EMEA electricity networks face complex grid capex challenges

September 19, 2024 (MLN): The energy transition extending across multiple price control periods implies the need for substantial and complex grid-development capex by EMEA electricity networks, Fitch Ratings says.

A constructive regulatory approach and long-term capex payback periods may increase our gearing tolerance, but proactive management actions may still be needed to contain leverage and maintain current ratings.

The development of renewables, onshore transmission networks and offshore grid connections are key drivers for the investment needs for electricity networks.

The EUR76 billion in aggregated 2024-2026 planned capex for the companies in our EMEA Electricity Networks — Relative Credit Analysis report is 1.8x the projected funds from operations (FFO) for the same period, which is an unprecedented effort for the network companies.

Networks may encounter challenges, while trying to meet ambitious national climate targets, including potential supply-chain bottlenecks, particularly related to manufacturing capacity. Companies are trying to secure capacity in advance of project execution to overcome these challenges.

Additional factors, such as stringent permitting and planning requirements, could slow down the pace of grid development. Below-target grid development limits the pace and increases the costs of the energy transition.

The EU and UK regulators are adopting a constructive approach to new investments, in our view, by implementing measures such as innovative infrastructure planning, accelerated permitting and enhanced remuneration frameworks.

Recent initiatives by the regulators reinforce our view that they are building a record of a stable, mature and reliable operating environment and remuneration framework for network companies.

The high capex needs related to the energy transition, supported by the constructive regulatory approach, may lead to a slightly increased tolerance for Fitch-defined gearing – measured by the net debt/regulatory asset base (RAB) ratio – within the electricity distribution and transmission networks that better reflects the magnitude of investments with very long payback periods.

FFO net leverage continues to be Fitch’s main leverage metric for networks with no official RAB set by their regulator, such as Redeia.

Even with increased tolerance in our analysis, we expect the evolution of networks’ capital structures in the forecast period to potentially require proactive management actions to restrain debt growth if rating headroom is exhausted.

Fitch forecasts mitigating measures, such as equity injections, hybrid debt issuance, direct funding from renewable developers or revised dividends, to be implemented to contain leverage for some issuers, most likely Amprion, Fingrid, Redeia and/or REN.

As a result, most ratings in the sector have Stable Outlooks.

However, the absence or deficiency of such supportive measures could lead to negative rating actions, for example, in the case of Fingrid. Fingrid’s capex-driven pressure on leverage is coupled with high dividends and lower congestion income in our forecast, leading to substantial breaches of FFO and RAB-based ratio sensitivities from 2026.

Fingrid’s Negative Outlook signals the risk of a downgrade if no remedial measures are implemented.

Copyright Mettis Link News