Paul Marty (E00): "The Energy Crisis is Behind Us, Transition Lies Ahead"

Having initiated his career in mergers & acquisitions with BNP Paribas in London, Paul Marty (E00) has since spent 17 years at Moody’s, where he currently manages a team specialised in credit rating for utility companies based in Europe, the Middle East and Africa. He presents an overview of the sector and its prospects in the context of the war in Ukraine and environmental imperatives. 

ESSEC Alumni: What is the state of play for the utilities market and sector in Europe? 

Paul Marty: Since the liberalisation of electricity and gas markets, initiated in Europe in the 1990s, the majority of utilities in production and supply activities operate in a competitive environment. Just two transport and supply networks are regulated monopolies. You find three main types of business model today: integrated utilities such as EDF, who operate along several steps of the value chain, regulated utilities like RTE who manage networks, and pure players operating in a single sector, which is often that of renewable energy. The sector generally boasts a solid credit rating, reflecting the essential nature of the services it provides and the barriers to market entry due to highly capital-intensive activities.  

EA: Where are we with the energy crisis triggered by the war in Ukraine? 

P. Marty: The energy crisis is for the most part behind us, resulting in the highest levels of gas storage ever seen and falling wholesale prices. That said, with the loss of its main historical supply source, i.e. Russian gas imported via pipeline, there is growing pressure on the structural aspect of the European market. This constraint means that wholesale prices remain higher and more volatile, despite the rise in liquefied natural gas (LNG) imports.

EA: What about energy transition? 

P. Marty: Decarbonisation targets are forcing utilities to abandon their highest carbon-emitting activities, such as coal-powered plants, and to invest in renewable energies like solar power or onshore / offshore turbines, and to a lesser extent in emerging technologies such as green hydrogen. Nuclear power is also seen by some countries as a decarbonation solution. The common factor between all these technologies is the need for substantial investments, funded by utility companies’ cash flows, by debt, and given the amounts required, increasingly by equity capital. In addition, electricity supply and transport networks need to adapt to the growth in production capacity. The European Commission estimates the cost of this adaptation at €584 billion for the current decade alone. 

EA: What are the main specificities of European utilities, compared to the world's other players?  

P. Marty: European utilities operate in a region where coal prices are among the highest in the world, but also where the levelised cost of energy (LCOE) for renewable energies is moderate. These combined factors prompt utility firms to shut down their coal plants and shift to renewable energy at a fairly rapid pace. In the USA and thanks to the Inflation Reduction Act (IRA), utilities can avail of substantial subsidies for renewable and nuclear energy, battery storage, hydrogen and carbon-capture technologies. In Asia, on the other hand, regulation is generally more favourable towards fossil fuels, in a context of soaring power demands. 

EA: What is the outlook for European utilities in the years to come? 

P. Marty: As we see it, credit prospects are stable for integrated utilities, thanks to current electricity and gas prices remaining relatively high and thus supporting margins (despite the ever-present risks of social and political intervention linked to energy bills). The same can be said for regulated utilities, owing to well-established, transparent regulations and an anticipated rise in authorised yields. Companies in the sector can nevertheless expect a major challenge: the commitment of massive investment to connect new renewable energy sources and support the long-term electrification of uses. 

EA: Could the recent European elections change the game?

P. Marty: A pure and simple overturning of existing climate legislation seems unlikely, but the gain in seats by parties opposed to this legislation in the past could slow down the current pace and dampen the ambition to develop new laws. This scenario would most certainly impact the EU’s aims and plans to reduce carbon emissions and develop electric vehicles, renewable energy and network infrastructures, which all require coordination between Member States. The rebound effect would lead to a slowdown for European utilities in the execution of their investment programmes. 

EA: Do ratings by agencies such as Moody’s influence these investment paths? 

P. Marty: We assess credit risk from an objective and independent standpoint. Our ratings help market players to make informed decisions and facilitate the effective allocation of capital by providing investors with independent forecasts and a common credit risk language.

EA: How do you guarantee the independence of your ratings? 

P. Marty: We have implemented robust procedures and policies to protect the quality and independence of our ratings, including a strict separation between analytical and commercial activities. On our website, we publish all the methods backing our decisions, and we always explain our reasoning, including the factors which may boost or lower a score. 

EA: What resources do you use to carry out your analyses? 

P. Marty: Our primary sources of information are utility companies’ activity and financial reports, which provide key data on individual company performance, as well as our meetings with their management teams. In addition, we have access to various databases, such as Bloomberg or FactSet, which enable us to monitor market trends. Reports published by bodies such as the International Energy Agency, or national (e.g. France’s Energy Regulatory Commission) and European regulators are also particularly helpful. Lastly, our discussions with colleagues responsible for sovereign credit ratings help us to put sector movements in perspective with national energy issues. 

EA: What resources do you recommend for anyone interested in European utilities?

P. Marty: I’d especially recommend our annual outlook on the sector, which explains our expectations in terms of credit for the coming 12 months, in addition to our report covering Europe’s main electricity markets. We also produce reports on individual companies and themes of special interest for investors, such as nuclear power or green hydrogen.

Interview by Louis Armengaud Wurmser  (E10), Content Manager at ESSEC Alumni 

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