The CNMC proposal to reduce the returns for gas and electricity impacts the market

CNMC proposal

A recent proposal by the National Commission of Markets and Competition (CNMC) to reduce the returns for the distribution and transport of electricity and gas had an almost immediate impact on the stock market and companies in the sector.

Late last week, the CNMC published a statement on its decision to submit seven new projects for circulars to public hearings. This circular, it said, “would define a stable and rigorous regulatory framework for electricity and gas returns in the coming years.”

The measure, which could lower the electricity bill as much as 40% and 70% in the case of gas, has generated reactions from companies in the sector that have been downgraded by rating agencies and, therefore, have seen their stock prices drop.

These circulars are still in the developing stage and the companies have until August 9 to submit their allegations, after which the corresponding law would be approved.

Downgraded ratings

Following the CNMC announcements, Credit Suisse downgraded Iberdrola, Naturgy, and Endesa, three of the biggest utilities in the sector. The rating agency warned of the risk for energy prices.

In the case of Iberdrola, the rating went down from Outperform to Neutral. For Naturgy, it went from Neutral to Underperform. For its part, Endesa also was downgraded from Neutral to Underperform.

On the other hand, it maintained the Outperform rating for Enel, Endesa’s parent company. This was also the case for EDP, which also kept its Outperform rating.

Meanwhile, Fitch downgraded all Spanish gas and energy services companies. This decision included Enagás (A-), Naturgy (BBB), and Madrileña Red de Gas (BBB-).

S&P had previously warned that the new regulation proposed by the CNMC would have a negative impact on companies’ credit ratings.

“While the CNMC’s initial proposal for the 2020-2025 regulatory period is in line with the outlook for the power sector,” it could have a significant impact on the income of Spanish gas companies, it said.

CNMC proposal impacts the stock market

The CNMC proposal affected Enagás and Naturgy’s stock prices. Once the cuts on returns were published Enagás, Red Eléctrica, and Naturgy all dropped in the stock market, as well as Endesa and Iberdrola, although not so drastically. The trend has maintained in the subsequent days.

On Thursday July 11, the Ibex 35 went up at opening. However, the negative trend continued for Naturgy (-0.353%), Endesa (-0.349), and Iberdrola (-0.0232%), as the power companies were affected by Credit Suisse’s downward revision.

Naturgy suspends investments

For its part, Naturgy announced on Wednesday that it would temporarily suspend investments on new gas networks. The company argued the decision was a caution measure given the push to reduce the returns for the distribution and transport of electricity and gas announced by the CNMC.

It also announced it would make an initial assessment of the impact of the regulatory change of July 24 on the quarterly results.

Naturgy clarified it would paralyze the installation of new networks, but not investments in maintenance and security.

Observations made by Red Eléctrica de España

Similarly, REE indicated that the CNMC’s decision “introduces a high level of uncertainty on return on investments, incorporates increased discretion on critical actions for energy policy, and discriminates against transport activities.”

According to Jordi Sevilla, REE Chairman, these cuts do not guarantee greater efficiency or lower service costs.

“Under these conditions of legal security it will be difficult to convince private investors to build the networks required for the energy transition,” he said.

Endesa would prefer a smaller cut

With regards to the reduction of the returns for the power sector, Endesa CEO José Bogas, said he would have preferred higher return rates, since it would “further encourage investment.”

The rate of return for power networks proposed by the CNMC is 5.58%.

For more information, check Energía16

See also: CNMC proposes reducing returns for electricity and gas distribution and transport

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