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A wind farm owned by RWE. "The discussions [over higher emissions targets] are very supportive of our business model," CFO Michael Müller said. |
With European lawmakers tightening the screws on emissions, fossil-heavy utilities ramped up their rhetoric on decarbonization during the 2021 first-quarter earnings season. For their greener peers, a strained global supply chain and rising costs brought challenges, too.
The European Parliament and EU member states agreed in April a 55% emissions-reduction target for 2030, in a move that one EU official said requires a "complete transformation" of the way energy is produced and consumed.
Utilities are listening: The Czech Republic's CEZ a. s., for one, announced last month that it is accelerating its transition into a low-emissions company, citing growing social and political pressure on the energy industry.
CEZ plans to reduce the share of coal-fired power generation in its portfolio to 25% by 2025, compared with 39% in 2019, and to 12.5% by 2030. The company also wants to grow its renewable energy capacity to 1.5 GW by 2025 and 6 GW by 2030.
CEZ was the biggest underperformer in a select group of European utilities in the first quarter, according to an S&P Global Market Intelligence analysis comparing EBITDA to analyst expectations.
Prices in the EU Emissions Trading System, Europe's carbon market, have risen to record levels in recent months as participants priced in higher goals, and the profitability of coal-fired generation has suffered as a result.
"The contribution of the coal-fired generation with CO2 prices at above €50 [per tonne of CO2] is so low that this does not translate into a significant impact on the economic profits of CEZ," Chief Sales and Strategy Officer Pavel Cyrani said during the company's May 11 earnings call.
A painful squeeze to the likes of CEZ and Poland's PGE Polska Grupa Energetyczna SA, the carbon market has been a boon for structurally lower emitters such as Austrian hydropower utility Verbund AG and French nuclear operator Electricité de France SA.
The ETS surge has seen power prices in the U.K., France and Germany grow by over 30% this year, with a similar trend also seen in Iberia. Among European utilities, Endesa SA is set to benefit most from the power price hike, Barclays analysts said in a May 24 note, given the high contribution of its power generation and retail business to EBITDA. Endesa is also long in carbon permits, Barclays said.
German coal exit pressures loom larger
Growing decarbonization pressure also forced change at a national level in recent weeks. Europe's largest economy, Germany, strengthened its climate law following a successful lawsuit by young activists. Meanwhile the country's first Green Party chancellor candidate leads opinion polls ahead of September's general election.
The German power sector will see 2030 power plant emissions capped at 108 million tons, down 38%, or 68 million tons, from the previous target aligned to existing coal closure timelines.
As a result, German coal operators such as Uniper SE and RWE AG may be required to move forward the shuttering of their assets. Uniper CEO Klaus-Dieter Maubach showed openness to the idea of accelerated closures on the company's May 6 earnings call, saying Uniper does not want to be a roadblock on the matter.
RWE CFO Michael Müller, meanwhile, said it remains to be seen whether the potential election of Germany's first Green chancellor and her coal exit plan for 2030 pose a threat to the closure timetable. But as RWE grows its renewables fleet, Müller sees tailwinds from the green political momentum.
"The discussions are very supportive of our business model ... we're now turning toward being a renewable player," Müller told analysts May 12.
Over in France, multiutility Engie SA's rejigged organizational structure also puts a bigger spotlight on renewables. The company also unveiled a new net-zero target for 2045.
Cable and steel woes for renewables developers
Wind giant Ørsted A/S underperformed compared to analysts' first-quarter EBITDA expectations. The company discovered a cabling defect in one of its older wind farms, which it expects to lead to a €400 million EBITDA hit, spread across 2021 and the following two years. Despite that, management held on to the company's earnings guidance for the year.
Ørsted's stock took a hit on the news, compounding a decline driven by a wider renewables sell-off. Analysts at Bernstein argued the market overreacted, saying in a note that "the Bear case is overdone," given that the cabling issue's impact is outweighed by larger gains made from selling stakes in wind farms. In addition, "Ørsted's onshore wind and solar growth potential is underestimated and recent inorganic moves suggest that Ørsted is serious about onshore," the analysts said.
Wind operators also received advance warnings from turbine-makers that rising commodities prices, chiefly steel, will increase future order bills as costs are passed on. Should the development become permanent, the costs could result in higher power prices as developers themselves shift the price increases onto consumers, Iberdrola SA CEO Ignacio Galán said during the company's May 12 call.
Utilities outperforming analyst expectations include EDP - Energias de Portugal SA, Naturgy Energy Group SA and Iberdrola, as well as E.ON SE, Fortum Oyj and RWE. E.ON and EDP, along with its renewables arm EDP Renováveis SA, outperformed despite booking significant hits from the Texas winter storm in February.