In quieter times, Romania’s largest green-power producer would be entirely focused on its upcoming initial public offering, an ambitious sale estimated at about €2.3 billion ($2.5 billion) sale that could be the largest-ever in Eastern Europe. But with droughts persisting across Europe, Hidroelectrica SA is gearing up to take on another challenge: adding wind and solar capacities and expanding its existing hydro portfolio.
(Bloomberg) — In quieter times, Romania’s largest green-power producer would be entirely focused on its upcoming initial public offering, an ambitious sale estimated at about €2.3 billion ($2.5 billion) sale that could be the largest-ever in Eastern Europe. But with droughts persisting across Europe, Hidroelectrica SA is gearing up to take on another challenge: adding wind and solar capacities and expanding its existing hydro portfolio.
That won’t be easy. Should the company, which generates about $1 billion annually in net income, succeed in adding about 4,000 megawatts in new onshore and offshore wind and solar projects, it would nearly double its existing energy capacity in the medium term.
There isn’t unlimited time. As worsening climate conditions play out in Europe, companies and investors are rushing toward green assets, and governments are allocating billions of euros to expedite the shift away from fossil fuels and meet carbon neutrality targets. While this creates opportunities, it also intensifies competition and could make it more challenging for companies to meet their looming targets.
Green Boom
Although Hidroelectrica has been a power producer for decades, the state-owned company only entered Romania’s consumer-facing power market in 2022, becoming the country’s fourth-largest supplier in a little over a year. The utility now has a market share of over 8%, more than half a million clients, and accounts for about a third of Romania’s total energy output.
There have been setbacks as its scaled: after buying its first wind farm from Germany’s Steag GmbH in what was hailed in 2021 as a landmark deal for a state-owned company, Hidroelectrica stalled in its pursuit of new projects. At the end of that year, it placed non-binding bids on three wind farms and one photovoltaic park with a total capacity of two gigawatts in a potential investment valued at €2.3 billion, according to its most recent annual report. But no deal followed, and no details have been released since.
The following year, a severe drought dried up European rivers from the Danube to the Rhine and slashed the company’s output, posing a serious threat to the utility’s business. Rising power prices triggered by Russia’s war in Ukraine helped the company raise its net income to 4 billion lei ($885 million), according to data released by its minority shareholder, but the moment delivered a message about the importance of diversification.
In its push to expand into wind and solar and broaden out its hydro capacity, Hidroelectrica is competing against dozens of large energy companies in Romania. Enel, E.ON, OMV Petrom, Engie, and a former CEZ unit now owned by the Macquarie Group asset management firm are all planning expansions into the green energy sector, with an eye to future funding opportunities. Romania stands to receive over €80 billion in EU funds in the next four years, and a large part has been earmarked for renewable energy production.
Of his company’s ability to compete in a crowded field, Hidroelectrica Chief Executive Officer Bogdan Badea told Bloomberg, “we are actively creating our own growth opportunities.” To ensure that the company doesn’t get bogged down in the red tape that can accompany energy projects, he said that the utility will only make offers on “projects that are at least ready for the construction stage and with engineering and procurement contracts in place.” The company was prepared to act on several wind and solar projects as soon as bids were approved, he noted.
To finance these plans, Hidroelectrica will rely on its own funding sources and potentially raise debt, he said, which may become easier once the company is listed on the stock exchange.
Hidroelectrica is expected to go public on the Bucharest Stock Exchange by June, and to have its shares sold by closed-end fund Fondul Proprietatea SA, which is the producer’s sole minority shareholder. The fund, managed by Franklin Templeton, plans to sell as much as 20%, which represents its entire holding in Hidroelectrica, a company it currently values at $12 billion.
While Hidroelectrica won’t get any money from the IPO, a successful listing would increase its visibility and give it access to an even wider range of investors.
Seeing Green
Romania’s renewables sector is benefiting from the fact that the country is in the midst of a massive wave of green investment. Already home to Europe’s largest onshore wind park, in the first three months of this year wind and solar projects worth over €1.5 billion received permits to connect to the grid, according to local newspaper Ziarul Financiar. Moreover, as domestic solar construction projects ramp up, the country may soon host some of the continent’s biggest solar parks.
Hidroelectrica, in particular, stands to take advantage of the moment.
“Given its strong financials and the possibility to combine multiple energy output sources, Hidroelectrica seems to be in an ideal position to become a national champion in renewables,” said Sorin Elisei, a managing director in charge of the energy sector at Deloitte. But he added a caveat: as a state-owned company, the Romanian government takes about 90% of the company’s profits to help cover its large budget deficit.
“It’s a fact that many state-owned companies start the year with big investment plans and only manage to complete 40% to 60% of those,” Elisei said.
George Sergiu Niculescu, Romania’s Deputy Energy Minister, took a more optimistic outlook, asserting that the government supports the company’s investment plans and wants to help it achieve them.
“We see rising power demand at home and in the region,” Niculescu told Bloomberg.
A successful IPO would not only be good for Hidroelectrica. It could also help the Bucharest Stock Exchange secure a long-awaited upgrade to emerging-market status by MSCI, and would enable Romania’s government to hit one of the milestones in its recovery and resilience plan, in which it pledged to sell a minority stake in a publicly traded hydro-power producer in order to unlock €29 billion in EU funding.
While the recent discovery of a gas reservoir in the Black Sea has sparked debate about whether Romania could become one of the region’s biggest energy exporters in coming years, renewables are where the sector sees opportunity. In continuing to go green, Hidroelectica and its rivals are harnessing their growth to billions in EU funding and future investor interest. Romania, meanwhile, is seizing on a unique opportunity to upgrade its outdated energy sector, invest in key infrastructure projects and possibly even change the structure of its consumption-based economy.
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