Is This The Most Innovative Power Company In The World?

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We came to the conclusion that the future is a separate line of business when perusing the graphically flashy 2019 annual report issued by Enel S.p.A. the Rome-based energy company. Enel’s is an unfamiliar name to most Americans (investors and consumers). It is listed and traded on the Milan stock exchange. But they are the world’s second largest producer of power, after the State Grid of China, and serve more than 60 million customers mainly in Italy, Spain and Latin America. And they are Europe’s largest utility.  Like most European utilities they underwent privatization in the 1990s. However the Italian government still owns about one quarter of the company. We’re not sure whether to call this a privatized company or not. Yes they have shareholders, a dividend policy and publish financial data in an appropriate manner. But as students of corporate finance know, owning 25% of the equity permits the exercise of disproportionate influence on management and corporate affairs. This funny post-war European relationship with capitalism reminds us of the story of the senior Italian politician, a devout communist, who also regularly attended Catholic Mass on Sundays.

But corporate structure aside, Enel is different for another reason. When many electric utilities in the US were still planning to add new coal fired base load power generation, Enel’s name was added to the Dow Jones Sustainability Index in 2004. Around the turn of the last century their management was very early in embracing the twin concepts of sustainability and decarbonization. At present the largest percentage of their power generation comes from hydro with significant additional generation from wind and solar. Management reduced coal fired generation by a third in the last year and its elimination is a priority.

In addition Enel has been at the forefront of digitization and smart meter installation. In the US, the closest comparison with Enel is to imagine a fully privatized TVA or BPA with a progressive, tech savvy management focus. 

Compared to other electric companies with clunky names whose annual reports are pedestrian compilations of legalese, environmental platitudes which might be more convincing if the company were not hanging on to those coal plants for dear life, and pictures of executives trying to look informal by not wearing ties, the Enel report is like an Alfa Romeo next to a dump truck.

Enel divides its business into four sectors: generation, infrastructure, retail and Enel X. The first three are self-evident for readers of this website and constitute 99% of Enel’s operating income. Enel X is a platform to reach consumers for new uses of electricity and its focus is very broad: cities, homes, businesses, and electric mobility. This means developing charging stations for electric vehicles, demand response and energy storage. They intend to deliver these products on a world wide basis and their reach certainly spans several continents.

What strikes us is Enel’s focus on this modest business venture now when it seems to matter little. Most investors won’t pay much attention to tiny lines of business especially in a corporation this large. But Enel’s management is making a public statement and also taking a risk. If this venture flops, as many new lines of business often do, everyone will know and the failure will be rather public. Whereas if they entered these new areas discreetly and with little fanfare, a failure here coupled with a modest write off would barely be cause for concern even among the most diligent analysts.  Innovation of this type is often smothered in large, bureaucratic organizations. However, Enel’s senior management has clearly bought into a green future involving smart grids and two way power usage and have made it a mainstay of their corporate identity. They are saying: this is a business, not a fig leaf. But they also have an advantage over comparable US utilities in scale and diversity of the customer base. They can experiment in different jurisdictions too. 

Their strategy seems to boil down to this. Overall energy demand will grow slowly but decarbonized electricity can continue to take market share from coal, gas and diesel/gasoline in transportation. To ensure this transition the electric company must provide sustainably sourced electricity while helping consumers to use it more easily and efficiently.

There is nothing we find particularly new or surprising about Enel’s corporate message. But like seeing a tiny daffodil growing between a crack in the sidewalk, we would not have expected the most progressive utility policies emanating from a giant, Rome-based Italian electric holding company. And besides in addition to being early they might also be right. Ciao.

Crude Oil

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