Steam rising from RWE's Niederaussem coal-fired power plant in Germany. The surge in power prices during the third quarter buoyed coal generation margins. Source: RWE AG

European utilities benefited from a surge in power prices during the third quarter, with generators of large low-carbon baseload portfolios, as well coal and flexible assets, cashing in on the continent's energy crunch. Even companies expected to be hit by regulatory interference, which surfaced as lawmakers watched household energy bills spiral, largely escaped major financial impacts.

Against that backdrop, most European utilities outperformed analysts' EBITDA expectations in the quarter, according to an S&P Global Market Intelligence analysis of S&P Capital IQ consensus estimates.

Finland's Fortum Oyj, which, together with subsidiary Uniper SE, rode a wave of high power prices with favorable hedging, beat the consensus estimates by 20%, while Enel SpA's Spanish subsidiary Endesa SA outperformed by over 22%.

Endesa was in line to see a significant impact from Spain's proposed clawback of what had been deemed to be excessive profits made by low-carbon generators as gas prices surged. That law was ultimately weakened to the point where Endesa now sees no financial impact, down from a projected €110 million hit from just the two weeks in September in which the law would have applied.

While regulatory clawbacks were limited during the quarter, this may not last, according to Patricio Alvarez, energy and utilities analyst at Bloomberg Intelligence. "If earnings volatility and windfall profits continue into next year, there is a risk of regulatory pushback," Alvarez said in an interview.

In the third quarter, the market underestimated the magnitude of the price surge, Alvarez said — and this could be even more pronounced by the end of 2021. "Most of the volatility from the hike in power prices is going to translate into the fourth quarter, which is going to encapsulate this even more."

Coal's renaissance

As gas prices surged in the third quarter, generation margins for coal became more favorable, even despite an increase in carbon prices under the EU Emissions Trading System. Coal plant operators, such as Germany's RWE AG, saw their earnings boosted as a result.

Increased hard coal and lignite burning by electricity producers may persist until 2023, according to an analysis by MSCI, based on forward wholesale energy and carbon prices and demand recovery. This would increase the absolute emissions and emissions intensity of players such as Fortum and RWE, MSCI said.

Coal-heavy Czech power generator CEZ a. s. was also buoyed by the price environment and saw its share price touch record highs, extending gains in the fourth quarter. The company beat analysts' EBITDA expectations by 19%.

The third quarter provided somewhat of a mini-renaissance for coal in Europe, just before the COP26 climate summit in Glasgow, Scotland, made phasing out coal one of its key goals. As generation rose, other coal operators such as Uniper and Polish utility PGE Polska Grupa Energetyczna SA also booked share price gains as the energy crisis took hold.

Yet there is limited long-term upside for coal in Europe as a result.

European policymakers unveiled a toolbox of first-aid measures in October for households and industries grappling with surging bills and also said they want to leverage the energy transition for job creation and economic growth.

MSCI said the sharp spike in the price of natural gas and other fossil fuels may in fact strengthen climate action by governments globally in the long run. The European Commission plans to limit the exposure of energy consumers to volatile gas, coal and oil prices by accelerating investments in renewables by speeding up renewables auctions and permitting processes.

"The current situation on the energy market is no reason to pause the coal exit. To the contrary," EU Energy Commissioner Kadri Simson said at COP26.

Even before Glasgow, the global trajectory on coal had been set. According to S&P Global Platts, the global coal plant pipeline stood at over 1,100 GW in 2015, when the Paris Agreement on climate change was adopted. Today, that figure has shrunk to 313 GW.

Gas in focus

Natural gas, meanwhile, may see a rosier longer-term environment in Europe as industry feels the pain of shortages. Large parts of the continent rely on the fuel in the power generation mix, and a new artery pumping gas into the heart of European industry, the Nord Stream 2 pipeline from Russia, will now come into service in early 2022.

Uniper CFO Tiina Tuomela said during the company's third-quarter earnings call that the energy crunch could have swung lawmakers toward including gas, as well as nuclear, in the EU's sustainable finance taxonomy, its green finance rulebook. "It is important to recognize [the role of nuclear and gas] in this transformation and look at the broader picture," Tuomela said.

While nuclear has scope for inclusion in the taxonomy, "gas is very tough to call," Alvarez of Bloomberg Intelligence said. But a lack of visibility is already deterring investment in further gas infrastructure, even though it is an easy replacement for coal in the short term.

Irrespective of the recent uplift for fossil fuel assets, the long-term earnings and investment thesis remains focused on renewables deployment, Alvarez added.

Some utilities presented longer-term strategic updates in the third quarter. RWE said it will spend €50 billion this decade to accelerate a pivot to renewables globally, and shareholders and analysts were largely upbeat. "We see the [update] as a positive for RWE's equity story, with a major emphasis on renewables build-out," analysts at Jefferies said Nov. 16.

British utility SSE PLC also wants to boost spending on renewables, and during the company's strategic update Nov. 17, executives poured cold water on activist investor pressure to break off the company's renewables division.

S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.