|
Despite turmoil in the gas and power markets, most European utilities have performed well financially. The surge in energy prices has pushed European governments to take action to protect consumers. Among those plans, price caps could be a game changer for the sector
|
| The main driver of the increase in inflation was energy prices |
|
Elevated natural gas prices expected to last another two years
The post Covid-19 economic recovery resulted in higher energy demand at a time when the global natural gas supply was already tight. The Russia-Ukraine conflict has aggravated the situation with various energy sanctions on Russia, a major supplier of oil, gas, and coal for Europe.
Recently, Gazprom announced the stoppage of its gas deliveries to Poland, Finland, the Netherlands, and Denmark for not honouring the contracts using the rouble. Energy suppliers consider the decision to be a breach of contract given that the euro is the currency agreed upon in the contracts signed with Gazprom. Total Russian supply cuts to the EU now amount to around 23bcm, which is about 15% of the total Russian supply to the EU.
These losses are still considered to be manageable given the strong LNG inflows we are seeing. According to Gazprom, they do not expect further supply cuts to any other EU buyers, given that those buyers have either paid or have already been informed that flows to them will be stopped. But as the geopolitical situation escalates further, additional countries/suppliers may experience gas stoppages from Russia.
The current market situation is expected to keep natural gas prices at high levels for at least another two years.
|
|
Dutch TTF gas forward contracts
EUR/MWh equivalent
|
|
Power prices have skyrocketed due to several factors
Natural gas is used by households, corporates, and industry. It is also used by utilities to operate their natural gas power plants to produce electricity. Across Western Europe, natural gas represented 17% of the energy used by utilities to produce power in 2021. The share of natural gas for power production ranges between 25% and 15%, depending on the profitability of the technology. Soaring natural gas tariffs have pushed wholesale and retail power prices up considerably since the beginning of 2021. Other elements have also played a crucial role, including high carbon prices, the decommissioning of coal power plants, and the reduced availability of nuclear power plants, which also explain high energy prices overall.
|
|
1-Year baseload power forward wholesale contract
EUR/MWh
|
|
The majority of European utilities are well positioned to face the turmoil
In the United Kingdom, about 30 gas and power suppliers have gone bankrupt since the beginning of 2021. These players, mostly pure retailers with a business model based on energy supply and contracting new customers on low tariffs in order to gain market share, suffered from a price squeeze amid surging wholesale prices. Some 2.6 million households, about 9% of the UK total, had to be allocated to a different utility.
Utilities differ in their business models. Integrated utilities generally operate along the value chain, profiting from four main revenue streams.
|
|
The four main revenue streams for European integrated utilities
|
|
While some European suppliers did not survive the turmoil due to their specific business models, most large European utilities, representing between 80% and 90% of domestic market share, are well protected.
Large European utilities have benefited from soaring power prices
In 2021 and the first quarter of 2022, results showed that large European utilities have benefited from soaring power prices overall, with earnings up from 2020. Depending on the specific utility, 2022 guidance is either stable or stronger than the previous year. The few utilities that have suffered financially, although far away from the threat of bankruptcy, are suppliers with a large energy trading department that were wrongly positioned in regard to hedging strategies. 2022 will also see large asset impairments for the Nordic and German utilities particularly active in Russia.
Furthermore, the majority of the large European gas and power suppliers have a very diverse business profile with multiple revenue streams, allowing them to face headwinds without serious damage. Most of them are geographically diversified, too. For instance, Southern European utilities have a strong presence in North and Latin America, where the markets offer different dynamics and regulations. German utilities operate across Western and Eastern Europe as well as in the United Kingdom. Some utilities have both a European and a worldwide geographical footprint. The business mix of European utilities also offers an advantage. Integrated utilities benefit from activities across the value chain with power and gas networks offering stable cash flows determined by regulatory packages. These utilities are also diversified in terms of power generation assets with a share of renewables that keep growing and that run at a low marginal cost.
|
|
