstream
Speaker 1: and downstream. And what do we mean by upstream is
Speaker 1: mainly fossil fuels, thermogeneration and renewable generation, everything that makes
Speaker 1: power general at the end and midstream we look at
Speaker 1: transmission and distribution basically all the grids and networks that
Speaker 1: runs our power. And in the downstream will focus on
Speaker 1: retail and energy services and also non energy services such
Speaker 1: as like telecom, real estate management, insurance and finance. Now
Speaker 1: all of us are here in London still in lockdown,
Speaker 1: so we see a path forward. Depending on when you're
Speaker 1: listening to this, we may or may not yet be
Speaker 1: permitted to have coffee with somebody outdoors in a park.
Speaker 1: So my question is what has changed for the European
Speaker 1: utility space over the past year with COVID nineteen. COVID
Speaker 1: nineteen has really impacted different parts of utility value in
Speaker 1: a different way. We have those field suppliers and generators
Speaker 1: with exposure to lower power demand and lower power prices
Speaker 1: and fuel prices, they have been hardest hit, while those
Speaker 1: units with more regulative returns and residential power retail they
Speaker 1: have been more protected. Yeah, and I talking more a
Speaker 1: denis from side of things, in particular energy services, which
Speaker 1: bowmanshures what we mean by energy services is like installing
Speaker 1: rooftop TV or storage or electric electric vehicle charge church
Speaker 1: chargers our energy efficiency for residential and commercial users. And
Speaker 1: we kind of saw the acceleration of a trend. We've
Speaker 1: been seeing that this businesses a lot of comp utilities
Speaker 1: that invest in the space, but it kind of been
Speaker 1: a bit maybe a bit slow to find growth. And
Speaker 1: I think COVID nineteen meant that utilities couldn't get in
Speaker 1: and install the stuff they cann't get to clients to
Speaker 1: to sell that, and we've kind of we've seen several
Speaker 1: utilities perhaps step back from the space centric and energy
Speaker 1: being to data data come to mind. Especially COVID nanty
Speaker 1: has exposed kind of the weaknesses of the coal industry.
Speaker 1: So we've seen basically all this reduced power demand and
Speaker 1: reduced a kind of power prices hitting those thermal generators,
Speaker 1: those coal industry, and meanwhile, renewables have been basically quite
Speaker 1: protected because they have the great priority and they have
Speaker 1: been able to secure good prices through like predetermined price
Speaker 1: agreements such as p p a s power purchase agreements.
Speaker 1: So do we think that these changes are here to last?
Speaker 1: Because you know, this industry doesn't change on a dime
Speaker 1: in terms of the infrastructure that you build and these
Speaker 1: p p as that you're signing into the future. So
Speaker 1: does this mean that these will be lasting impacts? When
Speaker 1: demand does what we think will actually return pretty you know,
Speaker 1: aggressively as soon as they start to open up again.
