Spanish Utilities Regulator Investigation Into Power Market: 2-6% EPS Risk

UBS | The regulator CNMC has kicked off an investigation on the competitive status of the Spanish power generation market. Endesa and Gas Natural Fenosa, the companies most exposed to it.

According to a press release on the regulator’s website, the objective is to assess: (1) the presence of market power in the formation of wholesale power prices, (2) the adequacy of restriction profits, and (3) the need for capacity payments.

We see €3-4/MWh downside risk to Spanish power prices

As explained in our “European Utilities: More EPS downgrades to come and major dislocations within the sector: time to cherry pick…” on September 7, we believe Spanish power prices could face c7% downside risk, based on our power price modelling, and adopting the current forward commodity curves. We also believe that the current €18/MWh gap vs Germany appears excessive: structurally, we estimate that it shouldn’t exceed €13-14/MWh.

Restriction profits may also be at risk

As highlighted in our past research, restriction profits may prove somehow too generous, especially for the incumbent, Gas Natural Fenosa. Specifically, we estimate that the limited competition in this backup market has pushed achieved prices to c€120/MWh. We calculate that GAS may achieve €250-350m gross profits from this activity.

EPS risk on Spanish generators at 2-6%

We estimate that a €3-4/MWh drop in power prices and a 20% cut in restriction profits would lower EPS of Endesa by c6% (Enel by c2.5%), GAS by c4%, Iberdrola by c3%, and EDP by less than 2%.