Tough outlook for wind dominates European utility earnings in Q2 2023

Rising costs for renewables projects, especially offshore wind, dominated conversations throughout the second-quarter earnings season in Europe.

Having bubbled under the surface for some time, the issue became acute when Sweden's Vattenfall AB said it was stopping development of its Norfolk Boreas project in the UK after seeing costs increase 40%.

"The offshore wind industry is in the middle of a perfect storm," Helene Biström, Vattenfall's head of wind, said during the announcement July 20.

Iberdrola SA Executive Chairman Ignacio Galán said more companies are likely to follow as turbines and other components, as well as financing, have become more expensive.

With turbine-makers such as Siemens Gamesa Renewable Energy SA far from profitability themselves, renewables developers need to get used to higher prices, according to RWE AG CEO Markus Krebber.

"Do I see a clear trend that equipment costs for offshore and also installation of offshore will come down in the next years? Clearly, no. Because if you look at the projects which are in the pipeline and the build-out targets of the Western world, and then the manufacturing capacity and everything you need to do that, there is still a very tight market supply," Krebber told analysts on the company's second-quarter earnings call.

Longer visibility in auction schedules, speedier grid connections, the option for both contract for difference and power purchase agreements in dual financing for projects, inflation indexation and direct financial support should now be leveraged by policymakers to help the sector out of this "worst-case" scenario, Krebber wrote on LinkedIn on Aug. 17.

Ørsted A/S CEO Mads Nipper said the series of unfortunate events in offshore wind have not changed the developer's mind on any of its projects, which are still set to go ahead as planned.

"We see no positive value creation impact from walking away from projects and pursuing new [ones]," Nipper said on Ørsted's earnings call.

The Danish wind giant was among those companies falling short of earnings expectations in the quarter, according to an S&P Global Commodity Insights analysis of S&P Capital IQ consensus estimates, alongside Finland's Fortum Oyj.

Among the outperformers was RWE, which raised its earnings outlook for the year on the back of strong performance in the flexible generation division and trading. Czech coal and gas utility CEZ a.s. also outperformed the consensus.

Enel's new strategy awaited

RWE and Ørsted were among European utility stocks that faltered in the first half of the year.

The share price of Italy's Enel SpA, meanwhile, grew in the first six months of 2023. Enel replaced its CEO in May and is set to outline its strategic direction under the new leadership at a capital markets day in November.

"We noted the repeated mentions of 'efficiency' and related cost savings to improve profitability," analysts at Morgan Stanley said in a July 26 note. On the call with analysts, Enel CEO Flavio Cattaneo said the biggest challenge for the utility was the complexity of processes and capital allocation.

These comments indicate a potential major change to Enel's portfolio being prepared for the capital markets day, the Morgan Stanley analysts said. "We expect a simpler and more focused geographic strategy would be taken well by the market," they added.

France's Engie SA's stock price also grew in the first six months of the year. Engie, like RWE, posted strong performance from its flexible generation and trading units while its renewables build-out made small gains in the quarter. According to Morgan Stanley analysts, more upside is possible later this year.

"Engie is in a position to reach the top end of its recurring net income guidance or even deliver above, and we think another guidance upgrade later in the year is likely to take place," they wrote July 28.

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