This trend is set to continue since Italy’s ENEL plans to float a minority stake in its renewables business, ENEL Green Power, this October. The stock flotation is designed to raise more than £3 billion for ENEL, which would help to reduce the utility’s overall net debt figure (currently in excess of £40 billion).
At a general level, the plan to demerge ENEL Green Power and to raise very substantial funds carries considerable risks. After all, the recession has caused real problems for many European Union countries, not least in the southern Mediterranean area, where financial markets have been very depressed by high budget deficits, the plunging euro and the perceived ability of some weaker members, such as Greece, Portugal and Spain, to remain within the euro.
It should be added that recent initial public offerings on the London Stock Exchange have not proved very popular. In some cases, planned IPOs have actually been deferred; others, such as that of online food store Ocado, have managed to succeed, but at a heavy discount to the anticipated price.
More specifically, investors in renewables stocks have been seriously disconcerted by government plans to reduce the level of public subsidies for renewables generation. Aside from Italy, such concerns are particularly prevalent in Spain, where substantial cuts in solar generation payments are expected. Whilst the details of these changes are still to be finalised, wind generators will also be adversely affected.
The prospects for renewable subsidies in Germany – the EU’s other major renewables market – will become more apparent shortly as the German Government launches its energy policy review, which will also address the contentious nuclear issue.
Futhermore, investors’ concerns about renewables stocks are underlined by their performance in recent years.
As economic reality kicked in during the latter part of 2008, renewables stocks fell, in some cases quite sharply. Not only were there concerns about the sustainability of government subsidies – so crucial to most investments in the renewables sector – but there was also a recognition that many such companies would need to raise additional funds.
For the larger companies, like Iberdrola Renovables, raising funds for its renewable operations is a comparatively modest challenge. For far smaller, start-up companies, the scenario is very different.
At least in the case of ENEL Green Power, the company will be vigorously backed by its parent, which will remain the dominant shareholder. The former’s renewables generation capacity amounts to approximately 5,700MW, more than half of which is either mini-hydro or geothermal – and therefore outside the proposed subsidy changes in both Italy and Spain.
The EU’s largest renewables company is Iberdrola Renovables, with a generating capacity of 11,400MW. Despite modest growth in the US – Iberdrola Renovables' key market – it remains in a strong position, as its aggressive market rating indicates.
Iberdrola’s neighbouring renewables business, Portugal’s EDP Renováveis, is facing some challenges, especially in the US. Its generating capacity currently exceeds 6,200MW.
The third EU integrated power company to demerge its renewables operations is France’s EDF. The renewables capacity of EDF Energies Nouvelles amounts to over 2,800MW, of which more than 90% is in the wind sector.
To date, neither Centrica nor Scottish and Southern Energy has adopted the renewables demerger approach. If, however, the ENEL Green Power IPO significantly beats expectations, both these companies may need to review their stance on this issue.
Make no mistake – the ENEL Green Power IPO is pivotal for the renewables sector.
Nigel Hawkins is a Director of Nigel Hawkins Associates, which undertakes policy and investment research on energy and water issues.
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