Europe’s power and utilities sector set for more pain after $27bn asset writeoff

Europe’s power and utilities sector wrote off €23bn ($27bn) in assets in 2016, according to new analysis.

Despite last year’s significant drop in asset impairments (the value of a fixed asset against the profit it generates) compared with 2015 levels, consultancy EY said in a report released this week that the writeoffs had been larger than expected and that stakeholders would be “left wondering whether an end is in sight”.

In answer to that question, EY predicted further impairments due to rapid sector transformation and the rise of converging technological trends including battery energy storage, electric vehicles and artificial intelligence.

Writeoffs by European utilities were down by 34 per cent on 2015’s record high of €34.7bn, the report said, noting that this figure excludes E.ON’s €7bn impairment against the value of its spinoff Uniper.

However, the writeoffs still equalled 8 per cent of the market capitalization of the companies sampled at the end of 2016.

Asset-related impairments made up the bulk of the total, at 92 per cent compared with 74 per cent in 2015. Power generation assets accounted for 62 per cent of overall impairments.

Continental western Europe and the Nordic countries remained the regions with the largest impairment writeoffs, making up 54 per cent of the total.

Drivers for the increased impairment included oversupply of capacity, the report said, which led to lower utilization rates for thermal power assets.

And the report predicted more disruption ahead due to the interaction of technological trends including battery energy storage, electric vehicles, solar PV, artificial intelligence and grid-edge technology.

According to EY, several ‘tipping points’ around these trends are set to “fundamentally alter the dynamics of the market forever”. These points include when non-utility scale solar+storage systems achieve cost parity with grid power and when their LCOE reaches parity with transmission and distribution costs; and when EVs achieve cost and performance parity with internal combustion engines.  

“As these tipping points approach, potentially undermining asset values across the entire value chain,” the report warned, “European utilities will have to consider the likely implications for further impairments.”