Speaker 1: In Gurnal, the thermal producers haven't doing well. It's not
Speaker 1: just because of COVID nineteen and the reduced power demand,
Speaker 1: but also because of the carbon price in Europe. We
Speaker 1: actually just hit a record high carbon price a few
Speaker 1: days ago, hitting over four d euros permetrics on and
Speaker 1: this adds quite a lot of price pressure cost pressure
Speaker 1: for these So basically the carbon price hits over forty
Speaker 1: or else prometric town a small and it's quite a
Speaker 1: big hight compared to seventeen when it was just over
Speaker 1: five years preton and it takes a ginormous bite into
Speaker 1: those carbon intensive coal and lignite generator's margin. And we
Speaker 1: will continue to say that cold being squeezed out the
Speaker 1: group by renewables and cheap gas. So this is geographically
Speaker 1: very split though, because there are some countries that are
Speaker 1: way more exposed to lignite than others. So which countries
Speaker 1: are changing the most? Definitely Germany has been one of
Speaker 1: those that are being hit the most. Also, increasingly we're
Speaker 1: saying that this is hitting also those Eastern European countries
Speaker 1: such as Poland. We will most likely to see like
Speaker 1: a cold face that is even faster than what has
Speaker 1: been said in the news at the moment, which then
Speaker 1: brings me to which companies, So you know, this will
Speaker 1: probably disproportionately advantage or disadvantage certain companies so which companies
Speaker 1: have done the best. We have been following this as well,
Speaker 1: like which companies have been performing better and based on
Speaker 1: like the three year return on investing capital. We're seeing
Speaker 1: that those who have been exposed mostly to the thermal
Speaker 1: generation like Uniper and r w E, they have been
Speaker 1: performing less well as those who have more renewable exposures
Speaker 1: such as like Nail and a bedroller and button Fell
Speaker 1: for example. Ultimately, the high performers have been those with
Speaker 1: regulator return whether it's from like grid operations or from renewables. However,
Speaker 1: there is a caveat about regulator returns is that it
Speaker 1: exposes these companies to polish a risk. For example, for
Speaker 1: European grids that which allowed returns have been falling. There
Speaker 1: is falling returns for European networks. An example that is
Speaker 1: off JAM the UK energy regulators have the return on
Speaker 1: equity transmission network GOT riders can achieve. And we're seeing
Speaker 1: systemilar trends across Europe, in Spain, Germany, in Scandinavia as well.
Speaker 1: And I guess in response to that, we're seeing I
Speaker 1: guess the the European Utilities Expanded Site of Europe. I
Speaker 1: guess Latin America has been one of the main targets
Speaker 1: there and they'll is it wants to expand, it's it's
Speaker 1: gris business there. Energy bought TAG Brazilian networks company, and
Speaker 1: eber Droll as well is also expanding its business in
Speaker 1: Brazil and the US, and it's really where it caes
Speaker 1: its growth in networks and not in its European businesses.
Speaker 1: So really, when we're talking about European utilities, in many
Speaker 1: respects we're talking about global utilities. Would you say that
Speaker 1: that is the strategy of the majority of the utilities
Speaker 1: in Europe is to be looking for expansion areas either
Speaker 1: in South America you know, typically very much linked to
Speaker 1: those in Iberia, right the utilities that operate there, or
Speaker 1: is that just you know, the select few. There is
Speaker 1: definitely a strong interest in South America. For example, both
Speaker 1: and Nell and I Padrola are strongly there. They are
Speaker 1: attracted by the demand, strong demand. That is, they're also
Speaker 1: attracted by some of the supportive policy regimes that are
Speaker 1: in place, and also by that there's still potential to
Speaker 1: grow quite strongly the renewable generation in those markets. At
Speaker 1: the moment. The good point there is expansion in Latin America. However,
Speaker 1: the sub companies are not expanding and if anything, they
Speaker 1: are actually reducing their geographic coverage. And I think Centrica
Speaker 1: is probably the biggest stories we saw there. Centrica had
Speaker 1: a energy business in North America, Direct Energy, which they
Speaker 1: sold to Energy Energy later in twenty twenty, and I
Speaker 1: guess the goal of Centrica now is to really consolidate
Speaker 1: this business and reduces focus down to just its home
Speaker 1: markets of the UK and Ireland. And essentially we're the
Speaker 1: only company doing this either Energy they have and it's
Speaker 1: quite a big strategy change, and part of that is
Speaker 1: to reduce the number of countries that they operation. Okay,
Speaker 1: so then we are really truly talking about Europe here.
