The past five years have been difficult for shareholders of European utilities. An average decline in the share prices of nearly two-thirds as reflected by the ESTX utility index is difficult to digest. Even taking the strong dividend payments into account, the value destruction is still above 50% before inflation. Is this the end of the traditional utility business model, or just a normal business cycle, where investors should have looked at the timing and overall valuation of utility stocks five years ago? Let’s have a closer look what happened in the utility sector in Europe in the last 15 years. At the end of the 1990s, the first liberalisation waves arrivedin Europe and the general technology boom reached its heights. Stronger competition on the wholesale market with US traders such as Enron and Dynegy opening operations on the European markets and overcapacity in the electricity generation led to declining wholesale power prices. Profits of European utility incumbents came under pressure, as the traditional fully integrated utility business model was transformed and split along the value chain into upstream, midstream and downstream activities. European incumbents were reacting to this threat in the first years of the new millennium by growing their own presence on the wholesale, trading and midstream market and by selling all non-core, non-energy related activities, spanning in many cases telecoms to construction and printing. Utilities transformed into pure energy plays. As wholesale prices were low, new-build activities slowed considerably and the overcapacity diminished step by step. The crisis among US traders, especially the insolvency of Enron end of 2001, first increased insecurity but later enabled the European utilities to regain a strong foothold in the wholesale spot and term market. The years 2003 to 2008 will stand out as the golden years for European utilities for many decades, as different factors worked in favour of the utilities profits. Wholesale market prices for electricity entered a bull market, and not only were absolute electricity prices on the rise, helping the profits of nuclear and lignite generation, but spark and dark spreads, defining the ability to generate returns by transforming either natural gas or hard coal to electricity,set record highs at above €25/MWh by the end of 2006. In 2005, Europe launched the European Union Emissions Trading System (ETS) to combat climate change. The ETS give each ton of emitted CO2 a price in a bid to reduce total emissions in Europe by a cap and trade system. Although…

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