26 September 2002 – Following Enel’s announcement of a refocus on the power sector, David Kurtz, director of analysis at Datamonitor offers his thoughts and concludes that Enel’s announcement is a critical move to ensure it retains a powerful position in Italy.

Having enjoyed hegemony over one of the most difficult of Europe’s power markets to penetrate, Enel is now facing a number of new, aggressive challengers. As news comes of a suspected U-turn by the antitrust authority over the required shedding of 5,500MW for approval of the Infostrada, yet more pressure may be brought to bear on the utility from new entrants.

With the sale of Interpower due before the end of the year and the power exchange to be launched (finally) at the start of next year, Enel’s announcement of a refocus on the power sector is a critical and timely move to ensure it retains a powerful position in its home market.

Just under 18 months ago Enel was announcing a plan to invest $18bn on acquiring companies over the next 2-3 years, with acquisitions spread across several sectors, including water. In part this was to make up for the shedding of generating capacity in Italy, whilst also position the company as a European multi-utility, similar to RWE, or Centrica, particularly at the residential level.

Its foray into gas was relatively successful, acquiring a string of small Italian utilities in 2000 and 2001 before acquiring 40 per cent of Camuzzi Gas, making the company the second-largest distributor after Italgas.. Its fixed and mobile telecoms company, Wind, is yet to make a profit, though it was the decision to move into water which was most widely criticised given the company’s lack of experience in the sector, with moves to acquire companies such as Southern Water in the UK and Acquedotto Pugliese in Italy failing.

With the multi-utility strategy proving to be both costly and unprofitable, new Chief Executive, Paolo Scaroni, is re-focusing on the power sector, albeit without any radical changes to the Group’s present structure. One of the main priorities is reducing the company’s generation costs, with Italy having amongst the highest prices of any EU country.

At present, Enel’s generation costs are above those of new entrants, with the generation mix too heavily weighted towards oil-fired power, thus making it vulnerable to fluctuations in the oil price. At present 47 per cent of capacity is oil or gas fired, and coal or orimulsion account for 12 per cent. Mr. Scaroni plans to move these shares to 24 per cent for both groups of fuels by 2007, with 38 per cent of power from coal and gas combined, against 15 per cent now. Given this, it seems sensible that Enel use the funds from the sales for the gencos for modernising existing plant, rather than throw money into diverse markets such as water.

While this strategy will help to bring costs below those of new entrants, achieving this will be hard. Many local authorities are expected to be opposed to this shift towards coal, and Enel certainly does not have a good environmental reputation. In the meantime, requests for new power plant builds are mounting, and with the new power bourse expected to open for business in the first quarter 2003, Enel will face tough competition from the country’s other generators.

Enel faces tough competition from the companies that have acquired part of the company’s 15 000MW of generation assets to date. These main threats are, of course, the companies that have acquired part of the company’s generation assets to date, plus the buyer of Interpower, to be announced later this year. Given the lack of access to Enel’s transmission network from outside the country it remains difficult for foreign entrants to gain entry.

The first of the three, 5438 MW Elettrogen, was bought by a group including Spain’s Endesa and ASM Brescia for $3.3bn. The company increased its interest in Elettrogen in March 2002, from 45 per cent to 51 per cent and is also repowering particular units owned by Elettrogen at the Ostiglia and Tavazzano power plants as part of a €1.2bn industrial investment plan, while also expanding its electricity marketing and trading activities.

Elettrogen currently owns 7 per cent of the Italian total, and Endesa is planning to boost its ownership of Italian generating capacity to 6200 MW through building CCGTs and improving efficiency ratios. The company is aiming for sales of 2.6TWh to major clients and, as soon as the electricity bourse is launched, to sell 15.6TWh to the captive market.

As part of its expansion in Italy it is looking to enter into alliances with municipal distribution companies. Of particular interest are the larger utilities including ASM Brescia.

A consortium led by Edison SpA won the bidding for the 7 008 MW Eurogen in March 2002, paying $3.29bn, leaving the 2611 MW Interpower as potentially the last remaining acquisition. Favourite to acquire Interpower is a consortium of Energia Italiana, ACEA of Rome and Electrabel with the latter two having joined forces with the former to create a single bid.

Electrabel has already formed a joint venture with ACEA, with the intention of gaining control of Interpower and selling and dealing electricity in Rome before expanding into neighbouring regions, taking advantage of the gradual opening of the power market. By combining generation assets with a supply customer base, the company is offered a natural hedge against wholesale price fluctuations.
Arguably, these companies plus Enipower, which is capitalising on its position in the gas sector and generation capacity to target large industrial electricity and gas consumers, form the greatest threat to Enel. As Enel is forced to reduce its position in generation, it must look to maintain its supply electricity market share while a move into gas will enable it to capitalise on the increasing convergence across the electricity and gas markets.

Linking with a municipal utility is the best route for large European players looking to gain a foothold in Italy For the large European players looking to gain a foothold in Italy and compete with Enel and Edison, a tie-up with a municipal utility plus generating capacity seems to be the preferred strategy. For those unable to achieve this, the market will be much tougher to crack, and so those that miss out on Interpower will be eagerly awaiting the verdict from the antitrust authority over further enforced disposals relating to the Infostrada acquisition. Many more companies are hoping to build new low-cost CCGT plant to undercut Enel and reap the rewards available once the power exchange is launched, however, they face problems in obtaining building permits.

David Kurtz comments: “Enel, so far, seems to have weathered retail competition well, retaining a substantial share of the eligible market by the middle of 2002. Datamonitor’s annual surveys of major energy users have, however, revealed this to be more of a result of lack of competitive offers than anything positive that Enel has delivered, and next year is expected to bring a change to Enel’s fortunes. To further increase competition, the Industry Ministry is opening the market down to consumers with demand above 50,000kWh, against 100,000kWh as planned, allowing small shops to choose supplier, as well as the larger supermarkets and medium-sized enterprises.

Overall, getting back to basics seems the right move. Although real market opening has seemed a painfully slow process, the walls around Fortress Enel are starting to look more and more exposed.”