Speaker 1: So since we are talking about Europe and we're looking
Speaker 1: at certain countries maybe decarbonizing faster than others, depending upon
Speaker 1: how their grids are currently set up, I wanted to
Speaker 1: know is there still a strong case for integration. We
Speaker 1: have seen kind of some signs of vertical integral being
Speaker 1: not as avantageous structure anymore. We saw Eon and r
Speaker 1: w E swapping their assets are double A focus is
Speaker 1: now in upstream while Ion is specialized in downstream. We
Speaker 1: also saw Ovote buying SSS retail Arm, which kind of
Speaker 1: raises the question whether the generation retail era is coming
Speaker 1: to an end after this deal, the majority of UK
Speaker 1: customers are now served by retailers with no generation, which
Speaker 1: was not the case twenty years ago where the almost
Speaker 1: nine was served by generator retailers. And there are easy
Speaker 1: kind of two groups of reasons. The pull reason from
Speaker 1: this integrated structure is that the skills to run a
Speaker 1: successful business is not that much. There's like little overlap
Speaker 1: between generation arm and retail arm. And then the ultimately
Speaker 1: the main argument why are many companies have chosen the
Speaker 1: integrated structure is the physical hedge, which means that you
Speaker 1: have one buy empower and one selling power and then
Speaker 1: you can match the volumes with each other. But it's
Speaker 1: becoming less important because of kind of the ongoing evolution
Speaker 1: of financial hedge and tools that it's providing this generator's
Speaker 1: options that are more flexible than coupling their generation with retail.
Speaker 1: They basically have now so many different financial instruments like
Speaker 1: pp A, forwards and future which can all do what
Speaker 1: the retail coupling did and maybe better. And also the
Speaker 1: field switching and increasing renewables are really making this hedging
Speaker 1: more difficult than before. And there's also the push element
Speaker 1: here that customers are wanting more today and utilities are
Speaker 1: exploring quite a lot like how can they do this?
Speaker 1: How can they satisfy their customers? But there have them
Speaker 1: been really a winning strategy. So by consolidating and having
Speaker 1: a larger customer base, this could help them to scale
Speaker 1: up faster. Now for a very short break, stay with
Speaker 1: us for right now, Let's say, okay, we've talked about retail.
Speaker 1: Let's throw the metaphorical car in reverse and let's head
Speaker 1: back up the value chain to networks, and let's talk
Speaker 1: about networks. What do you see and what should we
Speaker 1: watch for anyone when it comes to networks. So, as
Speaker 1: you say grid companies looking to grow abroad in Latin America,
Speaker 1: we said, the other big trend you see in networks
Speaker 1: is the adoption of digital technologies, so getting more smart
Speaker 1: meters in the grid. But that's where the smart meters
Speaker 1: live exactly. So that's probably a great use for smart
Speaker 1: meters for network comperies to see what's going on in
Speaker 1: their grids and being able to respond to that more
Speaker 1: quickly and just gathering that data, integrating that with other
Speaker 1: data streams from some stations they have on the grid,
Speaker 1: and using all that to understand where you know, predictive
Speaker 1: maintenance on their grid, you know, reducing those operating costs,
Speaker 1: while at the same time perhaps employing digital or software
Speaker 1: solutions such as local flexibility markets, which we recovering other research,
Speaker 1: which would allow these network companies to reduce the capital
Speaker 1: they're investing, so they might have brings that their building
Speaker 1: as well. So while the returns are falling, I think
Speaker 1: the target now for within your free to Lose is
Speaker 1: to try and get their costs down as much as
Speaker 1: they can. And which companies or utilities are doing this
Speaker 1: the best right now? So sorry, so and I will
Speaker 1: It's okay, it's a very short answer, but I'LL are
Speaker 1: investing very heavily in the digital space. Yeah, and it's
Speaker 1: not only the quality of the grids, but also the quantity.
Speaker 1: Because of the uptake of the huge amount of renewable capacity,
Speaker 1: we will also need a lot more networks to connect them.
Speaker 1: So we're expecting that just more grids will come online.
