European Power & Utilities Report – Q2 2018 - KPMG Global
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European Power & Utilities Report – Q2 2018

European Power & Utilities Report – Q2 2018

Price and margins overview

Electricity prices

Prices in France and Germany continued to increase in Q2 2018, similar to the pattern of Q1. The Spanish electricity market closed with record prices, compared to the Q2 price trend of the last 10 years. This was due to significant increases in gas and coal prices, along with the impact of CO2 emission rights. Electricity prices in the UK showed moderate growth from April to June, contrary to pronounced peak and decline in March.

Oil prices

Both WTI and Brent Oil average prices maintained an upward trend during Q2 2018, reaching US$70/b and US$76.70/b, respectively, at the end of May. The rising prices largely reflect the continuous decline in global oil inventory levels, impact of US sanction on Iran and economic crisis in Venezuela (see note below).

Gas prices

HH average prices remained fairly constant during Q2 2018 with minor fluctuations, closing at US$2.78/Mbtu by the end of May 2018. EU border average prices declined slightly during the quarter, reaching US$7.19/Mbtu. NBP prices were on the rise, attributing to the higher seasonal demand in April (see note below).

Coal prices

Australian, Colombian and South African coal prices increased significantly at the end of May 2018, thus following the January 2018 trend. The contributing factors were tight supply and strong consumption; however, this is expected to be temporary. South African coal average prices increased by 5.3 percent in Q2 2018 to US$98.80/Mt at the end of May 2018, reaching a peak in the last 7 years (see note below).

Carbon prices

Carbon prices increased moderately between April and May 2018 reaching EUR16.27/T, then declined to EUR14.99/T at the end of June. The average quarterly carbon price was up by 48 percent in Q2 vs. Q1.

Dark/spark spreads

Dark and spark spreads experienced strong volatility in continental Europe and touched negative values in Germany and France in the quarter. The UK and Italy were not affected by this trend as spreads remained stable during the quarter.

Regulatory overview

European Union

On 14 June 2018, the European Commission, the European Parliament and the Council of Ministers reached a political agreement regarding increasing renewable energy in Europe and implementing new rules for energy efficiency, which were both contemplated in the ‘Clean Energy for all Europeans Package’. The new targets are 32 percent renewable energy contribution and 32.5 percent energy-efficiency savings by 2030.

Germany

The Federal Network Agency has launched another phase of its consultation on the Network Development Plan (NEP) Gas during 2018–2028. After a public consultation on the transmission system's draft in February and early March, it is now up to the downstream network operators to approve the plan. Actual and potential users of the gas network can submit their comments on the NEP by 25 May 2018. The most important topics are the planned conversion of the H-gas areas to L-gas, the production restrictions in the Groningen field, the connection of the Nord Stream 2 pipeline and the market for liquefied natural gas (LNG).

Italy

The Italian Minister for Economic Development approved a decree, according to which major gas consumers are partially exempted from the payment of the general service charges, related to the gas commodity. The goal of such a measure is to incentivize companies to pursue more ambitious targets.

Portugal

The new Tariff Regulation of natural gas sector was approved in April 2018, which establishes the criteria and methods for the formulation of natural gas tariffs and prices for determining the allowed revenues, as well as the obligations of entities in the sector concerning the provision of information. In June 2018, the ERSE ‘Board of Directors’ approved the first amendment to the Tariff Regulation.

Spain

The National Commission on Markets and Competition (CNMC) published a report focused on the financial analysis of Red Eléctrica de España (REE), as the sole transmission and operator of the Spanish Power sector. Based on its analysis for the period 2013–2016, the CNMC has recommended lowering the financial retribution of sole TSO operator, REE, for the next regulatory period and putting legal upper limits to the company’s financial leverage.

The Netherlands

The Dutch government has formulated the objectives for a national climate agreement. This gives the go-ahead to discussions with the private sector, civil society organizations and subnational authorities. The aim is to reach a broad consensus on ways the Netherlands can reduce its CO2 emissions by 49 percent by 2030. It will be then developed into concrete programs in the second half of 2018. Implementation of the agreement will begin in 2019.

