articles Ratings /ratings/en/research/articles/211013-european-electric-utilities-face-higher-social-risks-than-their-u-s-peers-12135203 content esgSubNav
In This List
COMMENTS

European Electric Utilities Face Higher Social Risks Than Their U.S. Peers

COMMENTS

A Sudden Correction To Fast-Rising U.S. Home Prices Isn't Likely

COMMENTS

COVID-19 Impact: Key Takeaways From Our Articles

RESUPD

Research Update: Australian Postal Corp. Outlook Revised To Stable On Strong Parcel Earnings; 'A+/A-1' Ratings Affirmed

What's It Worth? The Rise Of Electric Vehicles In European Auto ABS


European Electric Utilities Face Higher Social Risks Than Their U.S. Peers

How The Two Regions Differ

Higher power prices in Europe imply increased social and political risk

The recent increase in commodity prices that brought higher electricity bills for European utility customers has accelerated the affordability debate. European wholesale prices have risen on average by more than 100% in Europe over the last 12 months and S&P Global Ratings believes power prices will continue to increase in 2022-2023 as supply tightens. Furthermore, we expect that supply will constrict further as Europe's more ambitious environmental targets accelerate the closure of thermal and nuclear baseload generation, which renewables cannot fully replace over the coming three years, leading to greater weather-related price volatility in the interim (The Energy Transition And What It Means For European Power Prices And Producers: September 2021 Update, Sept. 17, 2021).

In the face of higher customer electric utility bills, European governments have implemented various policies to address affordability. While some of these initiatives may help over the near term, given the rising cost of energy transition, which will be a key pillar of European climate policies applied at national level, we expect social risks will remain an elevated and a longer-term risk for European utilities relative to U.S. utilities.

While U.S. utility credit quality has been pressured because of environmental and governance credit risks (Industry Top Trends Update: Regulated Utilities North America, July 15, 2021), bill affordability or social risks have not yet meaningfully affected credit quality. We believe the primary reasons are that the U.S. electric customer bill represents a significantly lower percentage of household disposable income compared to Europe and U.S. commodity prices have been considerably less volatile than seen in Europe.

The Electric Bill In Europe Weighs More On Households Than It Does In The U.S.

While U.S. and European electricity utility bills are about the same, with the typical European electricity bill costing about 2% less than the average U.S. electricity bill (chart 1), relative to affordability, the European electricity bill is about twice as expensive compared to the U.S., because it represents a significantly higher portion of disposable income. Please note that this report focuses on the electricity bill burden for consumers and not the entire energy mix that would also include a customer's natural gas bill, the split of which can vary highly between European countries. While we recognize that this research may not tell the entire energy story and is not meant to draw conclusions between individual European countries, we believe that our underlying conclusions of higher affordability risks for European households on average compared to the U.S. remain valid.

Chart 1

image

As such, we believe, the European electric utility bill exerts a relatively higher social pressure on European households compared to U.S. households. On average, we estimate that U.S. households spend about 2.4% of their median net disposable income on their electricity bills. This is about a third of what Spanish consumers spend on their electricity bill (8.4%) and roughly half of the average of our selected Western European countries (5.7%) (chart 2). In our view, U.S. utilities are in a better position than their European counterparts to manage potential social risks that may occur as the industry continues to navigate through the energy transformation of reducing their carbon footprint.

Chart 2

image

The cost per kWh in Europe is considerably higher than in the U.S.

The cost of electricity for the seven Western European countries we selected for this report on € per kWh is about €0.32 or nearly 3x that of the U.S. (€0.11) (chart 3).

Chart 3

image

While this difference is striking, we believe that most of the variance is primarily due to European taxes that can account for as much of 60% the utility electric bill (chart 8).

Higher consumption in the U.S. offsets its lower cost per kWh than in Europe

Electricity consumption is much higher in the U.S.  While Europe's cost per kWh is about 3x as high as in the U.S., the customer bill is ultimately about the same because U.S. electricity consumption is about 2.5x higher than our selected Western European countries (chart 4). Overall, we view Europe's higher cost per kWh as offset by the higher electricity consumption in the U.S. and we believe the primary reason that the U.S. customer bill is relatively more affordable is because of the higher disposable income in the U.S.

