Europe utilities eye emerging markets

PUBLISHED : Friday, 15 November, 2013, 3:10am
UPDATED : Friday, 15 November, 2013, 3:10am

Germany's E.ON and France's GDF Suez, two leading European utilities, are posting lower profits as a prolonged energy crisis in Europe is leading to power plant closures and asset write-downs.

Both companies plan to focus on investment in emerging markets to try to counter a stagnant western Europe, where economies are struggling to emerge from recession.

E.ON said this week its European electricity production fell 7 per cent in the first nine months of the year and saw core profit drop by 20 per cent. The group trimmed its core earnings forecast for this year to a range of €9.2 billion (HK$95.8 billion) to €9.3 billion from €9.2 billion to €9.8 billion.

GDF, Europe's second-largest utility by market value after EDF, posted a 6.5 per cent drop in nine-month core earnings and said it would write down European power assets.

Falling demand and overcapacity have led to plunging wholesale power prices and thrown Europe's utilities into an unprecedented crisis.

To make matters worse, abundant United States shale gas has led to Europe-bound exports of cheap US coal, which makes gas-fired generators uneconomical.

E.ON has shut 7GW of gas plant capacity - equivalent to seven nuclear plants - while GDF has closed down 12GW, decided to close 2GW in the third quarter and has put a further 5GW to 7GW under review.

Ingo Becker, the European head of utility research at Kepler Cheuvreux, sees little improvement in market conditions. "There is no real end in sight," he said.

Utilities also struggle with renewables, which have zero fuel costs and enjoy priority access to the power grid, pushing thermal generation out of the market.

To compensate for low-growth Europe, GDF and E.ON bank on emerging markets where power demand growth is high.

GDF chief executive Gerard Mestrallet said that in past months GDF had sold power plants in Portugal and Australia and entered new markets including Mongolia, Vietnam, Uruguay and South Africa.

From January to September, GDF earned €10.5 billion in Latin America, Asia and the Middle East, or 15.5 per cent of its €67.6 billion consolidated revenue.

E.ON, which for years has run a utility business in Russia, has only recently begun expanding in other growth markets like Turkey, where it owns 50 per cent of energy group Enerjisa in a venture with Sabanci.