In 3Q20, most companies in KPMG P&U 20 experienced an improvement in revenue and EBITDA values, driven by the improving energy market environment. An uptick in Capex was also recorded across most utilities in 3Q20 vs. 2Q20 — implying recovery in the sector and renewed focus on capital investments to drive business.
The above financial performance of key P&U companies was a leading indicator of what was to come in 4Q20. No wonder electricity prices and input prices (including oil and coal) witnessed a rise on both q-o-q and y-o-y basis in 4Q20. Furthermore, the EUROSTOXX index witnessed a steady rise in 4Q20, propelled by successful clinical trial outcomes for COVID-19 vaccines and the prospect of a return to normalcy.
Some part of this recovery is supported by the regulatory developments within the European P&U sector that continued to focus primarily towards Green transition. For example, in December 2020, 22 EU member states signed a memorandum of understanding in which they expressed their willingness to support the development of a European value chain for green hydrogen and vowed to invest in the new key technology.
While it may be too early to exactly surmise how the 4Q20 performance of these companies might be1 — early indications and forecasts from analyst reports paint a positive growth story. The M&A activity has steadily increased in 2020 – from a 1Q historical low to a +60% growth (q-o-q) in number of deals and +267% growth (q-o-q) in total M&A deal value (mostly explained by the Veolia-Suez deal) to EUR 39.9 billion in 4Q20. For European P&U players, US remains a preferred region for making new acquisitions and has become especially attractive post the US elections.
It is expected that the year 2021 will be a witness to good growth rates for most P&U players in Europe as the European Union continues to focus on reduction in carbon emissions and achievement of net-zero targets. This will gear these companies to expand on their renewables portfolio further and it is likely that 2021 will witness a record-breaking feat for renewables auctions. Finally, European clean spark spreads remain above dark ones since 1Q19 (in France, Germany and the UK) – indicating a clear market premium to cleaner power plants.
Following a similar trend like the previous quarters, in 4Q20, regulatory developments within the European P&U sector continued to focus primarily towards Green transition. For example, in December 2020, 22 EU member states signed a memorandum of understanding in which they expressed their willingness to support the development of a European value chain for green hydrogen and vowed to invest in the new key technology.
- France has allocated EUR30 billion, from the EUR100 billion recovery plan, for its green transition plan. The allocated capital will be directed towards thermal retrofitting of public and private buildings, finance investments and operating expenditures dedicated to industry decarbonization, development of everyday green mobility, support and development of railway transportation, including freight, and development of green hydrogen.
- Germany too passed an amendment to the Renewable Energy Sources Act, to redefine the framework conditions for the expansion of renewable energies and achieve 65 percent Renewable share by 2030.
- Netherlands has allocated EUR438 million to support energy transition and job creation. It has also taken initiatives to ensure continuity of nuclear power usage and plans to become Northwest Europe’s hydrogen hub, by creating a commodity exchange for hydrogen by 2026.
- Russia has also extended its ‘Green’ energy support until 2035 and has allocated funds for Green transformation. Additionally, initiatives have been taken to setup a ‘Technological Hydrogen Valley’ in the country and focus on R&D activities within the value chain. Other countries such as Kazakhstan and Azerbaijan have also taken steps to adopt renewable energy.
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1 By the time this report is getting published, 4Q20 results of all European P&U companies are not out and an update will be issued with 4Q20 data for these P&U companies.