Tuesday, October 19

Spanish energy companies led the profitability of the sector in the EU before the gas and electricity escalation

Spanish energy companies led the profitability of this sector in the EU before the spectacular gas and electricity escalation of 2021. The rally has forced the Spanish government to intervene in the market to temporarily cut (until March) the “excess remuneration” of electricity companies via Royal Decree-Law. Its shock plan, a pioneer in Europe, has put the sector on the warpath.

The keys to the Government’s shock plan to reduce electricity by 22% until the end of the year

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Eurostat has data that measure business profit as a percentage of the sales volume of companies in the electricity, gas and air conditioning sector. According to the European statistical office, in 2018 (the latest year available) its profits accounted for 18.2% of its turnover, above the European average (10%) and other large member countries: in Germany it was 5 , 6%; in Italy, 10.1%; in the UK (which was still a member of the EU at the time) it was 15.3% and in France, 15.8%.

Data from the Central Balance Sheet of the Bank of Spain also show that this sector is among the most profitable in Spain. In 2019 (latest year available), the gross profit of these companies exceeded 12,800 million, close to 15% of the net amount of their turnover. It is a profitability much higher than the average (9%).

In March, with no signs of the energy upheaval to come, the Bank of Spain analyzed the effects of the cost of electricity on Spanish companies. Among their conclusions was that this variable was especially relevant for the smaller ones. For those with less than 10 workers, “44% have a percentage of electricity spending that represents more than 1.5% of total income”, well above the price. In addition, “the highest average prices are observed in the lowest consumption segments, generally corresponding to tariffs with lower voltage levels, due to the design of the tariffs itself.”

“Excess pay”

To justify the cut to the “excess remuneration” of the electricity companies, the decree published this Wednesday in the BOE begins by noting that light “is a systemic variable of the economy that affects families, self-employed workers, companies, industry and the economy in its as a whole “and the urgent measures adopted seek to” immediately stop the effect that the increase in the price of electricity is having on the rest of the sectors of the economy, which is already being reflected “in the CPI, at a maximum of nine years in August, “with the consequent loss of purchasing power for consumers and a loss of competitiveness for industry and the service sector)”. This “poses a risk of slowing down the recovery,” according to the government.

The Executive considers that these companies are receiving excessive benefits due to the design of the wholesale market, which means that technologies that do not burn gas to produce electricity benefit from the exponential rise in the price of this raw material in the daily auction: more than 250% in a year, and going up. For this Thursday, the pool broke another record when it was already close to 190 euros per megawatt hour (MWh) in a context of madness in the European energy markets. In case there were no ingredients for the tension of the last weeks (low level of gas storage in the face of winter, strong Asian demand, uncertainty about Russian supply …), the fire of an electrical interconnection between the United Kingdom and France forced to increase the use of combined cycle plants (natural gas) in the British electricity system.

To mitigate the spectacular rise in the pool, the Spanish Government will cut until March 2022 some 2,600 million euros to non-emitting technologies (mainly hydroelectric, nuclear and some old renewables) to drastically reduce the so-called charges of the electricity system (a part of the regulated costs). In an “emergency” analysis published this Wednesday, the consulting firm EY wondered “to what extent such action destroys or is contrary to the marginalist system applicable in the Spanish electricity market in accordance with the requirements of European regulations”. The Executive, which has the endorsement of the European Commission for these measures, highlights that Spain has been a pioneer in these measures, but it will not be the last.

Pedro Sánchez stressed this Wednesday that in the face of this escalation “he will always defend the interest of citizens above any pressure or private interest.” The president has assured that companies “can afford” this cut. According to data from the international consulting firm FactSet, the benefits of Spanish energy companies have an unusual weight with respect to national wealth. According to this firm, in 2020 the gross operating profit (Ebitda) of the sector represented 1.68% of Spanish GDP. That percentage is unmatched in other European countries.

In 2020, the two largest in the sector, Iberdrola and Endesa, easily dodged the pandemic. Between the two they increased their net profit by 36% to exceed 5,000 million, in a year of historic losses on the Ibex. Between these two companies and Naturgy they added an Ebitda of more than 17,700 million, close to the record of 2019. A large part corresponded to Iberdrola, the Spanish leader in this sector, strongly internationalized, and that this Wednesday opened the front page of the Financial Times not because of the cut it is going to suffer in Spain, but because of its criticism of the protectionist policies of the United States to favor its local steel industry in offshore wind, which an executive of the multinational called “Soviet central planning.”

The Basque electricity company is, by far, the one that has increased its Ebitda the most in the last five years. Until June 2021, it increased by 10% year-on-year, to 5,444 million, and that of its Renewables area (where its hydroelectric business is located) grew by 63%, to exceed 2,000 million, 49% in Spain. This, before the spectacular climb this summer. The company, which has quintupled its Ebitda since 2000, expects this magnitude to reach 12,000 million in 2022 and 15,000 million in 2025.

In addition to scoring multimillion-dollar profits in 2020, the electricity companies were among the winning sectors in the stock market after the stock market crash that followed the great seclusion and the pandemic, which accelerated plans to decarbonize the economy, a task for which these companies ( with an important driving effect on the economy) will be fundamental. Iberdrola, whose share price broke all-time highs at the beginning of the year (several executives took the opportunity to make money by selling shares in the midst of a Filomena storm) even surpassed Inditex’s market capitalization during the summer of 2020.

According to the employers’ association Aelec, which has rejected “the interventionist measures directed at the electricity companies”, classified by the PP as “confiscatory”, “the cut in the income from hydroelectric and nuclear generation, justified in an alleged increase in profits due to The rise in the price of gas is an unfair and misguided measure “with” a huge impact on the stability of a sector that is neither responsible for this situation nor is it benefiting from it, something that can be verified by observing the market value of the companies despite rising prices throughout 2021 “.

17.9 billion less

This Wednesday, Endesa and Iberdrola led the falls in the Ibex, falling 6.39% and 5.79%, respectively. In two days, its market capitalization has been reduced by 7,200 million. Since the Government unveiled its blueprint in June to cut extra revenue due to the cost of CO2 (which has also skyrocketed), the collapse has reached 17.9 billion. The recently approved decree joins this initiative, which plans to cut around 650 million euros to hydroelectric and nuclear plants due to the increase in carbon prices. This has led Foro Nuclear to once again take out the threat of a “disorderly” shutdown of nuclear power plants. Vice President Ribera replies that the companies cannot carry it out unilaterally and they need a favorable report from Red Eléctrica.

For its part, the APPA renewables employer assures that the decree will make facilities with long-term bilateral purchase and sale contracts (PPA), at prices much lower than current prices, “will have to sell at a loss” and could “temporarily paralyze their activity “, and ask to process it as a bill. The Wind Energy Business Association figures at 5,682 MW (21% of the power of this technology) the affected parks, which are more than 20 years old and have stopped charging the old premiums for renewables. This employer gives the example of a park with a PPA to supply energy to a third party at about 50 euros / MWh. Taking into account gas futures for the fourth quarter, with this cut (which is temporary) it would have to return € 78.1 / MWh to the system, “which would lead to a negative result of € -34.1 / MWh and It would force him not to generate electricity (economic nonsense). ”

The decree has also received criticism from the gas company Sedigas, which will wait to know the technical details of the mechanism to cap the increases in the regulated gas rate “to make a well-founded assessment of the possibility of incurring a potential structural rate deficit. for the gas system “that” could put its economic and financial sustainability at risk. Sedigas also claims a reduced VAT on the gas bill, such as the one temporarily applied to electricity.