Sector Update Austrian Utilities - New renewables law, new earnings potential
Following the long overdue publication of the draft of the new renewables law that aims to enable 100% renewables coverage of Austrian power demand by 2030 and the EU Commission's push for a 55% reduction of CO2 emissions also by 2030, we have taken a closer look at the potential implications of going full green in Austria and the implications for Austrian utilities. We find that EVN has the biggest local potential for the prime yielding technologies wind and PV, while Verbund lacks the home base and might be encouraged to go ahead with new hydro projects, whose levelised cost (of energy, LCOE) is far from achieving grid parity, i.e. breaking even at current power prices.
The new law is to replace outdated renewables legislation from 2012, which still offered generous subsidies through feed-in tariffs, but limited capacity additions. As the Austrian government targets 100% coverage of domestic demand with renewables by 2030, it plans to fuel construction of new plants in order to cover a gap of 27 TWh, an ambitious target that requires a myriad of legislative changes, speeding up approval processes as well as significant network and capacity investments. This strategy would support achieving EU renewables goals, and at the same time more than double the current scope of new renewables construction for wind and PV in the next ten years and wake up hydro construction. Subsidies should come down, but thanks to lower prices for wind turbines and PV panels, we would expect profitable operations, applying recent auction results in Germany as a blueprint for Austria. Large hydro, however, is likely to remain in merchant territory, i.e. earning its returns on the wholesale market, which still does not cover investment cost. Geography has to be considered as well. Wind potential is the highest in the provinces of Burgenland and Lower Austria, while hydro growth is geared towards pumped-storage plants in the Alps - and regional interests at play in zoning new generation areas. We believe that it is the regional utilities that would benefit overall.
We still like EVN for its cheap valuation, regulated earnings exposure and recovering project business, but we add its exposure to visible and profitable growth in renewables investment to our list. EVN remains a BUY, with a target price of EUR 20 (EUR 19 before). Verbund, though a key beneficiary of tighter climate rules boosting CO2 prices, has less material exposure to domestic renewables growth and strongly outperformed its key fundamentals. We downgrade Verbund to SELL from REDUCE, despite having raised our target price to EUR 44 (EUR 38).
The EU Commissions plan to tighten climate policy goals is another topic for the next months, with a summit in December scheduled for negotiations with Member States, including the reluctant CEE countries and legislation scheduled for June 2021. Cutting CO2 emissions by 55% (or 60%, according to the European Parliament) vs. 1990 would affect all industries, and measures are still not decided: The Emissions Trading System could cover all kinds of emissions, but also taxation could play a bigger role in making industry and households emit less greenhouse gases quickly. We are in a wait-and-see position regarding the electricity impact, also as CO2 prices have bounced back from the EUR 30/t mark twice recently and the plan requires massive investments in new capacities, by far outpacing the Austrian numbers.
After the summer, the dampening impact of the COVID-19 pandemic might return and weigh on seasonally adjusted demand, albeit not to the extent it did in spring. Still, we expect sluggish power price momentum to stay, and would not expect material recovery outside of the already priced-in capacity closures in Germany.
- We confirm our BUY recommendation for EVN and raise our target price to EUR 20 (EUR 19)
- We downgrade Verbund to SELL from REDUCE, despite having raised our price target to EUR 44 (EUR 38)
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