In December, 20 months into the top job at Germany’s Innogy AG, Peter Terium unveiled a 3 billion-euro plan to transform the utility into a provider of electric car technology, digital networks, and offshore wind farms. His goal, he said, was to become “a trailblazer of change. We do not wait to see what happens. We set trends.” Terium didn’t need to wait long to see what happened. A week later, he was out of a job.
Terium’s fate highlights the dilemma faced by European utilities. The likes of the U.K.’s Centrica Plc, Eon SE of Germany, and Italy’s Enel SpA are shifting away from their traditional business of simply selling electricity and starting to offer higher-tech—and potentially more profitable, but also riskier—services such as smart meters, rooftop solar panels, and installing batteries in customers’ garages.
Utilities, grid operators and other companies in the sector will plow $590 billion into digital initiatives from 2017 to 2025, or about a fifth what they’ll spend on of their total capital spending, according to Bloomberg New Energy Finance. The industry must make such investments if it’s going to survive, but “you need to credibly show that you can deliver,” said Leonard Birnbaum, an executive board member at Eon. “You can’t say, ‘Hey there’s the growth out there, let’s go spend money. Trust me, and let’s see what happens.”
The shift is changing the market’s view of what was long deemed a safe, stable sector that delivered consistent, if uninspiring, revenue growth. With the perceived risk of the industry on the rise, dividend yields of utility stocks have jumped. And the shares have been more volatile than the wider market since 2014 as prices for electricity, and the gas and coal needed to produce it, have whipsawed.
“Energy prices are going up and down much more than they used to,” said Elchin Mammadov, an analyst at Bloomberg Intelligence. Rising competition has squeezed margins, and as companies move away from carbon-based fuels, “they need to invest more even as their earnings are not growing as fast.”
Innogy, Fortum Oyj of Finland, and Sweden’s Vattenfall AB have installed thousands of electric vehicle charging stations across the Continent. Iberdrola SA in Spain and France’s Engie SA are developing software to let them better manage power lines and networks. And almost all of Europe’s largest utilities now connect thermostats and appliances to smartphones. Though such programs are pricey—the companies must buy and install millions of smart meters—they see it as a necessary expenditure to help customers more efficiently use electricity.
While the utilities feel they must adapt to the changing market with the shift, it’s difficult to predict the long-term payoff of initiatives such as e-car charging points given that there are few battery-powered vehicles on the road, said Andreas Regnell, head of strategic development at Vattenfall. “We don’t know when it will be profitable,” Regnell said. “So we are spending money a bit on a leap of faith.”
“Google of Energy”
Enel is seeking to beef up its digital offerings via a unit dubbed Enel X. The division, which its chief hyperbolically calls “the Google of energy,” has some 1,000 employees working on projects ranging from Enel-branded credit cards to systems that let electric vehicle owners sell power stored in their batteries back to the grid when demand peaks.
Podcast: Inside Renewable Energy: The Coming V2G Uptrend — Where’s the Value in Grid Friendly Electric Vehicles?
“Technology has meant disruption for the energy industry,” says Enel X boss Francesco Venturini. “We’re trying to turn that technology into an opportunity.”
In January, hedge fund Marshall Wace said in a letter to investors that it had sold short shares of German power producer Uniper. The letter said the fund expects coal prices to fall, which would cut the price of power. Marshall Wace also predicts that some of the utility’s generating plants will be taken out of service and others will be displaced by renewables. Both those factors would shrink Uniper’s earnings as its electricity revenue declines, the fund said.
Companies have seen their stock prices drop as “a lot of market share has been lost to renewables,” said Ahmed Farman, an analyst at Jefferies International Ltd. in London.
Longer-term investors are also taking note. Ronald Wuijster, chief investment officer at Dutch pension fund APG Asset Management, says many utilities must change their strategies to survive. While there’s no one-size-fits-all solution, he suggests companies pay greater attention to the potential effects of climate change as they plan their investments.
“For so many utilities, if you look at the long-term horizon you will see clear risks,” Wuijster said. “That could mean you’re gradually going to need to change your strategy.”
©2018 Bloomberg News
Lead image credit: CC0 Creative Commons | Pixabay
Sit in on sessions discussing “Digital Infrastructure and #IoT,” “Advanced Data Management & Diagnostics,” “Intelligent Grid Controls & Automation,” & MORE in our Big Data Track at #ElectrifyEurope. Learn more about our sessions—https://t.co/UMkK0RKPia pic.twitter.com/3f4kEOmsQV— Electrify Europe (@ElectrifyEurope) March 2, 2018