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* GRAPHIC-Oil giants vs utilities: https://tmsnrt.rs/3dt7Q0X
* GRAPHIC-Markets favour green utilities: https://tmsnrt.rs/3fwgdeJ
By Stephen Jewkes and Isla Binnie
MILAN/MADRID, April 6 (Reuters) - Europe's biggest utilities
Enel and Iberdrola saw the clean energy
transition coming decades ago when others baulked at the high
cost of producing energy from the sun and wind and instead stuck
with coal and oil.
Thanks to early decisions to buy power grids and build
renewable plants, the once-staid utilities are now among a
handful of global green energy majors going into battle with Big
Oil to supply low-carbon power full of confidence.
European oil giants such as BP, Royal Dutch Shell
and Total have sharpened their focus on
power, seeing it as the sector to build their businesses around
as they reinvent themselves as clean energy suppliers.
But they will need to wrestle market share from incumbents
such as Enel and Iberdrola that have been positioning themselves
for years to profit from the shift to cleaner energy, betting
the demise of fossil fuels was inevitable.
"The energy transition has been part of my life," Enel Chief
Executive Francesco Starace told Reuters. "There was no eureka
moment for us. We just said this is too stupid to be continued
for a long time."
The transformation of the two companies into global green
powerhouses has helped boost their profits and share prices
while generating cash and dividends despite a global pandemic.
Over the last two years their shares have skyrocketed as
investors shifted from oil stocks to buy into businesses they
felt had the financial footing and skill sets to lead the
accelerating energy transition. https://tmsnrt.rs/3fwgdeJ
Enel and Iberdrola have built clean energy capacity in key
markets such as the United States and Latin America and are now
aiming to have a combined 215 gigawatts of their own renewable
capacity by 2030 - enough to power some 150 million European
homes, based on an estimate by consultancy Wood Mackenzie.
Other leading green utilities that have also benefited from
the shift away from fossil fuels include wind and solar power
giant NextEra Energy in the United states and Denmark's
offshore wind farm specialist Orsted.
'KISS THE FROG'
Even before joining Enel at the turn of the century, Starace
was pushing companies hooked on oil and coal to switch to
less-polluting gas turbines.
"This is not the first energy transition, before there were
coal steam cycles which then transitioned to gas steam and so
on," he said. "I liked the sustainable side of renewables, the
fact you keep reusing the same energy from the sun."
The turning point for Enel was its creation of Enel Green
Power (EGP) in 2008, just after it launched a 39 billion euro
takeover of Spain's Endesa, a deal that boosted its
access to Latin America's fast-growing markets.
Starace was tasked with running EGP as a viable independent
business which did not rely on the generous incentives
governments were offering then to kick-start their green drives.
"Renewables were a whole different ball game - smaller
plants, less competitive, costlier. It needed its own space with
the right footprint and technology mix to deliver," a source who
worked at EGP said.
By the time Starace became chief executive of the Enel group
in 2014, he lost little time in buying back the part of EGP
listed in 2010 so the growth engine was fully in-house.
Iberdrola Chief Executive Ignacio Galan made an even earlier
switch away from coal and oil when he took the helm at Spain's
largest private utility in 2001.
He started closing fuel oil power plants - 3.2 gigawatts
(GW) of capacity had been decommissioned by 2012 - and shut the
company's last two coal-fired plants in 2020.
At the same time, Iberdrola boosted its spending on building
renewable plants, mainly wind farms, in Spain from 352 million
euros ($413 million)in 2001 to over 1 billion euros in 2004.
Galan met with internal and regulatory resistance, though
Swiss bank UBS said in a 2002 report entitled "Kiss the Frog"
that Iberdrola's new low-carbon focus could produce profits.
Investors still needed convincing. One Iberdrola source
recalled a U.S. asset manager's doubts about wind farms in 2004,
calling them pretty white darts stuck on a hillside. He changed
his mind when he visited one in Spain in 2007.
"He was sceptical, but three years later he said we were
right," the source said.
GRIDS APART
Consultancy Rystad Energy says oil giants have a long way to
catch up with the renewable energy majors in terms of capacity,
despite their ambitious target. By 2035, it estimates Enel will
still be leading followed by Iberdrola and NextEra.
Enel and Iberdrola have another significant advantage that
analysts say oil majors will struggle to match – thriving power
grids businesses.
Almost half of Enel and Iberdrola's earnings come from
millions of kilometres of power lines carrying electricity into
homes in Europe, the United States and Latin America.
"Grids are the backbone of the energy transition," says
Javier Suarez, head of the utility desk at Milan's Mediobanca.
"Owning them means steady cash flow and lower investment risk."
Most grids are monopolies with regulated, guaranteed returns
and operators rarely put them up for sale.
"Any new entrant into the industry is not going to be able
to get access easily or certainly not cheaply to the really good
legacy assets that Iberdrola and Enel have - the infrastructure
assets," said Wood Mackenzie analyst Tom Heggarty.
Networks built to take one-way power flows from fossil-fuel
plants now need a massive round of investment to accommodate
electricity generation from sources such as rooftop solar panels
that can also inject power back into the grid.
Incumbents like Enel and Iberdrola are the most likely
candidates to provide capital, analysts say.
Because returns are typically locked in with contracts, more
spending on grids and renewable power generation assets will
translate into more profit for the major green utilities, said
Goldman Sachs.
By the U.S. bank's calculations, reaching international
targets to cut carbon emissions to net zero by 2050 will require
a 200% jump in spending on such power infrastructure.
Enel is now looking to expand its grid network in Europe,
Latin America, the United States and the Asia Pacific region,
sources said.
In November, it said it would spend 150 billion euros of its
own money to help cut its carbon emissions 80% by 2030 and
nearly triple its owned renewables capacity to 120 GW, with
grids soaking up almost half the overall investment.
Iberdrola, meanwhile, has earmarked more than a third of its
spending plans for grids, mostly in the United States, which
will become its biggest market for regulated assets.
It has pledged to spend 150 billion euros on tripling its
renewable capacity and doubling its network assets by 2030.
The sums dwarf amounts European oil majors have pledged for
their fledgling green businesses so far.
"I don't think it was simple to decide to spend money in
renewables," Pierre Bourderye of PJT Partners said of Enel and
Iberdrola. "If it had been simple others would have done it at
the same time, but they did it 10 years later."
($1 = 0.8516 euros)
(Reporting by Stephen Jewkes in Milan and Isla Binnie in
Madrid; Editing by Veronica Brown and David Clarke)
