The energy transition is well underway, and it no longer relies on incentives, according to Antonio Cammisecra, head of global power generation for European utility giant Enel and CEO of subsidiary Enel Green Power.
"Subsidies are not needed anymore,” Cammisecra said in a recent phone interview. “Indeed, they are becoming rare today in this industry.”
Cammisecra noted that some of the markets where Enel operates offer dedicated auctions for renewable energy resources. He called that a “very soft” form of incentive, because winners benefit from having a long-term, fixed-price contract but still have to win the contract based on a competitive, unsubsidized price.
"Almost 100 percent of our new investments in renewables are based on pure market conditions,” he said. “No incentives whatsoever."
Enel has a lot of new investment coming down the pike. Last November, the Italian multinational energy company committed half of its total investment over the next few years to decarbonization efforts as part of a new strategic plan. Between 2020 and 2022, the utility will invest €11.5 billion ($12.6 billion) in additional renewable capacity, which will add another 14.1 gigawatts of assets to Enel’s existing 46-gigawatt renewable energy fleet (much of it hydro) by the end of the period.
The world, Cammisecra said, has entered "a new phase of renewable energy development."
A low barrier to entry in renewables
It’s already cheaper to build new wind and solar plants today than new gas or coal assets, Cammisecra said. In several of the countries where Enel operates, it is now also cheaper to build new wind or solar than operate existing thermal assets, he added.
But despite this momentum, European energy giants are under pressure to lean harder into the energy transition while ensuring that they also turn a compelling profit.
The recent ouster of Engie CEO Isabelle Kocher highlights the challenge that utility executives face in today’s energy market. Kocher is credited with setting the $42 billion French utility on a new strategic course, moving further into renewables and energy services and away from fossil fuel assets. But the CEO was criticized for producing weak returns amid this shift.
Cammisecra acknowledged the hurdles that energy companies face as they seek to lead the clean energy transition.
"The first [challenge] was we had to demonstrate that we were more competitive and that we could represent a better solution than fossil fuels,” he said. “Then we had to compete against the new market entrants, because this became one of the favorite investment environments for every possible other industry. Everybody wanted to be a renewable energy player, and the barriers to entry were and are quite low."
Putting a number on solar-plus-storage
In addition to renewables, Enel’s energy transition strategy includes deploying grid edge technologies in order to meet flexibility needs in the markets where it operates.
Enel’s plan includes spending an additional €13 billion in grid infrastructure and enabling technology by 2022. The firm’s energy services venture, Enel X, will add another 4 gigawatts of demand response resources and more than 300 megawatts of energy storage capacity over the next three years.
As with pure wind and solar projects, Enel is now also building renewable energy projects coupled with battery storage without any incentives, Cammisecra said. In Texas and Australia, these projects are penciling out purely on a merchant basis by dispatching power when needed and providing services, such as frequency regulation and curtailment management.
As for pricing, Cammisecra said pure solar projects are now, on average, well below $40 per megawatt-hour and as low as $20 per megawatt-hour in places like Chile. While numbers vary based on system size, adding energy storage typically adds 5 to 15 percent to the pure solar rate, which puts the average solar-plus-storage project between $40 and $45 per megawatt-hour by Cammisecra’s calculation.
"If you think about it, it's an extraordinarily competitive price,” he said. “Because this is not the price just for energy; it’s the price for adding a system capable of doing much more than just injecting power into the grid when the sun is shining.”
Key to profitability: A big project pipeline
Cost-competitiveness is great for winning auctions and doing deals, but it doesn’t bode well for making money. How do companies like Enel turn a profit amid the energy transition?
“That’s a question that in our industry we have been asking ourselves for at least 10 years,” Cammisecra said.
Energy companies need to be cost leaders, he said, but that's just one factor. "Most importantly, you make money by having a pipeline of projects from which you can pick and choose in order to serve your growth and investment needs."
Enel is never forced to invest simply because it has a business plan and needs to allocate capital to a particular project. Instead the company can choose from a 90-gigawatt global pipeline, with multiple projects in the U.S., Italy, Spain, Brazil and elsewhere.
"We have much more than what we need,” said Cammisecra, “which means that when we go to our investment committee, we only go with our best projects."
Enel Green Power touted a new deployment record in 2019 by building just over 3,029 megawatts of new renewable capacity all over the world — around 190 megawatts more than in 2018.
Cammisecra said the best projects will have the best renewable energy resource, the best local acceptance, the best grid connection and the best soil conditions to keep costs low and maximize generation in order to deliver an acceptable rate of return. At the same time, Enel continues to adopt new technologies to facilitate project deployment and enhance performance.
Enel’s corporate and industrial renewable energy deals are somewhat insulated from the price competition that comes with a regulated tender. As an integrated utility in several European countries, Enel can also escape some of the price pressure in markets where it develops assets to serve its own retail customer base.
This approach appears to be paying off. The Italian energy company reported last week that its revenue increased 6.1 percent to 80.3 billion euros ($88.48 billion) in 2019.
Meeting the goals of the EU Green Deal
While renewable energy developers have successfully attracted funding from large investors, such as pension funds and financial institutions, the grid has struggled on that front.
"Here, the intervention of public spending could absolutely be helpful,” Cammisecra said.
Expanding and digitizing the grid is especially important if the European Union is to achieve the goals laid out in the recently introduced European Green Deal. The European Commission has already budgeted at least €1 trillion of investment over the next 10 years to make Europe carbon-neutral under the new plan, which is still awaiting final approval.
Initial assessments show that the EU will need double the share of electricity in the bloc’s energy consumption by 2050. Hitting that target will require building a larger and much more flexible grid.
"In a constrained environment like Europe, with a dense population, scarcity of land and also [the] beauty of our landscape, expand[ing] the grid is not an easy task,” said Cammisecra. “That's why we look with a lot of interest to the capabilities that...digitization and automation will provide.”
"We need to invest in the infrastructure,” he continued, “because if we do not invest in the infrastructure, the strains will probably result in higher costs of generation or in [lower] levels of penetration.”