Most of Europe's power and gas utilities posted solid third-quarter results as the benefits of surging energy prices outweighed political risks and profit clawbacks.

Seven of the eight utilities analyzed by S&P Global Market Intelligence exceeded S&P Capital IQ consensus EBITDA estimates for the quarter. Only Italian gas utility Snam SpA missed the consensus.

Trading divisions at companies such as Engie SA and RWE AG generated record earnings growth in the period, cashing in on unprecedented volatility.

European gas and power prices surged to all-time highs in August as Russian gas deliveries via the Nord Stream 1 pipeline subsided and companies were instructed to fill gas storage ahead of the winter, whatever the cost.

"The high energy prices are generally benefitting utilities' profitability, especially their clean generation businesses," analysts at Fitch Ratings said in a Nov. 14 note. "However, high prices amplify political risk."

Indeed, further interventions are afoot.

The U.K. will introduce a 45% levy on "excess profits" above £75/MWh made by renewable and nuclear electricity generators — a move that some observers said will deter investment. For now, companies such as SSE PLC rake in higher returns. The British utility doubled its earnings during the quarter on the back of higher prices.

The European Union will start collecting funds via a €180/MWh revenue cap from December, which will target non-gas power generators such as renewables and nuclear. Since the cap was announced, some developers have expressed concern over investor sentiment, while others, like Ørsted A/S CFO Daniel Lerup, argue the cap strikes a fair balance for developers and consumers.

Market analysts note that the level chosen by the European Commission still leaves healthy returns for generators compared to historical power deal values.

Germany's largest gas importer nationalized

On the losing end of the high and volatile price environment were Uniper SE and its majority owner Fortum Oyj. Having been cut off from Russian gas volumes, Uniper was forced to buy replacement molecules on the surging spot market. After losing liquidity through margin calls for months without the prospect of relief, the company agreed to nationalization by the German state in July.

In the third quarter, Fortum executives spoke of "massive scars" in the company's finances after Uniper booked a €40.37 billion loss, the largest in German corporate history.

For Fortum, which only finalized its purchase of Uniper in 2020, the nationalization was a bitter lesson, breaking decades of confidence in Russian reliability. The Finnish utility will return to its Nordic roots, focusing on hydropower and nuclear in its home markets.

"It is clear that we cannot be happy," CEO Markus Rauramo said in September. "This definitely has not gone as we had planned or I had anticipated." Fortum's stock price has weakened throughout the war, now standing 40% lower than at the beginning of the year.

Russian gas supplies were given a permanent blow in the quarter after a series of explosions along the Nord Stream 1 and 2 pipelines in the Baltic Sea in September. Europe has pointed to Russian sabotage as the cause.

Much of the Russian shortfall is now being made up with liquefied natural gas, for instance from the U.S. Related infrastructure is now given fast-track political support, including in Germany, where a long-nascent import terminal project in Wilhelmshaven was revived and is now completed, with first gas expected in early 2023.

RWE and Uniper are among the companies backing new LNG terminals. Earlier in the year, RWE signed a long-term gas supply deal with U.S.-based Sempra as part of this effort. However, European buyers replaced barely half of the lost Russian supplies in September and October, according to S&P Global Ratings.

"European utilities, which typically have a weak position on global LNG markets, will be competing with established Asian buyers that can agree supply contracts for 15-20 years or longer," Ratings analysts said in a Nov. 9 note.

There are also infrastructure constraints across Europe that mean LNG may not reach the demand centers from certain ports. "For some utility companies, the risk of investing in new or larger LNG business could outweigh the rewards," Emmanuel Dubois-Pelerin, credit analyst at Ratings, said in the note.

US Inflation Reduction Act makes eyes wander

In August, the Inflation Reduction Act, or IRA, was enacted in the U.S., boosting the prospects for wind and solar development through tax credits and streamlined permitting procedures.

Utilities in Europe, long considered a global front-runner in renewable energy and decarbonization, are now looking across the pond with envy and keenness.

Especially for emerging green hydrogen, regulatory support in Europe is "almost none compared to America," Iberdrola SA CEO Ignacio Galán said.

RWE CEO Markus Krebber said the IRA is a reason why the company decided to acquire Con Edison Clean Energy Businesses Inc. in October in a $6.8 billion transaction. Speaking of a "massive boost for green growth" and a "reindustrialized" economy hungry for green power, Krebber said the U.S. is an appealing location for fresh investments in clean energy.

"The Inflation Reduction Act provides a stable, long-term investment framework that makes this acquisition even more attractive for us," Krebber said Oct. 3, just after the deal was announced.

EU policymakers have taken note, and have pointed to unfair advantages for U.S. markets that could harm other countries' renewable energy efforts. The IRA will give the U.S. "a market-distorting boost, tilting the global level playing field and turning a common global objective — fighting climate change — into a zero-sum game," the European Commission said Nov. 8.

S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.