Chart 4

image

Chart 5

image

U.S. household income is the key reason for affordability.  The U.S. after-tax disposable household income is about 2x higher than our selected Western European countries (chart 6). We believe that these underlying economic differences between Europe and the U.S. increase the social risks on the European utilities relative to the U.S. utilities. However, we recognize some limitations to the after-tax disposable income comparisons. Much of the difference in the after-tax disposable household income between Europe and the U.S. reflects the considerable higher taxes paid by Europeans. As a result, Europeans typically enjoy higher social benefits that could include health care and schooling.

Chart 6

image

Europe is not homogeneous and electricity bills weigh most on Spanish households

In Europe, the electricity bill burden for households is uneven from country to country. The fluctuating rates between the countries reflect differences in the use of natural gas as a percentage of the total energy mix, the level of renewable penetration, and the difference in the gross domestic product (GDP) per household.

From the countries we've selected for this review, Spanish households are the most vulnerable to increasing pressure on their electricity bills, followed by France and then Sweden. The elevated electricity bills in France correlate to greater consumption related to heating given the higher penetration of electric heating in France than for European peers. According to France's Environment & Energy Management Agency, 34% of residential and collective housing were electrically heated as of 2018. In Sweden, the high electricity bill in absolute terms is correlated with higher weather-driven consumption.

Chart 7

image

While we recognize that just analyzing the electric utility bill does not tell the entire energy story, we believe that the relative ranking of electricity bill burden provides a valuable estimate of countries with the highest social awareness on affordability especially considering the growing drive to reach net zero by 2050. In Italy, the Netherlands, and the U.K., the use of natural gas as a percentage of the total energy mix is high. Based on the International Energy Agency's 2019 data, natural gas use in these countries represents 36%-40% of the total energy mix. As such, natural gas customer bills in these countries represent a sizable share of their annual energy bill and we estimate the heavy utilization of natural gas for heating in these countries contributes to gas bills that are higher than electricity bills. Therefore, although electricity bills for customers in the Netherlands, Italy, and the U.K. account for the lowest percentage of disposable income from our selected Western European countries, we believe utilities in these countries could also face social risks when incorporating the full energy bill of both electric and natural gas.

In the U.S., with regard to the affordability of the electric bill (chart 2), significant variances between the 10 states we've selected for this report exist, but the differences are not nearly as drastic as seen in Europe. For our selected U.S. states, California's electric bill is most affordable, accounting for just 2% of disposable household income. Conversely, West Virginia's electric bill was least affordable, accounting for 3.7% of disposable household income. While West Virginia's electric bill accounted for about 40% more of disposable income compared to California, West Virginia's electric bill was still relatively more affordable than six of the seven selected Western European countries analyzed.

The spotlight on affordability could translate into adverse regulatory measures for utilities

We believe that European utilities are confronted with a higher risk of political intervention, in the context of the current commodity spike and potentially higher electricity prices that could last for the longer term. Political intervention could be in the form of fiscal reforms that are neutral to utilities' credit quality or could result in clawback measures that could be more detrimental to a utility's credit quality. Because taxes represent up to 60% of the European electric bill (chart 8), fiscal reforms would be a conceivable means to reduce the burden on the customer bill. However, the degree of political intervention is uncertain and even more uncertainty exists for countries such as France that are facing near-term presidential elections in 2022.

Chart 8

image

Spain is the most emblematic case with strong political response to rising power prices and the adoption of adverse regulatory measures for utilities. The Spanish government aims at clawing back from Spanish power producers an estimated €3.2 billion over 2021-2022 (Spain's Plan To Claw Back Billions From Utilities Could Stunt Renewables Growth, Sept. 29, 2021). Specifically, the clawback mechanism on gas prices, implemented in a Royal Decree Law and thus already into force, will constitute pure loss on earnings for all Spanish power producers since they have already hedged 100% of their production for 2021 and 2022 at materially lower prices than those on the post markets. The financial impact of these clawback measures, although material, did not negatively affect the credit quality of these utilities because the measures remain only temporary, lasting through March 31, 2022.

Conversely, governments in Europe have chosen fiscal reforms, instead of recouping utility profits as done in Spain, to contain the increase in the energy bill.

