Francesco Lavecchia: Welcome to Morningstar, I am Francesco Lavecchia and today with me is Tancrede Fulop, Senior Equity Analyst for Morningstar.
So Tancrede, Ursula von der Leyen recently promised that the European Commission will adopt a series of policies to reduce energy prices. In the US, with the new Trump administration, they risk of a cut in tax credits for renewable energy is increasing. Can you tell us more about this changes in energy policies and the direction in which they are going?
EU Action Plan for Affordable Energy
Tancrede Fulop: Yes, sure. So a bit of background electricity prices in Europe are the highest in the world, together with the with the UK. So on February 26, the European Commission will present an Action Plan for Affordable Energy and last week, at the World Economic Forum in Davos, Ursula von der Leyen said that a key level of this plan will be a modernized EU super grid. So basically, the European Commission wants more interconnection between member states. So, countries with an excess of renewable power can export this power to countries with a shortage of power. And in the US, yes, with the Trump administration, so the tax credits for renewable power in the US expires in 2030 and with Trump this date is at risk. And, our best case scenario is that the expiration of these tax credits will be pull forward to 2027.
Higher Earnings Growth For Utilities Investors
FL: What consequence do you think these new energy policies will have on the European utility sector in terms of costs revenue and new investments?
TF: Yes. So more interconnections mean more investment opportunities for electricity transmission grid operators like Redeia or National Grid for companies we cover. So more investments will mean higher earnings growth, but I would caution that these investments take many years to materialize. Then the Commission assumes the European Commission assumes that the more interconnections we bring down wholesale power prices and enable greater reliance on renewables. This is actually an old argument of nuclear skeptics, like the Danish European Energy Commissioner Dan Jørgensen. But in reality, the opposite can happen, with more interconnections a shortage of renewable power will drive skyrocketing power prices which would spread across connected countries.
This is what happened in December in Germany and Nordic countries and during the many days where there was no wind and no sun and the energy minister of Sweden complained about the lack of baseload power capacity in Germany, namely nuclear, and some Norwegian politicians threatened to to dismantle the interconnections between Norway and mainland Europe. So on the bottom line, you have more investments, but an uncertain impact on wholesale power prices. And at the end, electricity bills could increase because grid investments will have to be funded whatsoever. In the US an early phase out of the renewables tax credits would spur an acceleration of renewables investments. This is what happened in the past when tax credits expired.
Energy Policy Change: Winners and Losers Among EU Stocks
FL: Which European utility would be most affected by these changes? Can you describe a best-case and a worst-case scenario and how your stock valuation can change in terms of the forecasts and the fair value estimates?
TF: Yes, so best-case scenario for the tax credit in the US is that the expiration remains in 2032. So the most positive impact will be for companies with the largest US renewable footprint like EDPR, its parent company EDP, and to a lesser extent RWE and Orsted. Regarding the Affordable Energy Action Plan in Europe, so if that leads to higher wholesale power prices it would be positive for companies with largest sensitivity to power prices like Acciona Energia, Verbund or Engie.
Worst-case scenario in the US would be an immediate repeal of the of the tax credits. So the losers would be the winners of the best-case. So EDPR, EDP, and for EDP I could reduce myself estimate by around 15% in this situation and regarding Europe, if you have lower wholesale power prices the losers would be Acciona Energia, Verbund and Engie. But my fair value estimates are based on a mid-cycle power price assumption of 60 euro/MWh, so I have some margin of safety.
FL: Thank a lot Tancrede. For Morningstar I am Francesco Lavecchia. Thanks for watching.
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