Falling power prices in the last quarter of 2023 dampened European utilities' earnings, signaling a mellower market environment following the energy crisis. But executives see green shoots for 2024 amid rising electricity demand from datacenters and certain competitors withdrawing from the scene.

An S&P Global Commodity Insights analysis of S&P Capital IQ consensus estimates showed that in a select group of European power and gas utilities, most companies underperformed expectations for 2023 fourth-quarter EBITDA.

Danish wind developer Ørsted A/S accounted for the largest miss, having scrapped two major US offshore wind projects during the quarter and booked impairments worth 28.4 billion Danish kroner for the full year.

While 2023 overall was a bumper year for some power generators, including RWE AG and Engie SA, analysts said falling prices and reduced volatility will not see these results repeated in 2024.

Still, European utility executives highlighted new opportunities on calls with analysts and investors.

"I do think there's a less tense competitive environment which is allowing us to get good profitability on the projects we are moving forward to investment decisions," EDP - Energias de Portugal SA CEO Miguel Stilwell d'Andrade said March 1.

In combination with ongoing operational challenges ranging from permitting delays to grid connection queues, falling power prices are slowing down the competitive dynamics in the renewables sector, according to Stilwell d'Andrade. In particular, oil and gas companies, which in recent years have made headlines with aggressive market entrance strategies, are backtracking, the CEO said.

"I think they're clearly on their way out, if not already out," Stilwell d'Andrade said.

Smaller players, meanwhile, are pulling back because of balance sheet struggles and ongoing supply chain disruptions, Stilwell d'Andrade added. Those dynamics improve the market environment for the company's renewables arm, EDP Renováveis SA, and other large developers, the executive said.

Datacenters high on the agenda

As in the US utilities market, the growing demand for clean power from datacenter operators has become a major theme in the European renewables space.

While the growth is less drastic than in the US, where large datacenter operators secured 4 GW of capacity in the past year, European developers see strengthening interest in power purchase agreements (PPAs) from the likes of Microsoft Corp., Apple Inc. and Amazon.com Inc. Artificial intelligence in particular requires more computing power.

"They need a lot more energy due to their new AI datacenters. And this is great news," David Ruiz, CEO of Spanish developer Grenergy Renovables SA, said on the company's Feb. 28 earnings call. "They basically need energy wherever they're going to have datacenters."

The booming demand from the datacenter sector may also change the process for PPA dealmaking, Ruiz said.

"Normally, in our business, the project comes first and then you find the right PPA. But I think the business might change and, in some cases, the PPA comes first and then you look in the market for the right project to match that PPA," Ruiz told analysts.

PPA prices overall have come down slightly from the peaks seen during the energy crisis, driven especially by solar. In some markets, such as solar-rich Spain, low PPA prices make the investment case challenging.

"This is clearly a buyer's market," Marco Palermo, CFO of Endesa SA, said on the Enel SpA subsidiary's Feb. 28 earnings call. "With these prices, it becomes very difficult to justify an investment in solar."

Mid-term outlook remains upbeat

The outlook for European utilities is losing steam, analysts at Bloomberg Intelligence wrote March 6, with several companies guiding for lower earnings in 2024 and 2025 amid declining power-price futures.

"Still, we expect prices to stabilize beyond this near-term slump as lower energy costs aid a gradual recovery in industrial demand and carbon costs, while the EU's climate goals support clean-energy investment and electrification," the analysts said in a note.

Analysts at Barclays said their outlook for European utilities in 2024 is positive. "Rates likely have peaked in 2023, and recent extreme power prices are now receding along with associated political pressure," they wrote in a note March 13.

"2024 may be a year where volatile macro conditions that have been dominant over the past two to three years give way to positive structural growth stories as the sector benefits from energy transition and infrastructure upgrade themes, " the Barclays analysts said.

While regulatory clawbacks of high prices may be over, the specter of political risk for renewables remains, executives at RWE said. European Union nations will head to the polls for the EU's parliamentary elections in June, and Americans are set to choose between Joe Biden and Donald Trump this year.

As of March 18, US$1 was equivalent to 6.86 Danish kroner.