  • France introduced a "price shield" for both natural gas and electricity, meaning that any tariff increase will be limited to 12% and 4%, respectively, over the next 12 months. For electric bills, the tax rebate will offset the higher costs, temporarily reducing potential social risks. France has also granted to about 5.8 million eligible households an extraordinary €100 top-up in Cheque Energie to be paid in December 2021 (plus €150 on average) effectively reducing the tax burden for lower income households and lowered the VAT to 5% from 20%.
  • Italy's government has allocated €3 billion to cut households' energy bills by about 30%. It will also inject €700 million from the sale of CO2 allowances, transfer into the state budget the proceeds of tax on renewables of about €1.8 billion, reduce VAT (totaling about €500 million), and extend social tariffs by about €450 million to be split between electricity and natural gas bills.
  • In the U.K., the steep rise in energy costs will most likely be passed on to customers through the standard variable tariffs, i.e., the default energy tariffs, despite the energy price cap mechanism on retail suppliers, which sets a limit on the amount that suppliers can charge more vulnerable customers. We believe that the October price cap reset and the imposition of an industry levy to absorb the burden of failed suppliers will challenge household energy affordability, particularly as supportive government measures, such as furlough, end. (The Energy Price Crisis: Examining The Impact On U.K.Suppliers, Sept. 30, 2021).
Energy transition translates to higher bills in both Europe and the U.S.

Most European governments are committed to transitioning to a net zero economy. We expect that to complete this transformation the industry will still require billions of Euros of incremental private and public investments, part of which will be passed through to the final consumers. That in turn, also raises affordability concerns on households. For the integrated utilities we rate, we expect aggregate annual investments to gradually increase to about €130 billion by 2023, from about €100 billion in 2020 (chart 9). We anticipate utilities will pass some of these rising expenditures to electricity consumers in the form of increased network costs and sustained power prices by significant growth in demand. While we recognize that higher carbon revenues received by the countries will finance part of these investments, we expect that these investments will lead to a higher electric customer bill. To address potentially elevated social risks, governments will have to determine the appropriate cost sharing between consumers, taxpayers, and state budgets. In our view, alleviating taxes from the energy bill by passing it to a general tax may be a difficult political decision at a time when governments still aim to boost economic recovery post-pandemic.

Chart 9

image

The recent creation of a social fund envisaged at the European level by the Fit for 55 package could alleviate pressure on more vulnerable households by redistributing energy efficiency savings on the path to net zero (Fit for 55: The Gains (And Pains) For European Utilities, Sept. 29, 2021). However, this remains a proposal and details are missing, including the magnitude of the plan and whether the effectiveness of such a social fund would mitigate the impact on countries with the highest social risks.

Across the U.S., we expect annual capital spending for regulated electric and natural gas utilities to grow by about 4% over the 2020-2024 period which is somewhat lower than the 7% annual growth rate over the prior decade (chart 10). Overall, we expect that over the next three years, the industry's capital spending will increase to more than $160 billion from its current $147 billion.

Chart 10

image

As explained above, we believe U.S. utilities are in a better position to handle social risks compared to European utilities because electricity bills in the U.S. represent a a much smaller percentage of disposable income. However, even U.S. utilities will need to take steps to reduce a possible sudden increase to the customer bill partially related to the high capital cost of energy transformation. This will include reducing other costs to the customer bill, including operation and maintenance costs or fuel-related costs. If U.S. utilities continue to use technologies and renewable energy to reduce the overall impact to the customer bill and maintain customer bill growth at a level consistently below inflation, they should be in a better position to handle the costs of potential social risks.

Related Research

This report does not constitute a rating action.

Primary Credit Analysts:Gabe Grosberg, New York + 1 (212) 438 6043;
gabe.grosberg@spglobal.com
Claire Mauduit-Le Clercq, Paris + 33 14 420 7201;
claire.mauduit@spglobal.com
Research Contributors:Federico Loreti, Paris + 33140752509;
federico.loreti@spglobal.com
Minni Zhang, New York;
minni.zhang@spglobal.com
Research Assistant:Jesal K Gandhi, Mumbai

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.

Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: research_request@spglobal.com.


Register with S&P Global Ratings

Register now to access exclusive content, events, tools, and more.

Go Back