Spain’s big energy companies have accused the Energy Ministry of “driving investors away” with their strategy of revealing the next milestones in the energy reform to the large investment banks. Everything seems to point to the fact that the reform will substantially damage the sector’s profitability, so the utilitis have asked the government to carry out an excercise of “caution and responsability,” sector sources told Europa Press.
Alarm bells have gone off at the electricity companies’ headquarters. The trigger has been the report from one of the biggest global investment banks, Goldman Sachs, published on Thursday. The report warns about the imminent cuts in remuneration and in the electricity sector’s profitability. In the opinion of the top US investment bank, this has still not been discounted by the markets.
The report was like a bombshell for the stock markets. The main electricity firms (Iberdrola, Endesa, Gas Natural and REE) saw almost 3 billion euros shaved off their market capitalisation in just one day. Goldman Sachs flags three specific factors which could have a “significant” impact on sector revenues. In the first place, remuneration for the distribution business, which the government has commited to revising, could fall 40% during the period 2020-2025. Secondly, the profitability of the renewable energy business could drop 30%, while the new renewables auctions could put downward pressure on prices between 2019 and 2020. In light of all the above, Goldman has cut its EPS for the utilities by 8%.
The US investment bank explains that its valuation has not been made on the basis of conjecture, but is based on information given at meetings with representatives of the Spanish government. Although they don’t idenfity these representatives, it turns out that Daniel Navia, the Secretary of State for Energy was there. So, in the wake of these meetings, Goldman Sachs says it has become “more cautious” about the Iberian utilities, recommending a Sell on all.
At the same time, Moody’s rating agency has warned that the two renewable energy auctions which have taken place in Spain this year will push prices in the system down, but will increase costs and the risk exposure of those companies awarded new capacity. Between the two auctions held in May and July, a total of 8.037 MW of new renewable energy capacity was awarded, distributed between 3.910 MW of photovoltaic, 4.107 MW wind energy and 20 MW in other technologies.
Moody’s estimates that these renewable energy auctions have cut the costs of eletricity and have transferred the risk supported by the system and the consumers to the distributors, which is “positive for the viability of the system”. But it’s “negative” for the companies awarded the projects. The companies suspect that Moody’s analysis is also based on information obtained from the government. And they have screamed blue murder about it. They believe this strategy of transmitting foreseeable cuts in the sector via the big investment banks or rating agencies, with a lot of influence in the markets, could be a disincentive for investors, “driving away” capital. So they are asking the government to carry out “a responsability exercise” and be cautious about the remarks they make.