Strategic Plan, value creation, and climate change
Enel is committed to adopt a strategy based on meeting the objectives of the Paris Agreement (COP21). By way of strategic planning and risk management integrated with sustainability and climate-related issues, the Enel Group has created sustainable value over the long term. Over the last four years (2015-2018), the Group has increased profitability while achieving objectives related to decarbonization, digitalization, and customer service. The Group’s Strategic and Business Plan 2019- 2021 (the Plan) calls for continuing along this virtuous path based on a long-term view and the achievement of a series of predetermined objectives.
|Renewable||Renewable capacity (% of total)||41%||46%||55%|
|CO2||CO2 emisisons (kg/kWheq)||0,409||0,369||0,345|
|Retail free-market customers||Milion||17||22||36|
|New businesses||Gross margin (bilion euros)||-||0,5||0,9|
|Simplification||Group earnings to total earnings (%)||64%||72%||71%|
|Cash generation||FFO-Gross investment (bilion euros)||1,8||2,5||4,4|
|Remuneration of shareholders||Dividend per share (euros/years)||0,16||0,28||0,36 (1)|
(1) Guaranteed minimum dividend (floor).
The Group’s commitment can also be seen in the objectives pursued in relation to the United Nations’ Sustainable Development Goals (SDGs), specifically: inclusive and equitable quality education (SDG 4); access to clean, affordable energy (SDG 7); inclusive and sustainable economic growth (SDG 8); industry, innovation, and infrastructure (SDG 9); and sustainable cities and communities (SDG 11). Enel is working to achieve the full decarbonization of electricity generation by 2050, in line with the objectives of the Paris Agreement and with the science-based targets, while also helping to achieve the United Nations’ SDG 13.
Enel’s value creation model is based on a long-term vision that aims to take advantage of opportunities in the energy transition in three main areas:
(i) the decarbonization of the generation capacity (increase of about 11.6 GW in the Group’s renewables capacity1 and decrease of about 7 GW in thermal capacity by 2021 compared with 2018);
(ii) infrastructure development (+10% of electricity distributed over the distribution network in 2021 compared with 2018; 3.4 million public lighting points by 2021; some 455,000 public and private electric vehicle recharging points by 2021) and new customer services (9.9 GW of demand response by 2021; 173 MW of distributed storage installed per year by 2021) at the service of electrification and urbanization;
(iii) the digitalization of assets, customers, and human capital (5.4 billion euros in investment for the period 2019-2021).
1 Includes managed capacity.
Climate-change reference scenarios
The Group develops financial and macroeconomic scenarios over the short, medium and long term to support both business and strategic planning and the investment evaluation process. This makes use of economic and statistical models progressively integrated with climate-related data by introducing projections related to physical and transition scenarios in order to have a broad and consistent view of the landscape both in countries in which the Group has a presence and in those of potential interest.
Forecasts of the main variables are constantly compared against the most authoritative international sources.
The Group has taken two physical scenarios representing two distinct, extreme pathways of concentrations of greenhouse gases (GHGs) developed by the Intergovernmental Panel on Climate Change (IPCC) in order to include the most extreme pathways of those that are plausible:
- Representative Concentration Pathway 2.6 (RCP 2.6): a climate- change scenario consistent with limiting global warming to below 2 °C by 2100 (mean of +1 °C over the period 2081-2100 based on the IPCC Fifth Assessment Report);
- Representative Concentration Pathway 8.5 (RCP 8.5): a business-as-usual scenario that represents the most pessimistic forecast of containing GHGs, resulting in a mean temperature increase of 3.7°C over the period 2081-2100.
In order to study the effects of climate change and related transition scenarios, the Group has entered into a collaboration with the International Centre for Theoretical Physics (ICTP) concerning the geographical downscaling of global climate scenarios. Downscaling enables detailed forecasts at a greater resolution so as to track the business impact of a series of relevant variables, such as temperature, rain levels, snow levels, solar radiation, and wind. This approach produces a model that integrates climate change with the other country-level variables, starting with the countries of greatest relevance to the Group and then extending out to global coverage. Integration of the scenario analyses with climate-related variables will result in an increasingly important tool supporting informed strategy and operating decisions.
The initial results of the scenario analysis and climate data have shown that significant, chronic changes will take place gradually over the coming decades. Changes compared with historical trends will be gradual, with limited effects in both scenarios until 2050, but with more extreme chronic effects under RCP 8.5 from 2050 to 2100, compared with historical trends and RCP 2.6. Studies of Europe and South America have pointed to a general increase in temperature with a greater impact in southern Europe and in Central and South America and of particular intensity by 2100. In these areas, rainfall levels could significantly decline after 2050 under RCP 8.5 forecasts, but could increase in northern Europe (e.g. Scandinavia). Differences in solar radiation patterns, on the other hand, could be more significant beginning in 2100 in the regions most exposed to a significant reduction in rainfall, whereas wind patterns could experience less homogeneous variations.
