European electricity grids turn money into power
Grid builders, given their role in the energy transition, are poised for rapid growth in both assets and earnings
One may be an accident and two a coincidence, but three is most definitely a trend. Spanish utility Iberdrola last week joined the UK’s National Grid and Belgium’s Elia in raising money to finance new investments in electricity grids. The group’s €5bn equity raise will not be the sector’s last.
Electricity networks in Europe and the US need huge amounts of investment. In Europe, grids tend to be older than those elsewhere. And the continent’s commitment to clean energy — which means more renewable power, but also more electric vehicles and heat pumps — entails big increases in transmission and distribution capacity.
Overall, European networks will attract €800bn of capital expenditure between 2024 and 2033, Goldman Sachs analysts estimated last year, sharply increasing the asset base on which their regulated returns are calculated. Iberdrola reckons its network assets will increase from more than €51bn at the end of this year to over €90bn by the end of 2031. That’s a 10 per cent compound annual growth rate. The UK and US account for a big chunk of the new investments.
Some utilities will opt for fresh equity because they already run a tight financial ship. Cutting dividends — another way of generating financial headroom — is unpopular with investors in a sector that has traditionally been bought for its defensive qualities and high yields. Currently, Iberdrola’s net debt to ebitda ratio is 3.3 times, according to Mediobanca. While financial headroom depends on lots of other metrics, too, such as how risky the underlying business is, other integrated groups such as SSE and E.ON are more highly geared, on RBC numbers.
The good news is that raising equity to fund growth is not unpopular with investors. National Grid’s huge £7bn rights issue last year caused the stock to crash, but it has since dusted itself off nicely.
That ought to be especially true for Iberdrola, which thinks regulators will allow it to set tariffs for its networks such that it makes a nominal post-tax return of 9.5 per cent on the new money it has raised. That allowed it to sell shares in an accelerated bookbuilding at a discount of less than 5 per cent to the previous day’s closing share price last week; no mean feat considering the utility’s stock has performed strongly this year.
The appeal of companies that build electricity networks in Europe is not yet reflected in their shares, which typically trade at a pedestrian mid-teens multiple of expected earnings. Utilities in general are defensive, with long-term investments and returns which are set by regulators. But electricity grid builders, given their role in the energy transition, are poised for rapid growth in both assets and earnings. That’s a powerful combination.