By Pietro Lombardi and Nina Chestney
MADRID/LONDON, March 21 (Reuters) – Spain’s Iberdrola IBE.MC is poised to unveil its plan to prioritize expanding and modernizing grids in the coming years. This shift in focus follows the company’s resilience amidst an energy crisis, positioning itself as Europe’s leading utility by market value.
As its peers struggle with escalating costs in renewable projects, Iberdrola stands out with a surplus of funds from the steady income generated by power grids.
Analysts anticipate sustained annual investments in the double-digit billion euros range, with a sharp focus on network development.
The Spanish utility bolstered its financial capacity by canceling the acquisition of U.S. energy firm PNM Resources in January, a deal valued at around $12 billion. Additionally, the sale of gas assets in Mexico has injected $6 billion into Iberdrola’s coffers.
In a recent move, the company offered $2.5 billion to acquire the remaining 18.4% stake in its U.S. subsidiary Avangrid, aiming to enhance its presence in the networks business within the country.
With a substantial cash reserve at hand, the imminent question leading into Thursday’s investor meeting is how Iberdrola intends to allocate the rest of its capital.
Executive Chairman Ignacio Sanchez Galan has highlighted the opportunities present in U.S. power grids, identified as offering the most promising returns, followed by markets in Britain and Brazil.
Embracing the Stability of Power Grids
Iberdrola’s domestic market in Spain presents limited growth prospects, partly due to regulatory constraints on energy companies’ investment in power networks. In contrast, countries like Brazil, Britain, and the U.S. offer more favorable conditions with less restrictive investment regulations.
In a departure from renewables, Iberdrola adopted a cautious approach, emphasizing the need for acceptable returns on renewable projects that cover financing costs plus a premium of 150-200 basis points.
The renewable energy sector has grappled with challenges stemming from increased interest rates, soaring debt costs, and uncertainties surrounding project profitability linked to fluctuating wholesale electricity prices – a scenario exacerbated by geopolitical tensions such as Russia’s invasion of Ukraine.
Seizing Financial Certainty in Grid Investments
Prior to the current market volatility, Iberdrola’s foresight in the clean energy arena propelled it to the top position as Europe’s largest electric utility two years ago. With a market capitalization of approximately 71 billion euros, the company ranks among the global utility giants.
Over the last decade, investments totaling around 41 billion euros enabled Iberdrola to amass 42 gigawatts of solar, wind, and hydroelectric capacity, while increasing the value of its network assets to over 42 billion euros.
The company’s strategic pivot away from renewables to power grids, constituting half of its core earnings, signifies a strategic move to secure stable cash flow amidst industry challenges.
Following its footsteps, Italy’s Enel also announced a shift towards a more cautious stance on renewable projects.
Navigating Towards Grid Expansion
Despite its involvement in the U.S. offshore wind sector, Iberdrola has been less impacted by inflation and supply chain disruptions that escalated project costs for its competitors.
The company terminated power purchase agreements for two U.S. offshore wind projects last year due to escalating project expenditures. This decision averted potential substantial write-offs down the line, as noted by Sanchez Galan.
Iberdrola’s expansion plans in the U.S., focused on leveraging green subsidies, involve significant investments primarily in grids within its 2023-2025 strategy. Though the potential acquisition of PNM was abandoned due to regulatory concerns and shifting interest rates, analysts foresee smaller-scale deals on the horizon.
The European Commission forecasts a substantial investment of 584 billion euros ($637 billion) in upgrading power grids and enhancing storage infrastructure across Europe in the current decade.
With ample reserves of hydropower, Iberdrola is well-positioned to navigate the evolving grid landscape, offering efficient storage solutions compared to traditional batteries.
“The primary concern for investors lies not only in what Iberdrola plans next but also in who will lead the company post-Sanchez Galan’s tenure,” observed Gonzalo Sanchez-Bordona, analyst at UBS, echoing broader sentiments within the financial community.
(Reporting by Pietro Lombardi in Madrid and Nina Chestney in London; editing by Barbara Lewis)
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