Endesa, Iberdrola see different shift in short position

Spain's biggest power utilities Endesa and Iberdrola expect different evolutions in their short positions in the Iberian wholesale power market despite both having strong renewable capacity growth plans.

The firms have the highest installed generation capacity in Iberia at 26.63GW for Iberdrola and 21.65GW for Endesa, followed by Portuguese utility EDP with 13.22GW and Spanish utility Naturgy with 12.06GW. Endesa and Iberdrola have been the biggest and second-biggest generators, respectively, in the Mibel Iberian day-ahead wholesale market in most years over the past decade, but were matched at times by EDP, according to data from Spanish regulator CNMC up to 2019 (see generation share table).

Despite often being the biggest producers, the utilities have also ranked as the largest buyers of electricity in the day-ahead market for several years, with Endesa consistently holding the highest share (see purchase share table).

Both companies are net buyers of electricity in the Iberian wholesale market because demand from their customers is higher than their own generation. Endesa has had by far the highest net buying position in the Spanish zone of the Mibel day-ahead market since 2008, while Iberdrola has been a net seller in years of strong hydro generation such as 2010, 2014 and 2016, according to CNMC.

Iberdrola looking to ‘balance' short position

But Iberdrola expects its growth in renewables capacity in the coming years to balance its short position, leading to fewer purchases in the spot and forward markets, it said late last year in its business plan for 2020-25. It did not disclose when it expects to balance the short position and did not comment on queries sent by Argus.

The firm's generation and supply business in Spain produced 6.5pc less power last year than in 2019 at 33.93TWh, as "energy purchases from third parties and from our renewables businesses have increased, given prevailing low prices", it said in its 2020 financial report. The generation and supply business consists of thermal assets — nuclear, combined-cycle gas turbines and combined heat and power plants.

Iberdrola's Spanish renewables division increased its generation by 16.8pc to 25.91TWh last year. The company's total generation in Spain grew by 2.4pc on the year to 59.85TWh in 2020, while its total gross electricity sales in Iberia inched up by 0.5pc to nearly 95TWh. Of the total sales, 51.41TWh were in Spain's liberalised market, down by 5.6pc from 2019.

"The company has traditionally maintained a short position between its own production and sales to customers," Iberdrola said in its 2020 report.

No change for Endesa

Endesa, on the other hand, does not expect any change in its short position in the coming years.

"Although it is true that we expect an increase in renewables output due to the significant investment plan we have announced, it is also true that we are closing all our coal capacity in the peninsula during 2021," the company told Argus.

"We are focused on keeping our leading position in sales in the Spanish market and, as generation activity becomes increasingly fragmented due to the entrance of new renewable generators, it is clear that the short position is likely to remain as it is," the firm added.

Endesa generated 56.27TWh last year, down by 8.4pc from 61.40TWh in 2019, while its total gross electricity sales slipped by 9.7pc, to 88.92TWh from 98.45TWh. The firm purchased 27.2TWh of power last year in its liberalised business, down from 32.7TWh in 2019.

Endesa's total installed capacity in mainland Spain dropped to 17.388GW last year from 19.066GW in 2019, as it shut down over 2GW of coal-fired capacity, leaving it with 2.523GW. It will scrap its remaining coal-fired capacity in the Spanish peninsula this year, closing the 1.1GW Litoral de Almeria and 1.4GW As Pontes facilities.

Short position ‘not ideal'

Despite Iberdrola's expectation of balancing its short position in the coming years, market participants do not expect to see changes in it or Endesa's positions.

"I don't believe they can reduce their short position too much," energy consultancy Neuro Energia manager Javier Colon said. The companies' share of the generation mix could fall as they close their thermal plants and other firms increase their penetration of Spain's power market, he said.

Both utilities have been losing customers in Iberia, but the loss rate has so far been "moderate", Colon said. Competitors such as Spanish integrated firm Repsol and French energy firm Total nevertheless pose a threat to traditional utilities, he added.

Iberdrola's Spanish customer base is not expected to grow in the near term, mainly because of increased competition. "We see a flat portfolio… we expect to maintain around 11mn customers," chief executive Francisco Martinez Corcoles said recently.

Endesa lost 2.4pc of its electricity customers in the Iberian deregulated market last year, citing "fierce competition".

Maintaining a short position would not be ideal, as this would leave them "more exposed", according to Colon.

Nuno Fonseca of energy consultancy Mind Your Energy, and a former head of power trading at Citibank, said that prices have declined on the Iberian market in recent years and having a short position in a falling market could be "advantageous".

Major utilities that have sales prices locked in have taken advantage of the situation by lowering their own generation and stepping up purchases of electricity at lower prices. "When you close a position and you are hedged, instead of generating you can go to the market and buy and then sell to clients with higher margins than if you were generating," Portuguese utility EDP's former chief executive Antonio Mexia said last year when explaining the firm's strong results in energy management.

Holding a long position in generation, on the other hand, is beneficial when prices are rising, Fonseca said — especially amid expected upward pressure from the EU emissions trading system market.

"In the long run, it is better to have a more balanced position — and that is why there are more and more companies betting on generation in the Iberian market," Fonseca said.

Whether Iberdrola can balance its short position will ultimately depend on Spanish hydropower reserves, as the company has the region's largest hydro fleet, brokers and traders said. And even if the firm manages to balance its short position, no major changes are expected in the forward markets, they said, because the company is not considered very active in trading futures contracts in Iberia. Endesa, on the other hand, is widely regarded as one of the most active players in that market.

Iberdrola plans to add about 8.5GW of renewable capacity in Spain in 2020-25, taking its total to 25GW. It currently has 17.4GW.

Endesa aims to increase its renewables capacity in Spain to about 11.5GW in 2023 from an estimated 7.7GW last year. It recently said it could build up to 15GW of renewables capacity in 2021-30, having boosted its gross pipeline of renewable projects to 41.8GW as of 31 December 2020, from 25.7GW in September.

By Juan Weik