Speaker 1: And these big utilities in Padrola and now they have
Speaker 1: already made a big commitment to expand their grids in
Speaker 1: Padrolla said that they were invest almost thirty billion euros
Speaker 1: to kind of increase it almost two hundred by which
Speaker 1: is quite a big uptake from their existing base and
Speaker 1: throwing the car in reverse yet one more time. So
Speaker 1: let's go back to generation. So you mentioned that we'renewables
Speaker 1: were an indicator actually, well not an indicator, but that
Speaker 1: we did see some correlation between success recently and the
Speaker 1: amount of existing renewables that people actually had as a
Speaker 1: part of their portfolio. And the question is what are
Speaker 1: the opportunities and what are the things to watch in
Speaker 1: the generation side. We talked a little bit earlier about
Speaker 1: how renewables for some of these companies, the ones that
Speaker 1: actually had a lot of exposure there did pretty well recently.
Speaker 1: And do you see that as continuing to be a trend. Yes, definitely.
Speaker 1: The business case for renewables are definitely there. The cost
Speaker 1: of the technology is falling and climate policy is supporting it.
Speaker 1: And also it's important to think what are the future
Speaker 1: gaps and industrial decarbonization will be a big thing, a
Speaker 1: big thing to watch. Electrification will definitely boost renewables, so
Speaker 1: there will be business case there and there will be
Speaker 1: also a business case to kind of in those newer
Speaker 1: technologies to decarbonize those hard to embate sectors like the
Speaker 1: aluminum and cement. A lot of utilities have already jumped
Speaker 1: into like a development of hydrogen ccs, and it will
Speaker 1: be interesting to see like what kind of business strategy
Speaker 1: will actually be the winning one in those areas. And
Speaker 1: another thing be interesting to watch is the flexibility, which
Speaker 1: will be a key challenge as we have more uptake
Speaker 1: of renewables, So the question will be how do we
Speaker 1: kind of address all these challenges. Companies will definitely want
Speaker 1: to be involved in this, and there will be also
Speaker 1: a market design challenge for kind of making all this
Speaker 1: piece come together. And then how about even further back
Speaker 1: to the fossil fuel part of things, because really, let's
Speaker 1: go as far upstream as possible. Now we're already talking
Speaker 1: about how renewables are going to help with decarbonization, but
Speaker 1: presumably there is still just quite a bit within the
Speaker 1: fossil fuel space that has yet to transition to something else,
Speaker 1: or may never transition to something else. How do you
Speaker 1: see that changing, I guess or maybe not in the
Speaker 1: next year. The story for coal is quite straightforward now
Speaker 1: as we're also expecting the carbon to go up as
Speaker 1: with a renewable uptake. The cold story is that it
Speaker 1: will be faced out just by looking at the economics,
Speaker 1: not even taking into account like those cold face out policies.
Speaker 1: But the bigger question is is gas. What will happen
Speaker 1: to gas? Right now? There is still a business case
Speaker 1: for gas because of the volatility of renewables and the
Speaker 1: need for balancing the grid and most utilities in Europe
Speaker 1: they have already committed to net zero, but at the
Speaker 1: moment gas is still profitable and it's a money maker
Speaker 1: for them. So how to face out gas will be
Speaker 1: a bigger question for them to kind of get to
Speaker 1: their actual net zero commitment. So what are some of
Speaker 1: the companies again from the business models, So who are
Speaker 1: the utilities that are doing the best in the space
Speaker 1: an upstream? We have seen that it's the renewable majors
Speaker 1: that have been done. The BA asked, So we have
Speaker 1: an l in Padrola and E d F what the
Speaker 1: fall they are all kind of doing similarly well when
Speaker 1: we look at like the return on the investing capital
Speaker 1: and are there any outliers here across the utility space comprehensively.
Speaker 1: We're seeing certain trends and certain sub segments, but are
Speaker 1: there any outliers which just don't seem to be doing
Speaker 1: the things that the others are. So one company made
Speaker 1: one energy major Energy didn't five years ago, didn't take
Speaker 1: the same route as an l or Jola. It preferred
Speaker 1: to go down an energy services rout and and since
Speaker 1: you does intend, they've acquired about nineteen companies in this
Speaker 1: energy services space as energy storage companies, energy efficiency generation,
Speaker 1: and on site generation. Last year they decided against that strategy.
