In 2022 the major electricity groups broke all records, spurred by the Ukraine conflict that sent gas and electricity prices soaring. Iberdrola, Endesa, and Naturgy closed that year with a combined profit of 8.529 billion euros. This year 2024 the scene is very different due to lower prices, yet the three sector leaders show no sign of slowing down, aiming for total profits around 8.7 billion euros based on guidance from their first-half results presentations. In that period the three firms together earned 5.976 billion euros, ahead of 4.444 billion in the same period of 2023 and 3.548 billion in 2022.
Although the aggregate figure looks higher than during the energy crisis, the individual results tell a different story. Endesa posted a lower figure than in 2022, a year when the company led by Jose Bogas achieved extraordinary profits from reduced industrial consumption that left a large amount of stranded gas which was resold amid very high prices.
In any case these are profits, not losses, in a market marked by sharply contrasting prices. In the first half of 2024 the average price of electricity was 39.09 euros per megawatt hour, down from 89 euros in 2023 and a peak of 206 euros in 2022, according to the Iberian Market Operator. The gas price stood at 30 euros, versus 58 and 100 euros in earlier years, according to the European gas benchmark metric.
The key, beyond the purely financial aspect of extraordinary events, lies in the vertically integrated model of these companies. This model goes beyond the refrain of not putting all eggs in one basket and instead emphasizes having a stake in every stage of the value chain. Technically, this means a single group carries at least one transportation or distribution function and, at minimum, one generation or supply function under the internal market directive.
That is precisely the case for the three large energy groups, which operate generation, commercialization, and distribution. In generation and sale they can capitalize on high prices by selling energy to other firms at higher margins and to their own group companies at favorable terms, while the distribution networks provide stable revenues even as investment and regulatory conditions shift. The distribution segment offers fixed income over time, influenced by prior investments and regulatory prices set by governments. This aspect will be crucial in coming years as plans to deploy networks that integrate renewables with demand from large industries unfold, prompting the sector to press governments and regulators to remove investment caps and improve network profitability.
For example, in the first half of 2024 Naturgy earned 1.043 billion euros, roughly the same as 2023 and double the amount from two years earlier. Despite a noticeable squeeze in liberalized gas and electricity activities, regulated segments grew through regional remuneration revisions in Latin America and growing electricity distribution in Spain.
A recent arrival to the electricity business, Repsol chief Josu Jon Imaz, downplayed the impact of lower electricity generation prices. He suggested the integrated model means any shortfall on one side can be offset by gains on another and noted the attractiveness of price falls for the group’s commercialization arm during a results presentation.
Endesa saw lower electricity and gas sales offset by reduced energy purchase costs and stable distribution. The company highlighted effective management in a volatile market thanks to its integrated strategy focused on customers, reporting a profit of 800 million euros, a bit under 2023 and shy of 2022’s level.
For Iberdrola, generation led by increased hydroelectric pumping, along with lower nuclear output and a diminished distribution margin, offset the weaker prices. The president explained that pumping has become a recurring business regardless of rainfall, while production decisions would be adjusted to market conditions to ensure returns. Iberdrola posted 4.133 billion euros in profit, up 64 percent from 2023 and double the 2022 figure, buoyed by gains from selling its combined cycle business in Mexico.
Is Competition Returning?
After years of dominance by the big three, lower wholesale prices have brought competition back to the market, according to Endesa’s chief executive. He cautioned that price wars akin to those seen in the telecommunications sector are unlikely. Instead, competition is manifesting through promotional campaigns, and the market remains healthy because final prices have not fallen sharply. Even with low wholesale prices, consumer tariffs have stayed relatively stable.
In the wake of the Ukraine price spike, many smaller players were largely sidelined. Without integrated generation capabilities, these firms faced coverage challenges amid wholesale price volatility, a situation noted by regulators. A recent Bank of Spain report pointed out that excluding generation activities left independent players with limited natural hedges, especially when contracts within groups were unavailable. The rebound in competition is evident not only among independent firms but also among oil companies leveraging multi-energy offerings to provide fuel discounts and regulated tariffs like PVPC, which has been among the cheapest in the second quarter of the year, albeit with regulated margins that limit profitability. Big utilities have historically opposed this tariff model.
Prices are expected to rise again in the second half of the year, potentially doubling the wholesale electricity cost seen in the first six months to around 80 euros per MWh. In the current month, electricity averages around 68.75 euros per MWh, according to the Iberian Energy Market Operator. Futures markets indicate prices near 80 euros for upcoming months, based on OMIE and OMIP data.