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Big oil’s lessons for the new green supermajors

  • Once humble utility companies, Enel and Iberdrola have emerged as global clean-energy giants

The decline of oil-and-gas supermajors over the past two years has been matched by the rise of previously obscure utility companies. In Europe, Enel and Iberdrola have emerged as green-energy giants, in part by taking leaves out of the big-oil playbook.

Like Shell and BP before them, the companies have built global portfolios to meet growing energy demand, only with wind and sun rather than fossil fuels. The strategy has already made them the world’s two largest renewable energy producers by capacity, but they want to get even bigger.

Enel said Tuesday that it will nearly triple its capacity to 120 gigawatts by 2030. Earlier this month, Iberdrola laid plans to double its capacity to 60 gigawatts by 2025. The companies are similar to U.S. peer NextEra, which trades for much higher earnings multiples, but with an international rather than domestic footprint.

All three are gearing up for dramatic growth in clean-power demand as emerging markets get richer and developed economies decarbonize. Renewables can now be cost-competitive with fossil fuels, and governments are accelerating plans to cut carbon emissions.

The two companies share traits with the oil supermajors. They are vertically integrated: They secure government rights to many wind and solar sites; develop those projects; and then manage power plants and distribution networks. Their big, international operations provide the scale for cost efficiencies, as well as local know-how and relationships.

Oil producers maintain a bank of drilling rights. Similarly, Enel and Iberdrola hold permissions to develop a large pipeline of renewable projects around the world: Enel has 141 gigawatts worth, while Iberdrola has 70 gigawatts. They continue to bid for new opportunities.

There are some important differences, too. Oil projects are typically high-risk, high-return investments, while new power plants are a surer thing and generate correspondingly lower profits.

Crude is a global commodity and prices are volatile. Harder-to-transport power is a much more local product, with prices often regulated or fixed by long-term contracts. That predictability helps utilities to use leverage to boost returns, while oil companies need lower debt levels to weather commodity-price cycles.

Based in Rome, Enel operates primarily in Europe, the U.S. and Latin America. Its plan to triple its renewable capacity is part of a €160 billion, equivalent to $190.30 billion, investment package in solar and onshore wind farms, power infrastructure, storage and hydrogen. It also has 10 coal-fired power plants that it intends to unload by 2027.

Spanish rival Iberdrola plans to spend €75 billion by 2025 to double its capacity. It builds solar and wind farms, both on and offshore, mostly in the U.S. and Europe. Last month, the company bought PNM Resources, which supplies power in New Mexico and Texas, making it one of the largest players in the U.S. market.

There are risks. Green power demand is expected to rocket but returns could be pressured as many companies, including the likes of BP and Shell, crowd into the space. The payback on these multidecade projects could eventually also be squeezed by higher interest rates, lower long-term power prices (when fixed-price contracts expire) or regulatory changes. Ironically, climate change could shift patterns of wind or sunshine, affecting plants’ efficiency.

Still, renewables are set to be a major energy source and Enel and Iberdrola, as the current leaders, warrant more attention. These are a far cry from your grandmother’s utility stocks.

This story has been published from a wire agency feed without modifications to the text.

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