France
Revision of the Multiannual Energy Plan in 2018

The law on energy transition for green growth, the foundation for ‘Energy Transition’ in France, was passed in 2015. It rules the revision of the Multi-annual Energy Plan (MEP) after 5 years. The main objectives (previous target) that will be updated in 2018, cover:

  • the share of renewable energy: 50 percent of power by 2023
  • bio-methane injected into the gas network: 8TWh by 2023 
  • total energy consumption: down by 12 percent compared to 2012
  • primary consumption of fossil fuels: down by 22 percent compared to 2012
  • primary consumption of coal: down by 37 percent compared to 2012
  • primary consumption of oil products: down by 23 percent compared to 2012
  • primary consumption of gas: down by 16 percent compared to 2012 
  • emission of greenhouse gases from energy production: 254 MfCO² in 2023 (compared to 294 in 2018).

Denmark

On 29 June 2018, the Danish government together with all parliamentary parties entered into a new energy agreement, with the aim to cover the Danish electricity consumption with renewable sources of energy by 2030. The agreement focuses on building three new offshore wind farms having capacity of 2,400MW utilizing solar cells and land winds thus aiming to provide technology-neutral supply of energy. Also, new pool of EUR32.2 million (DKK4.2 billion) will be allocated annually over 20 years, for technology-neutral expansion using biogas and other green gases.

Turkey

The Energy Market Regulatory Authority (EMRA) announced that the organized wholesale natural gas market will come into effect at 8:00am on 1 September 2018, following the activation of the Continuous Trade Platform, in a manner that there will be an obligation for delivery, invoicing and payment.

Capital markets overview

Eurostoxx utiltities

The Eurostoxx Utilities Index maintained an upward trend at the end of Q2 and increased an average of 3.8 percent QoQ.

Best performance

RWE AG, EDP and EDP Renovaveis registered the best performance in Q2 2018, in terms of QoQ growth of share price. During this period, 16 out of the top 18 European players experienced a positive QoQ price evolution.

Valuation levels

Valuation levels in the sector averaged at 7.8 EV/EBITDA in Q2; 1.3 percent lower than the previous quarter.
Wide differences persist in EBITDA multiples, with Fortum Oyj, Iberdrola, S.A., Snam S.p.A., National Grid plc and EDP receiving the highest valuations, trading at 11 x EV/EBITDA and above.

Net debt ratios

Net debt ratios averaged at 3.1 x EBITDA in Q2 2018; 3.1 percent lower than the figure registered in Q1 2018 (3.2 x EBITDA).

Credit ratings

Iberdrola and Centrica experienced an upgrade in their ratings; while EDP, Enel, Endesa, Eon and Fortum observed a downgrade in their respective ratings.

Global M&A overview

Main trends

The last quarter continued to see a very active M&A market. The total value of the top 10 deals exceeded EUR95 billion, with a broad diversification of subsectors (oil, gas, infrastructure, renewables and water).
Major deals during Q2 2018 targeted mostly US companies (5 deals in the top 10).

Main transactions

  • Acquisition of Andeavor Corporation, a US-based energy company engaged in the manufacturing and sale of transportation fuels, by Marathon Petroleum Corporation (EUR25,892 million).
  • Purchase of 76.73 percent stake in Energias de Portugal S.A, a Portugal-based energy company, by China Three Gorges (Europe), a Chinese state-owned power company (EUR22,947 million).
  • Acquisition of Santos Ltd., an Australia-based energy company, by EIG Global Energy Partners, a US-based investment company in the oil and gas sector (EUR10,100 million).
  • Acquisition of 26.71 percent stake in Williams Partners L.P., a US-based energy infrastructure company, by Williams Companies, Inc. (EUR8,867 million).
  • Acquisition of all outstanding shares of Vectren Corporation, a US-based energy and applied technology holding company, by CenterPoint Energy Inc. (EUR6,610 million).

Note: The World Bank source will publish the June month prices for Crude Oil, Coal and Europe gas prices in the next report, which will be released in September 2018.

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