Wind power at the heart of utility corporate strategy

The strategic acquisition and development of renewable power is proceeding at a record pace. Wind power generation, in particular, has evolved as a strategic imperative for utilities aiming to expand globally into new markets. In a market characterized by high levels of consolidation, utilities are driving key competitive advantages by integrating horizontally and vertically along the value chain

Report Highlights
A new proposition for investment in renewable energy has emerged as utilities address a shifting set of strategy drivers. Horizontally integrated renewable utilities continue to rapidly expand their market presence in all aspects of the energy value chain as renewables start to play a larger, more strategic part of power generation portfolios

Europe's largest renewable utilities are increasingly undergoing IPO to drive greater operational and capital efficiencies. In the case of EDF and Iberdrola, these efficiencies have delivered greater competitiveness and increased market share as both utilities rapidly and significantly scale their operations under difficult market conditions

The horizontal integration of fixed-cost wind assets is a natural evolutionary market response and a safer unhedged business model than horizontally integrated conventional generation assets. In the longer term, this efficient model will increasingly drive the industry towards competitive, non-subsidized wind power generation
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DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
ANALYSIS 2
There remains a sharp divide between liberalized and liberalizing markets in terms of wholesale price dynamics 2
The dynamics of the wholesale/retail price interface vary significantly between liberalized and liberalizing markets 2
Despite the advent of full market opening in July 2007, Europe's gas markets remain at widely differing levels of competitiveness 3
In common with the gas sector, Europe's power markets remain at widely differing stages of competitive development 4
Europe's wholesale gas markets remain at a widely different stages of development 5
A wide disparity exists in levels of competitive development in the European wholesale power markets 6
There remains a sharp divide between liberalized and liberalizing markets in terms of wholesale price dynamics 7
The development of traded wholesale markets tends to follow a preset pattern of distinct stages 7
The wholesale market development cycle gradually builds up enough momentum to spur wholesale support services 8
Players reliant on GPAs as a result of a lack of wholesale liquidity are exposed to a range of possible price drivers governing their WACOG 9
A range of competing pressures impact wholesale energy prices to varying degrees in established or establishing wholesale markets 10
Declining indigenous European gas production creates new wholesale market pricing pressures for utilities 11
The growth in LNG has created a greater range of price exposures for European gas buyers 12
In recent years, wholesale energy prices have shown continued upward movements 13
Europe's main wholesale gas markets have shown strong price increases 13
European wholesale power prices have exhibited strong upward movement in recent years 14
Oil price inflation has been phenomenal and continues to super-peak 15
Spark and dark spreads have seen sharp decreases in recent years 16
Spark and dark spreads have seen sharp decreases in recent years as coal prices increase 17
General taxation and green commitments are also playing a part in pushing up prices in certain markets 18
The tax burden on retail gas consumers has fluctuated at varying rates in different markets 18
Taxation levels on retail power prices have shown significant fluctuation between markets in recent years 19
Green obligations and energy efficiency targets create further price pressures for utilities 19
Environmental costs are starting to impact upon UK retail prices (case study) 20
Rising wholesale prices have inevitably fed through to higher retail prices across Europe 21
Retail power prices across Europe have continued to rise in recent years 21
Retail gas prices across Europe have continued to rise in recent years 22
Current retail margins in Germany are the highest among liberalized European power markets, followed by the UK 23
Over the past three years, markets with higher levels of competitive intensity have seen the fastest growth in retail prices 24
In contrast to the power sector, liberalized gas markets have generally seen lower levels of price increase 25
APPENDIX 26
Definitions 26
Ask the analyst 26
Datamonitor consulting 26
Disclaimer 26
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Table 1: High oil, gas and environmental compliance costs have driven the utility acquisition of profitable and competitive fixed-cost wind assets on a purely economic basis 3
Figure 1: Shifting strategy drivers have impacted utilities, forcing them to evaluate their options in renewables 2
Figure 2: Large European wind asset owners integrate horizontally along the value chain by initiating their renewable development activity separate from their core generation activity 4
Table 2: As the scaling of utility ownership of renewable energy continues to grow rapidly, consolidation of wind portfolios will become commonplace as utilities seek to leverage scale and efficiencies 5
Table 3: Major utilities have pressed ahead with initial public offerings of their renewable energy assets 6
Figure 3: High oil, gas and environmental compliance costs have driven high renewable utility valuations on a purely economic basis 7
Figure 4: Following the IPO in Q1 2008, Renovables consolidated the fulfillment of its strategic plan goals for the year 2008 8
Figure 5: Markets recognize that the wind industry is largely at the mercy of government programs that drive artificially stimulated demand 9
Figure 6: Since its IPO, Renovables has underperformed its largely vertically integrated peer group, as well as the Spanish Ibex index 10
Figure 7: In 2007, the proceeds from the capital increase allowed EDF EN to accelerate its growth, thereby meeting or exceeding its objectives 11
Figure 8: In Q1 2008, investor sentiment towards EDF EN remained relatively strong, despite widespread bear market conditions 13
Figure 9: Since its IPO in Nov 2006, EDF EN has outperformed its largely vertically integrated peer group, as well as the French index 14
Figure 10: Wind makes for a safer unhedged horizontally integrated asset than convention generation 15
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