Higher regulated returns linked to rising interest rates will complement ad hoc countermeasures taken to cushion the impact. Regulators have already indicated or even implemented improvements on the remuneration on invested capital which is likely to strengthen grid operators’ operating cash flow, interest and capex coverage.

The catch is that the improved returns on regulatory asset bases (RAB), enlarged by the massive investment underway, will take time to materialise, says Scope Ratings in its latest report on the utilities sector.

“Increased remuneration on investments might apply only or mostly to new investments and usually kick in when current regulatory periods end – hence the importance of companies’ recent and continuing efforts to stabilise their finances,” says Sebastian Zank, deputy head of corporate ratings at Scope.

“The scale of the capex challenge varies by country but represents multibillion-euro sums for Europe’s main grid companies in the years ahead, much higher than that invested in recent years,” Zank says.

Figure 1: Net capex (EUR bn) by major European grid operators 2016-2024E

Source: Scope Ratings

Take the UK. National Grid has signalled an annual average of GBP 3bn for the period 2022-2026 (total investment need of GBP 15bn) for its UK electricity transmission and distribution assets, compared with an annual average of about GBP 2bn over the past few years.

Germany is another good example. Investment in the transmission grid could amount to EUR 75bn by 2030, according to utility to EnBW AG, which implies an increase of average yearly capex to EUR 9.4bn for the four German transmission grid operators, up 27% from the aggregated amount invested in 2022 (for more details, see page 3 of attached report).

“Grid operators across Europe, confronted with credit rating downgrades or negative rating outlooks in many cases, have had to take various measures to bolster their balance sheets,” says Marco Romeo, analyst at Scope.

“Italy’s Terna SpA, for example, issued large volumes of hybrid debt securities, whose equity component allows the raising of funds while protecting credit ratios,” says Romeo.

Others have sold non-core assets – Alliander NV, Enexis Holding NV, Terna SpA, National Grid plc and Red Eléctrica SA – and/or reduced dividend payments.

The Dutch government helped recapitalise TenneT NV. The German government, meanwhile, is discussing how to consolidate the fragmented ownership of the country’s transmission grid – TenneT and Belgium’s Elia Group SA via their subsidiaries operate a major part of the German electricity transmission grid – to strengthen long-term funding.

Figure 2: European grid operators trying to offset ratings pressure from mounting capex

Source: Scope Ratings illustration

“The ratings pressure will likely persist for selected TSOs and DSOs, particularly in Germany and the Netherlands. The longer and steeper the capex phase weighs on a grid operator’s free operating cash flow and leverage, the more likely we will see equity contributions and/or major organisational restructurings, i.e. mergers or asset disposals. We believe that stakeholders, in particular sovereigns and sub-sovereigns, will stand by to support most affected utilities to avoid delaying the energy transition when grid operators have to be spread over a longer time period,” says Zank.

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