As European utilities recapped their 2021 performance, earnings calls were dominated by talk of unprecedented price surges and market upheaval during the second half of the year, with Russia's ongoing invasion of Ukraine set to prolong this volatility.

Most European utilities exceeded analysts' EBITDA expectations in the fourth quarter of 2021, according to an S&P Global Commodity Insights analysis of S&P Capital IQ consensus estimates, as power prices surged to record highs and companies escaped regulatory intervention, at least for now. Spain's Iberdrola SA and Endesa SA, as well as Czech utility CEZ a. s., each outperformed the consensus by more than 10%.

Volatility and surging energy prices played into the hands of hydropower producers in the second half of 2021. With low operating costs, low hedges and no exposure to surging carbon prices, Austria's Verbund AG and Norway's Statkraft AS saw profits surge. And the end of 2021 was not the end of energy market volatility.

After Russia invaded Ukraine in late February, scrutiny on exposure to Russia heightened. A raft of sanctions, companies exiting the Russian market and a further boost in commodity prices marked the first weeks of conflict. But supply lines in the European energy market are also set for a fundamental shift in the longer term, some executives said in full-year earnings presentations.

Fortum, Uniper most exposed to Russia

Finland's Fortum Oyj and subsidiary Uniper SE are among the European utilities most exposed to Russia. About 20% of Fortum's EBITDA is generated from assets in the country, according to rating agency Fitch. Both Fortum and Uniper have seen their share prices plummet since the invasion of Ukraine.

The Nord Stream 2 gas pipeline was the first energy project on the chopping block in late February, with Germany moving to halt its permitting process indefinitely. The decision triggered impairments by the project's financing partners, including Uniper and Wintershall Dea AG.

Fortum is not prepared to ditch its wider Russian operations despite the conflict in Ukraine, with executives citing its obligations to power and heat customers and its 7,000-strong local workforce. But the company will not make new investments in Russia until further notice and will continue to cut its thermal power generation in the country, Fortum said.

Uniper reiterated its commitment to Russia repeatedly over the years, despite questions over carbon emissions and political risks, with former CEO Andreas Schierenbeck once calling the division one of the company's three key strategic pillars.

Analysts at MSCI still played through the scenario of a Russian divestment by Fortum, saying it would accelerate the company's decarbonization.

"The potential sale of the Russian unit, which represents 32% of the company's net book value of assets, could reduce the overall share of fossil fuels in Fortum's power capacity mix to 48%, from 65% as of Dec. 31, 2021," the analysts wrote in a March 10 note. A sale of Uniper's Russian unit Unipro would cut the company's fossil power share to 63% from 74%, MSCI added.

Separately, sanctions on technology exports into Russia may hamper the companies' operations and modernizations of power plants in the country, MSCI said.

Corporate credit ratings are also under pressure from the war in Ukraine. In light of the geopolitical risks, S&P Global Ratings placed Fortum and Uniper on a watch for downgrade March 14. Meanwhile, PJSC Gazprom is the largest gas supplier to Uniper, resulting in exposure to supply shocks, Fitch said March 16.

Renewables developers see openings

The situation in Ukraine could provide upsides for renewables developers, as EU lawmakers doubled down on green commitments.

This moment is an opportunity for Europe to "regain competitiveness with its own energy and ... regain energy sovereignty," Xavier Barbaro, chairman and CEO of French renewable power producer Neoen SA, said on the company's March 14 earnings call.

That means accelerating the transition toward renewables. But one roadblock to such a plan could be the cumbersome permitting processes that have slowed the installation of renewables capacity across Europe in recent years. In its March 8 proposal to rapidly reduce the EU's reliance on fossil fuels from Russia, the European Commission called for member states to simplify permitting for wind and solar projects.

In Germany, the new coalition government's so-called Easter package is expected in the coming weeks, including higher renewables targets and plans to accelerate permitting. However, it may be some time before any such legislation has a material effect on capacity additions, RWE AG CEO Markus Krebber said on the utility's March 15 earnings call. "And we hear the same from other European countries."

Indeed, Italian authorities have already moved to fast-track the delivery of new renewables permits since the war in Ukraine began, according to Barbaro. But relaxing planning rules or expediting licensing processes should not come at the expense of competitive market dynamics and companies' ability to deliver capacity, the Neoen CEO said.

"If Europe wants to increase the pace of the energy transition, you will need to have healthy players," Barbaro said. "You cannot have, at the same time, crazy low prices and starving competitors, and additional capacity and the replenishment of the pipeline."

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