Regarding the transition scenario definition, the Group refers to the leading international sources, such as the International Energy Agency (WEO Sustainable Development Scenario; WEO Current Policies Scenario; ETP 2017 2 °C Scenario 2DS; Beyond 2 °C Scenario B2DS), the International Renewable Energy Agency (Reference case, Remap case), and Bloomberg New Energy Finance (BNEF New Energy Outlook). This approach enables Enel to associate a series of assumptions and variables to the potential climate-related pathways, to develop a scenario consistent with the Paris Agreement (COP21). The transition scenario includes variables such as demand for energy and services or assumptions about electrification, the use of electric vehicles, and the prices of commodities and CO2.
In order to reach this objective, a sharp reduction in emissions from power generation, high renewable energy sources penetration, and the use of effective policy mechanisms and measures with regard to carbon pricing are expected. Within this landscape, we are also expecting an increase in energy efficiency, and in the electrification of industrial and residential consumption as well as in the transport industry.
This transition towards lower carbon emissions and efficiency in the use of energy could lead to a gradual uncoupling of economic growth and the consumption of resources and, consequently, to lower demand and lower prices for fossil fuels.
Description of climate-related risks and opportunities
The Group’s strategy and positioning ensure resiliency and adaptation as well as mitigation capabilities with respect to the evolution of the external context associated to climate change thanks to a vision, a business model, and a position of leadership that are aligned with the Paris Agreement (COP21) and which are centered around the axes of sustainability and flexible growth of utilities:
- world leader among private-sector operators in terms of installed capacity in renewable energy1 (about 43 GW);
- world leader among private-sector operators of distribution networks in terms of customers served (some 73 million);
- world leader among private-sector operators in terms of retail power and gas customers (about 70 million);
- approximately 6 GW of demand response managed worldwide.
Risks and opportunities are described by taking into account the physical and transition scenarios and with the support of the various components of longterm strategy assessment described in the section “Risk management” (e.g. materiality analysis, ESG risk analysis, competitive analyses, etc.). The Group is working to gradually integrate the models of scenario analysis and strategic planning with climate models in order to establish more accurate relationships between the climate scenarios themselves, the macroeconomic landscape, the energy scenarios, and business fundamentals.
The information presented below is the result of a preliminary impact analysis that, by assessing the potential longterm effects (beyond 2030) and analyzing the Group’s portfolio over the period of the Strategic Plan (2019-2021), associates sensitivity analyses of operational and industrial phenomena related to physical and transition variables.
With regard to the risks and opportunities associated with physical variables, and taking the IPCC pathways as points of reference, we analyzed the trends in the following variables and associated operational and industrial phenomena with potential risks and opportunities: (i) change in mean temperatures and potential increase and/or decrease in energy demand; (ii) change in mean rainfall and snow levels with a potential increase and/or decrease in hydroelectric generation; (iii) change in mean solar radiation and wind with a potential increase and/or decrease in solar and wind generation.
In addition to chronic trends, the frequency and impact of these events have been looked at in terms of extreme events potentially resulting in unexpected physical damage to assets. However, work to perfect these analyses is ongoing.
According to the scenarios used, significant, chronic changes in the variables analyzed, even in the event of increases, would have a material impact mainly over the long term.
By integrating financial strategy with sustainability and innovation, the Group has already implemented a series of actions aimed at mitigating potential risks and taking advantage of opportunities related to physical variables, such as the digitalization plan aimed at, inter alia, implementing systems and plans of preventive maintenance and, in particular, resilience plans for the infrastructures of the electrical grid. Enel is also active throughout the electricity value chain (generation, distribution and sales) and has a diversified portfolio of assets, in terms of both generation technologies (with a marked increase in renewables, especially wind and solar) and the markets and geographical areas in which we operate, thereby minimizing climate-related risks and their overall financial impact. The Group also adopts the best strategies of prevention and protection in order to reduce the potential impact on the communities and territories surrounding our assets. All areas of the Group are subject to ISO 14001 certification, and the potential sources of risk are monitored by way of internationally recognized Environment Management Systems (EMSs).
Sensitivity analysis of operational and industrial-type phenomena that can be associated with physical variables
|Chronical physical variable||Description of the potential impact in terms of scenario values of the Strategic and Industrial Plan||Estimated potential impact on EBITDA (average year figures in the 2019-2021 period)|
|Temperature||Higher/lower demand for electricity (+1/-1% accumulated) with an impact on generating (1) and distribution (2) facilities||+0,1/0,2 billion euros|
-0,1/0,2 billion euros
|Rainfall||Higher/lower hydroelectric generation (+10/-10% annual) with an impact on generating facilities (3)||+0,1/0,2 billion euros|
-0,1/0,2 billion euros
|Wind||Higher/lower wind generation (+10/-10% annual) with an impact on generating facilities (3)||+0,05/0,1 billion euros|
-0,05/0,1 billion euros
|Irradiation||Higher/lower solar generation (+10/-10% annual) with an impact on generating facilities (4)||+0,01/0,05 billion euros|
-0,01/0,05 billion euros
(1) Values calculated using the stochastic methodology and representation of the equivalent deterministic variations.
(2) Impact with regards to Italy and Iberia.
