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All parties must end eventually. For European utilities, however, the end of historically high energy prices has arrived much earlier than expected.
European gas and electricity prices returned to pre-Ukraine war levels this year, helped by high imports of liquefied natural gas, a warm winter and still subdued industrial demand. Hedging means much of the earnings hit will be delayed until after next year.
Many European power companies have sold forward 50-100 per cent of their anticipated production for this year and 25-60 per cent for 2025, often at prices above €100/MWh, according to a Moody’s analysis. Across Europe, wholesale power prices are below this level, even if they have improved since hitting lows in February.
Differences in these hedging strategies explain the crooked response in utilities’ share prices this year. Generally, those companies more reliant on “baseload” or “flexible” technologies such as nuclear, biomass, gas and coal are more exposed to near-term market prices. Renewables generators use fixed price government contracts, or sales agreements direct with corporates, to cover a large proportion of their expected output in advance.
RWE — which generates higher earnings from its flexible power generation business than renewables — blamed the lower price environment when it cautioned in March that its adjusted earnings this year would probably be at the lower end of its €5.2bn-€5.8bn guidance range.
It said profits from its flexible power unit were expected to average €1.4bn for 2024-26. Previously it had guided to earnings of €1.5bn-plus. In 2023, when market prices were still high, earnings from its hydro, gas and biomass power stations exceeded €3.1bn.
Industrial power demand may improve this year if prices remain low. But unless there is a significant uptick, expect companies to start trimming capital expenditure budgets for 2025-26 — or selling off more assets to fund newer projects. If prices remain subdued beyond 2025, Moody’s estimates the sector could need to reduce capital expenditure by 15-20 per cent relative to current plans to maintain ebitda/capex ratios, which have ranged between 1.2x and 1.4x in the past five to six years.
Even before this year’s wholesale price drops, diversified utilities were already devoting a higher proportion of their capex budgets to regulated assets such as electricity grids — which offer stable, predictable returns. Grid-owning companies like Iberdrola, SSE and Enel have suffered less severe share price falls this year.
Expect the return of power prices to earth to accelerate that trend.
nathalie.thomas@ft.com
