Wind power at the heart of utility corporate strategy

Wind power at the heart of utility corporate strategy

Introduction

The strategic acquisition and development of renewable power is proceeding at a record pace. Wind power generation, in particular, has evolved as a strategic imperative for utilities aiming to expand globally into new markets. In a market characterized by high levels of consolidation, utilities are driving key competitive advantages by integrating horizontally and vertically along the value chain

Scope

*Insights into the industry's global scaling and how it has instigated record M&A activity and aggressive valuations as demand for wind assets surge

*Knowledge of how horizontal integration of renewable operations creates tangible upsides for utilities upstream, but creates barriers downstream

*A case study of the two largest horizontally integrated renewables utilities: Iberdrola Renovables and EDF Energies Nouvelles, pre and post IPO

*An understanding of why horizontal integration of wind assets is ultimately a safe unhedged business model and a natural evolutionary market response

Highlights

A new proposition for investment in renewable energy has emerged as utilities address a shifting set of strategy drivers. Horizontally integrated renewable utilities continue to rapidly expand their market presence in all aspects of the energy value chain as renewables start to play a larger, more strategic part of power generation portfolios

Europe's largest renewable utilities are increasingly undergoing IPO to drive greater operational and capital efficiencies. In the case of EDF and Iberdrola, these efficiencies have delivered greater competitiveness and increased market share as both utilities rapidly and significantly scale their operations under difficult market conditions

The horizontal integration of fixed-cost wind assets is a natural evolutionary market response and a safer unhedged business model than horizontally integrated conventional generation assets. In the longer term, this efficient model will increasingly drive the industry towards competitive, non-subsidized wind power generation

Reasons to Purchase

*Recognize how shifting strategy drivers are impacting utilities, forcing them to assess their options in a rapidly consolidating renewables industry

*Evaluate the upsides and drawbacks of the horizontally integrated business model, drawing on EDF and Iberdrola's experience

*Formulate and apply successful strategies to solidify existing portfolios and expand into new global markets to unlock further competitive advantages

DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
SOURCES 1
ANALYSIS 2
A new value proposition for investment in renewable energy has emerged as utilities address a shifting set of strategy drivers in an increasingly competitive environment 2
Increased market liberalization in Europe has facilitated a new wave of international activity among utilities 2
The industry's global scaling has instigated record M&A activity and aggressive valuations as demand for wind assets surge 3
A new proposition for investment in renewable energy has emerged as utilities adopt new strategies to differentiate themselves 4
Horizontal integration of renewable operations creates tangible upsides for utilities upstream, but creates barriers downstream 5
By adopting the horizontally integrated model, Iberdrola and EDF have been able to scale their operations at a faster pace, thereby increasing market share and returning more value to the investor 6
Iberdrola, EDP, Enel and EDF recognize the benefit in leveraging their significant wind asset base and geographic reach 6
The increasing cost of hydrocarbons and environmental compliance have underpinned Renovables' high valuation 7
Post-IPO, Iberdrola Renovables is a highly profitable, geographically diversified business with strong growth prospects 8
Despite strong fundamentals, Renovables has slid since the IPO, following fears over recession and possible regulatory changes 9
Renovables' recent decline was largely driven by global and local market pressures, not its horizontally integrated business model 10
Since the IPO, EDF Energies Nouvelles has delivered strong growth in terms of both operational and financial performance 11
EDF EN has significantly outperformed the market, despite recent fears over recession and possible regulatory changes 13
EDF EN's dominant market position and efficient horizontally integrated model have kept the company ahead of the curve 14
The horizontal integration of fixed-cost wind assets is a natural evolutionary market response and a safer unhedged business model than horizontally integrated conventional generation assets 15
Horizontal integration of fixed-cost wind assets is an unhedged yet comparatively safe business model 15
This efficient model is best placed to drive the industry towards non-subsidized and competitive wind power generation 16
APPENDIX 17
Definitions 17
Annual levelized generation cost (also known as the unit cost per MWh) 17
Capex (also known as capital expenditure) 17
Discount rate 17
ERIX: European Renewable Energy Index 17
Load factor 17
M&A: merger and acquisition (of a wind farm or company) 17
MLEIRENE: Merrill Lynch Renewable Index 17
YOY: year on year 17
Ask the analyst 18
Datamonitor consulting 18
Disclaimer 18
List of Tables
Table 1: High oil, gas and environmental compliance costs have driven the utility acquisition of profitable and competitive fixed-cost wind assets on a purely economic basis 3
List of Figures
Figure 1: Shifting strategy drivers have impacted utilities, forcing them to evaluate their options in renewables 2
Figure 2: Large European wind asset owners integrate horizontally along the value chain by initiating their renewable development activity separate from their core generation activity 4
Table 2: As the scaling of utility ownership of renewable energy continues to grow rapidly, consolidation of wind portfolios will become commonplace as utilities seek to leverage scale and efficiencies 5
Table 3: Major utilities have pressed ahead with initial public offerings of their renewable energy assets 6
Figure 3: High oil, gas and environmental compliance costs have driven high renewable utility valuations on a purely economic basis 7
Figure 4: Following the IPO in Q1 2008, Renovables consolidated the fulfillment of its strategic plan goals for the year 2008 8
Figure 5: Markets recognize that the wind industry is largely at the mercy of government programs that drive artificially stimulated demand 9
Figure 6: Since its IPO, Renovables has underperformed its largely vertically integrated peer group, as well as the Spanish Ibex index 10
Figure 7: In 2007, the proceeds from the capital increase allowed EDF EN to accelerate its growth, thereby meeting or exceeding its objectives 11
Figure 8: In Q1 2008, investor sentiment towards EDF EN remained relatively strong, despite widespread bear market conditions 13
Figure 9: Since its IPO in Nov 2006, EDF EN has outperformed its largely vertically integrated peer group, as well as the French index 14
Figure 10: Wind makes for a safer unhedged horizontally integrated asset than convention generation 15