Speaker 1: They've replot of course they are going to spin out
Speaker 1: the energy part of the energy services business and take
Speaker 1: them cash raised from that and invest into developing renewables
Speaker 1: and building as their grids business as well. So there
Speaker 1: were companies who maybe took a different tax and now
Speaker 1: we see them reverting course and going to the same
Speaker 1: route dash an l aber droller that they pursued so
Speaker 1: successfully in the upstream. Maybe one company that comes to
Speaker 1: mind is for Tomb while kind of other companies they've
Speaker 1: been more invested in how to dicarbonize their generation protfolio.
Speaker 1: For to instead, their generation portfolio was quite low carbon,
Speaker 1: but instead of going more or expanding their low carbon
Speaker 1: They went and bought Uniper who had higher carbon intensity
Speaker 1: than they did, so that was an interesting development. But
Speaker 1: I guess what they are really betting on is that
Speaker 1: there will be a tighter power market and while coal
Speaker 1: and nuclear plants retire and the gas production from growing
Speaker 1: and ends, there will be a really tight power market
Speaker 1: where like gas plants that Uniper has a lot and
Speaker 1: hydro they will have a huge advantage in that case.
Speaker 1: So we've talked about a lot of successful business models
Speaker 1: and a lot of successful businesses on the show, keeping
Speaker 1: it really quite upbeat. But I want to know about
Speaker 1: how competitive this space is and what we see happening
Speaker 1: in the future. I mean, is it is it a
Speaker 1: crowded market? That it is definitely. We have been seen
Speaker 1: quite a lot of new entrants in this market, especially
Speaker 1: from oil and gas sector. There is a huge gap
Speaker 1: between kind of now and reaching the Paris Agreement, so
Speaker 1: there is space as well, but it definitely getting more competitive.
Speaker 1: And example of that is what we saw with the
Speaker 1: U k C Bed auction where we saw a record
Speaker 1: high level of bidding from oil and gas sector. From
Speaker 1: BP and in theF both of the oil and gas
Speaker 1: and utilities have their advantages. And it's good to notice
Speaker 1: that even though maybe oil and gas have a lot
Speaker 1: of money, but utilities they have advantage in um their
Speaker 1: experience of developing assets and building looss renewable projects and
Speaker 1: also their existing pipeline is invaluable and those factors have
Speaker 1: been built over the years and it may give them
Speaker 1: an edge over this oil majors coming into the power sector.
Speaker 1: But what also Shells mentioned earlier that they have big
Speaker 1: trading desks and ability to manage big offshore projects. This
Speaker 1: could help them kind of to manage those merchant risks
Speaker 1: that we see in a power sector and manage those
Speaker 1: unsubsidized revenue risks. And all the gas majors in their
Speaker 1: focus isn't just on the upstream in renewable development. We're
Speaker 1: actually seeing a lot of activity from shell in particular
Speaker 1: in the downstream space. So show has acquired energy retail
Speaker 1: businesses in Australia. In the UK they about battery storage
Speaker 1: companies that's on and in Germany they have but four
Speaker 1: separate electric vehicle charging companies total has bought SAFT an
Speaker 1: array of ev charging companies itself. So oil and cast
Speaker 1: companies are chargeting both the upstream the generation side as
Speaker 1: well as the downstream on the retail side, and Shell
Speaker 1: only recently announced that they want to double the amount
Speaker 1: of electricity that they sell to customers by With that,
Speaker 1: that's what to watch when we sit down to do
Speaker 1: the next look at these utilities and their company profiles.
Speaker 1: This may be a very different conversation with a lot
Speaker 1: more energy companies involved in a bigger way going forward.
Speaker 1: And with that, Michael both, thank you so much for
Speaker 1: your insights today and great having you on the show.
Speaker 1: Thank you, Thank you. Ny. This episode of Switched On
Speaker 1: was edited by Rex Warner who Grace Stook Media. Bloombergin
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