(3) With regards to Italy, Iberia, Romania and South America, whether thermal or renewable.
(4) Global scope.
As for the risks and opportunities associated with transition variables, and based on the various scenarios mentioned above in combination with the various factors involved in the identification of risks (e.g. the competitive landscape, the long-term outlook for the industry, materiality analyses, etc.), we analyzed the trends in the following drivers and related potential risks and opportunities: (i) prioritizing the phenomena of greatest relevance in terms of climate change; (ii) distinguishing between the short term (less than 3 years), medium term (3-5 years), and long term (beyond 5 years); and (iii) connecting these drivers to the TCFD recommendations for the classification of risks and opportunities.
Short-term risks and opportunities and strategic actions of mitigation and adaptation:
- introduction of laws and regulations for getting through the transition and the Paris Agreement introducing stricter emission limits and/or altering the generation mix by price signals;
- increasing focus within the financial community on ESG issues with potential future benefits in terms of the availability of capital, which is also tied to financial sustainability, and of new products and markets (e.g. green or other sustainable bonds);
- technological maturity and full competitiveness of renewable energy, both large-scale and smallscale, with positive effects on return on investment.
Medium-term risks and opportunities and strategic actions of mitigation and adaptation:
- use of more efficient means of transport from the point of view of climate change, particularly with regard to the development of electric vehicles and recharging infrastructures;
- development and/or expansion of (new) assets (e.g. storage) and/or low-carbon services (e.g. energy as a service) in response to technological progress and shifts in investment from the supply side to the demand side of energy in order to move beyond the Paris Agreement with benefits in terms of new revenue opportunities;
- use of low-carbon sources of energy as the mainstream segment of the energy mix in countries with opportunities to develop renewable resources and with flexibility in their electricity and energy systems with positive impacts in terms of return on investment and new business opportunities;
- increase in the level of competition and convergence of opportunities from diverse fields with opportunities to access new markets, services and/or partnerships or for the entry of new players into the energy industry;
- regulatory changes with a view to integrating new digital and renewable technologies and to driving infrastructure resilience with potential benefits in terms of introducing new mechanisms of remuneration tied to environmental performance and innovation.
Long-term risks and opportunities and strategic actions of mitigation and adaptation:
- uncertainty and volatility in business drivers (e.g. macroeconomics, energy, climate, etc.) that are growing and persistent as new paradigms, with effects on price indicators, on the cost of raw materials and technologies, on the value of assets, and on reputation;
- gradual increase in the decentralization of the energy and electricity industries with a shift towards distributed technologies and resources, which leads to new business and investment opportunities with a focus on the customer and on the needs of infrastructures.
By integrating financial strategy with sustainability and innovation, the Group has already implemented a series of actions aimed at mitigating potential risks and taking advantage of opportunities related to transition variables. Of particular note are the main actions concerning the energy and climate transition:
- a decarbonization strategy for power generation, resulting in a reduction of thermal fossil fuels of over 6 GW from 2015 to 2018 and an increase of about 6 GW in renewable sources to bring carbon-free power generation to 51% of the total and emissions to 0.36 kgCO2/kWheq. The Plan calls for a further reduction of 7 GW in thermal generation by 2021 and the addition of 11 GW of renewable energy, which would bring carbon-free generation to 62% of the total2;
- financial strategy aimed at integrating ESG issues, leading to a sustainable approach to debt management, including by issuing green bonds – with Enel having issued three green bonds for a total of 3.5 billion euros (for further details, see the Green Bond Report, available at the following link https://www.enel.com/it/investors1/ obbligazioni/main-programs/green- bond) – and collaboration with leading international development banks and financial institutions (e.g. the World Bank, the European Investment Bank - EIB, and other banks dedicated to regional development);
- strategy to develop renewable energy, both on a large scale with the Enel Green Power Business Line with an IRR/WACC spread of around 150 bps and with the Enel X Business Line by developing distributed solutions for large and small customers;
- strategy to develop electric mobility and new services with the Enel X Business Line, which, as of 2018, has about 3 MW of installed distributed storage and manages some 2.5 million lamps, 49,000 public and private electric vehicle recharging points, and more than 4 million property units connected to the fiber-optic network. The 2019-2021 Business Plan calls for bringing annual installed storage to 173 MW, public lighting points to 3.4 million, recharging points to 455,000, and property units connected to the fiber-optic network to 8.5 million;
- strategy to develop renewable-energy PPAs with players in various industries, as well as a series of technology and other strategic partnerships supported by innovation efforts that take advantage of a global network of innovation hubs created to develop technology startups of the greatest potential and to transform ideas into business solutions;
- plan for the digitalization of assets, of customers, and of human capital, which reached around 1.5 billion euros in 2018. The plan calls for a total investment of 5.4 billion euros;
- investment plan focused entirely on the transition to renewable energy and related networks and customers. From 2015 to 2018, about 8 billion euros has been invested annually, over 90% of which dedicated to low-carbon products, goods and/or services and, therefore, to the energy transition. The plan calls for maintaining this level of investment and of focus on climate change.
2 All figures in this paragraph include managed capacity.