European Power & Utilities Report – Q1 2018 | KPMG | GLOBAL
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European Power & Utilities Report – Q1 2018

European Power & Utilities Report – Q1 2018

Price and margins overview

Electricity prices

Prices in France and Germany increased in Q1 after the relevant reduction experienced at the end of 2017 (from late November peaks). Spanish prices came down significantly due to a higher share of hydro, wind and other renewables. UK electricity prices followed the price trends of natural gas and experienced a pronounced peak in early March, recovering January-level prices at the end of the quarter.

Oil prices

Notwithstanding the reduction of prices experienced in February, both WTI and Brent Oil average prices maintained their upward trend during Q1, reaching US$64.80/b and US$70.20/b respectively at the end of March.

Gas prices

HH and EU border average prices rose during the quarter mainly due to January’s sharp increase when both references peaked almost at US$3.80/MBtu and US$7.50/MBtu, respectively. Since then HH and EU border prices have come down to US$2.80 and US$7.00/MBtu at the end of the period. NBP also followed this trend after their March peak.

Coal prices

Both Australian and South African coal prices increased during Q1 2018 mainly due to January’s sharp increase. Since January’s peak, prices have come down significantly (even below Q4 2017 inthe case of Australian coal). Colombian coal average quarterly prices fell by 3.2 percent in Q1 to US$81.20/Mt. mainly after the slight increase experienced in January.

Carbon prices

Carbon prices rose significantly during the quarter, reaching EUR13.20/T at the end of March, after data showed emissions rose in 2017 and Britain’s government declared its intention to stay in the ETS until the end of 2020. Average quarterly carbon price was up 31 percent vs. Q4’17.

Dark/spark spreads

Dark and Spark spreads maintained high volatility and negative values in Germany and France for Q1 (more clearly in the case of Germany). The UK and Italy were not affected by this trend as spreads remained at close to zero or had slightly positive values, respectively, during the quarter.

Regulatory overview

European Union

The European Commission approved six electricity capacity mechanisms aimed at ensuring the security of supply in Belgium, France, Germany, Greece, Italy and Poland. The Commission stated that even though these mechanisms are in line with the 2014 Guidelines on State Aid for Environmental Protection and Energy, they are temporary and cannot replace the imminent electricity market reforms.

Germany

The Federal Network Agency announced on 20 February 2018 the bid results for the auction for Onshore Wind Energy which took place on 1 February 2018. In the auction procedure, the Federal Network Agency awarded 83 bids with 709MW. The average award price was 4.73 ct/KWh. This auction was held together with the auction for solar plants.

Italy

In relation to white certificates, the ARERA (Italian Authority), with the resolution 139/2018/R/efr approves the updates of the TEE (Energy Efficiency Certificates) market rules. These rules are effective from the GME (Gestore del Mercato Elettrico) publication date. The objective is to eliminate tariff barriers to energy efficiency and electricity consumption.

Portugal

An incentive has been created for municipal public passenger transport vehicles to promote the replacement of the use of vehicles powered by fossil fuels by electric vehicles, as part of the commitments made by successive Portuguese governments in struggling against climate change.

Spain

Spain lost the second international arbitrage related to the cuts in renewable energy plants remuneration. The Stockholm Chamber of Commerce obliged Spain to pay EUR53 million to Novenergía (an institutional investor) which is the owner of various PV plants on Spanish territory. Spain has about 30 more international arbitrages related to similar disputes demanding a total EUR7.565 million in compensation.

Turkey

Turkish Energy Minister Berat Albayrak stated that preparations have started to hold new tenders for 1,000 megawatt (MW) wind and solar power plant projects in 2018 at a sector meeting on 22 February 2018. The Renewable Energy Office, Ministry of Energy in Turkey has announced three sites for new wind power and three sites for new solar projects.

United Kingdom

Capacity Market auction results: The T-4 Capacity Market (CM) auction cleared at a record low price of GBP8.40/kW, securing 50.4GW of capacity for delivery in 2021/22. This will be at a gross cost to consumers of around GBP423 million. In addition, this year’s auction means a big shift away from coal, with nearly 8GW of existing coal stations missing out on agreements. It also highlights how existing gas and nuclear, plus new interconnectors and decentralized energy are vital in filling the gap, as the GB market transitions to a power system that is both more localized and more international, with decreasing dependence on large-scale power generation. On the other hand, the low clearing price, however, means that it is difficult for proposed new largescale gas-fired capacity.

United States

The Federal Energy Regulatory Commission (FERC) removed barriers to participation of electric storage resources in the capacity, energy, and ancillary services markets operated by Regional Transmission Organizations and Independent System Operators. This is considered a step towards a market model that takes into consideration the physical and operational characteristics of electric storage resources.

Capital markets overview

Eurostoxx utiltities

After the significant reduction experienced in January, the Eurostoxx Utilities Index maintained an upward trend at the end of Q1 and has gained 11.8 percent in the last 12 months.

Best performance

CEZ as, EDP Renovaveis and Gas Natural registered the best performance in Q1 2018 in terms of share price; a period where 14 out of the top 18 European players have experienced a negative QoQ price evolution.

Valuation levels

Valuation levels in the sector averaged at 7.9 EV/EBITDA in Q1 2018; 1.3 percent lower than the previous quarter.

Wide differences persist in EBITDA multiples, with Snam, Iberdrola and Fortum receiving highest valuations, trading above 11 x EV/EBITDA.

Net debt ratios

Net debt ratios averaged at 3.2 x EBITDA in Q1 2018, 5.3 percent lower than the figure registered in Q4 2017 (3.38 x EBITDA).

Credit ratings

S&P and Moody’s made the only changes in credit ratings in the European sector during the quarter with the downgrade of Fortum OyJ to BBB and Baa2 respectively.

Global M&A overview

Main trends

The last quarter continued to show a very active M&A market. The total value of the top 10 deals exceeded EUR80 billion with a broad diversification of subsectors (oil, gas, infrastructure, renewables, water…).

The largest deals during Q1 2018 targeted mostly US companies (6 deals in the top 10).

Main transactions

  • Acquisition of Energy Future Holdings Corporation, a US-based holding of electricity companies by Sempra Energy (EUR15,962 million).
  • The sale of a 40.32 percent stake of MPLX LP, a US-based company that owns, operates and develops crude oil, refined product, other hydrocarbon-based product pipelines and other midstream assets to Marathon Petroleum Corporation (EUR14,670 million).
  • Purchase of Calpine Corporation, a US-based integrated power generating and power solutions company, by Calpine Consortium (EUR14,495 million).
  • Acquisition of MPLX Refining Logistics LLC and MPLX Fuels Distribution LLC, a US based fuels distribution assets of Marathon Petroleum Corporation and a US-based refining logistics assets of Marathon Petroleum Corporation by MPLX LP (EUR6,949 million).
  • The sale of Maersk Olie Og Gas A/S, a Denmark-based oil and gas exploration company, to Total S.A. (EUR6,325 million).

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