Utilities: from ugly duckling to swan

In the 80’s and 90’s, electric companies or utilities were synonymous with boring, predictable and conservative business. They were quasi-monopolistic companies that managed a business of medium profitability, very stable and not at all given to innovation. In short, they were ideal values for pension funds and low-risk portfolios. But in 20 years, the change has been enormous. Today, Iberdrola, Enel, Nextera or EDPR among others are companies that are leading the energy transition and are true star values among investors. What is the reason for this change? Is it sustainable over time? Will oil companies be able to enter the business?

  1. The leading Utilities

Perhaps the main key to understanding the transformation of utilities are renewables. Utilities have been pioneers and leaders in the promotion, construction and operation of renewable assets.

As shown in the table above, the main wind energy operators are utilities. And according to a BCG study, the utilities where renewables have the greatest contribution are those that are creating the most value

The rise in value of the main “renewable” electricity companies has been spectacular in recent years.

Let’s see some of them in more detail:

  • Iberdrola: is the great pioneer of renewable energies and especially wind power. With the leadership of the tireless Ignacio Sánchez-Galán and with Gamesa as manufacturer, it was one of the motors of the wind power in Spain in the golden years of the decade of 2000 and began its internationalization that has led it to be leader in many markets with its companies Avangrid (USA) or ScottishPower (UK). Currently he is one of the main developers in offshore, with projects in France, Germany, UK and USA among others and is entering very strongly in solar.

A few weeks ago, it announced its strategic plan for the next years where it will invest 75 billion€ until 2025, of which more than half will be in renewable generation.

North American company is very active in onshore wind and solar, although they still have a lot of conventional generation, especially gas.

  1. Competitors

Apart from the obvious competition between the utilities themselves in the main markets, there are other companies that want a piece of the juicy pie of the renewable generation:

  • IPPs: 15 or 20 years ago, independent power producers (IPPs) such as Acciona or Scatec used to rub shoulders with large utilities, but today, although they still have their own niche projects, they can no longer compete in size and scope. In the next few years we will continue to see the specialization process of IPPs looking for niches where they are very competitive.
  • Oil companies: this is the great current threat since they are companies that see that their main business is not sustainable and want to “invade” the clean energy business at a stroke of chequebook since their business still provides a lot of cash.

The main oil companies, especially the European ones, are launching an offensive to build their clean generation portfolio. Their goals are very ambitious:

o British BP has a target of 50 GW by 2030

o Italian Eni 25 GW in 2035

o Nowegian Equinor 16 GW in 2035

o French Total 35 GW in 2025

Taking into account that currently they do not reach even 10GW between all of them, it is clear that they are going to have to make a very important effort to achieve their objectives. And they are already working on it, as shown by the recent operations of Total in Spain securing a pipeline of 5 GW solar and of Galp acquiring 3GW solar from ACS.


  1. Electric vs. Oil, who is better prepared?

As we have mentioned before, oil companies are a fearsome competitor due to their great liquidity and their need to leave their traditional business in order to survive. Even so, my bet on utilities is clear and is based on several key competitive advantages in the clean energy business

  • Experience: oil companies are newcomers to the business while utilities have been developing and operating renewable assets for 20 years. This is key in a business where bureaucratic procedures are an important part.
  • Profitability: in addition to the above and due to the urgency of the oil companies to build their project portfolio, they are almost obliged to buy projects already developed or in the promotion phase. The utilities, however, are developing a large part of their pipeline from scratch or “greenfield”, which makes them more profitable. This, together with the greater experience in the operation, makes the profitability we can expect from the assets much higher in the electric utilities than in the oil companies.
  • Vertical integration: this is the great secret weapon of the electricity companies. In the investment plans of Iberdrola or Enel that we mentioned before, approximately 40% of the total investment was destined to infrastructure and networks. And this will be the key to even greater business in the coming decades: Smart grids. And in that business, whoever controls the networks, whoever can manage demand and whoever can offer value-added services will be the real winner. And it is the utilities that will be in all parts of the value chain from generation, through transport to distribution and will be able to offer integral services to an increasingly electrified society. Some already anticipate improvements of 3-4p.p. in profitability in the short term and up to 25p.p. in the long term thanks to the opportunities of the “digital” energy business

The main utilities have made a strong commitment to renewable generation and it is currently bearing fruit in the form of profitability, leadership and growth. But perhaps most importantly, they are in a unique position to also be the leaders of the new electrified economy of the future.