A natural gas tanker. Surging demand for gas amid low storage levels in parts of Europe have pushed prices to record highs, dominating the energy conversation in the third quarter. Source: IgorSPb/iStock/Getty Images Plus via Getty Images

As European utility executives prepare for the third-quarter earnings season, they are certain to reflect on an unprecedented few weeks that have turned the sector on its head. The third quarter was dominated by a surge in commodity prices across Europe, which sent power prices to record highs and triggered government interventions aimed at curbing domestic electricity bills.

In some jurisdictions, producers of low-carbon baseload power like nuclear or hydro have been able to cash in on the rising prices, being shielded from the surging cost of gas and rising EU carbon prices. Austria's Verbund AG is among those set to benefit, and against this backdrop already raised its earnings guidance for year.

Nordic power producers Statkraft AS and Fortum Oyj are also expected to see performance uplifts in the third quarter and beyond. Statkraft has only hedged around one-third of its generation and was able to export Norwegian power to the U.K. through the new North Sea Link interconnector for the first time in October. Fortum subsidiary Uniper SE raised its 2021 profit guidance on Oct. 21 in light of the high market prices.

For power producers in Southern Europe, the feed-through could be dampened by wide-reaching government policy interventions, with Spain putting forward measures to claw back windfall profits made by low-carbon generators amid surging gas prices. The decision was criticized as excessive, potentially weakening Spain's market appeal for new investments.

However, the Spanish government is now expected to relax the gas price clawback measures, analysts at Berenberg said in an Oct. 22 note, in a boost for the likes of Endesa SA, Iberdrola SA and Naturgy Energy Group SA.

Spanish lawmakers have also floated a contentious CO2 clawback law, targeting older generating assets that supposedly benefitted unduly from high power prices before the existence of the EU's carbon market. But that measure is also viewed with uncertainty, with Berenberg analysts reducing the probability that the levy will be enacted in its proposed form to 50% from 75%.

Overall, equity analysts expect the major Southern European utilities to post positive earnings results in the third quarter, according to an S&P Global Market Intelligence analysis of S&P Capital IQ consensus estimates. That also includes EDP - Energias de Portugal SA and Endesa's parent Enel SpA.

In France, utilities Engie SA and Electricité de France SA are set to be largely shielded from policy measures curbing consumer bills. Tariffs have been capped to protect consumers, but when prices return to lower levels, expected in spring next year, reductions will not be passed on fully to households. This will make the impact from the intervention broadly neutral for the deep-pocketed suppliers able to weather the short-term impact, CreditSights analysts said Oct. 4.

With gas supplies not expected to recover until after the winter, coal-fired power generation is likely to maintain an economic edge already seen in parts of Europe during the third quarter. "While it may be an unpalatable suggestion, it is possible that we could see increased production from coal plants over the winter," CreditSights said. Utilization rates of coal plants in France, Germany, Italy, Spain and the U.K. were between 5% and 30% last year, suggesting plenty of spare capacity, analysts said in an Oct. 6 note.

Further policy measures across Europe looking to curb consumer bills are likely. Earlier in October, the European Commission proposed a toolbox of measures for EU member states, including deferred bill payments and subsidies for struggling industries, equipping energy ministers across the bloc with further options.

READ: US utility Q3 earnings calls to focus on federal climate plans, stagflation risk

The affordability debate is becoming louder in Europe. Compared to U.S. utilities, European companies face higher social risks in light of the rising prices, according to S&P Global Ratings, given that Europeans pay up to three times more than Americans for their power relative to disposable income.

"While Europe's environmental policies aim at reconciling ambitious energy transition and containing the cost of energy, maintaining a balance between higher transition costs and power price affordability is challenging," Ratings analysts said Oct. 15.

In the U.K., SSE PLC remains in the spotlight, coming under pressure from investor Elliott Management Corp. to split off its renewables business, which includes high-growth assets like offshore wind. A breakup would not be a home-run, Berenberg analysts said, arguing that an integrated business supports dividend growth.

SSE's renewables business is also focused on the U.K. and Ireland, and lacks the geographic scope of the likes of Danish wind giant Ørsted A/S, they cautioned. "A breakup would not guarantee value creation," the analysts said Oct. 14.

Ørsted was plagued by low wind speeds across its offshore wind assets in the second quarter of 2021. But concerns that this could develop into a chronic weakness, for instance due to climate change's impact on weather systems, seem unfounded.

"Our analysis and academic research do not point to any evidence of structural climate change induced weakness on windspeeds; some studies even point to rising windspeeds in Ørsted's footprint," analysts at Bernstein said in an Oct. 4 note. According to consensus estimates, the company is expected to post improved third-quarter EBITDA compared to the year-ago period.