European utilities on the cusp of a decade-long investment opportunity
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IhorOkhrimenkoSenior credit analyst
Speed read
- European utilities face a unique, decade-long investment opportunity
- Winning themes are renewables, decarbonization and EM diversification
- We are constructive on the sector's credit quality
The utilities sector is at the forefront of a global challenge to provide affordable, low-carbon and reliable power to a growing population and tackle climate change by decarbonizing its generation fleet. It is also primed to capitalize on the evolution of renewable technologies which in recent years have enabled a rapid decline of the Levelized Cost of Energy for solar and wind.
We are positive about utility companies that are improving the quality of their assets and reducing their cost structure while actively and effectively working towards diversification.
Abundant flows of financial capital, progressive policies and the advancement of technologies made environmental progress possible in 2019, most notably in Europe.1 Yet much remains to be done across the globe to combat climate change.
The European Green Deal and the 2030 Climate Target Plan represented a step change in EU climate ambitions in 2019 and 2020. The Covid-19 crisis has accelerated this agenda even further, as the decarbonization efforts will be used to support economic recovery. By summer 2021, the European Commission will revise all of the EU’s climate and energy legislation to align it with the new plan.
Figure 1 | Ranking of industries by carbon intensity
Figure 2 | EU emissions in perspective
A steep path towards decarbonization
Figure 3 | Decarbonization pathway across sectors
Utility outlook for 2021 is supportive
What we look for in utility credits
We are positive about utility companies that are improving the quality of their assets and reducing their cost structure while actively and effectively working towards diversification. This involves not only moving away from fossil-based and nuclear energy generation activities towards renewable energy sources, namely wind and solar, but also investments in networks, energy efficiency strategies in supply activities, Scope 1, 2 and 3 emissions disclosure with credible emissions reduction targets, and geographical diversification to emerging markets.
We view the credit quality of the sector constructively. Leading utility companies have upgraded their capex programs to prioritize renewables and networks, with leverage Net Debt/EBITDA projections considered to be manageable.
Regarding SDG contributions more specifically, we focus on utility issuers whose activities reflect a positive contribution to the SDG 7 (Affordable and clean energy) and SDG 13 (Climate action) by screening for certain positive and negative KPIs. These include renewables/nuclear generation in the energy mix, sales to emerging markets, nuclear/coal expansion plans, and carbon intensity of operations. We believe companies with these positive characteristics will have more reliable and stable financial performances over the long run.
Robeco’s Active Ownership team seeks to engage with the utility companies to understand their 2030 climate strategies and decarbonization pathways in depth, and to ensure that they are aware that climate change considerations will affect their equity valuations, bond performance and credit ratings in the coming decade.
1Annual GHG emissions fell the most in the EU27+UK in 2019, at -3.8% vs. South Korea (-3.2%), the US (-2.6%), Japan (-2.1%), Russia (-0.8%), vs. increases in India (+1.6%), China (+3.4%), Iran (+3.4%). These seven countries are responsible for more than 70% of global GHG emissions. Source: The EU’s Joint Research Centre 2020 report.
