Nearly 8 billion euro of investments to fuel Italgas’ growth
Last June 15, Italgas presented its 2023-2029 Business Plan, which defines the Group’s growth path in the coming years.
The priorities of the energy markets have taken on aspects of greater complexity in Europe since the start of the war in Ukraine, as the goal of carbon neutrality must be achieved while guaranteeing, at the same time, security of supplies and competitive costs for citizens and businesses.
Italgas sees its assets playing a key-role in the delivery the ecological transition. Leveraging on a digitized, flexible, and intelligent network, not only in Italy but also in Greece, Italgas will be able to foster a diversification of energy sources leading toward decarbonization on efficient and cost-competitive terms.
The know-how developed in the gas distribution in Italy, thanks to forward-looking investments in recent years, now allows Italgas to have expertise in terms of digitization technologies and innovation capabilities that can also be applied to the Greek network, as well as to the water and energy efficiency sectors, where the Group intends to have a stronger competitive position in the future.
Let us put some questions to Italgas Head of IR Anna Maria Scaglia to get a better understanding of the approach of this Plan, not only in the rationale behind the investment allocation, but also in the impacts it will bring in terms of shareholder value.
In the new scenario we are facing not a dilemma, but an energy “trilemma”. Before the war in Ukraine, the goal was single and clear: to achieve carbon neutrality by 2050. Today the equation is more complex. The operators in the industry are called upon to make investments that will not only enable a rapid ecological transition, but at the same time ensure the security of energy supplies on competitive terms.
However, the current scenario, as complex and challenging as it is, offers Italgas the opportunity to play a key role. And indeed the 2023-2029 Plan, while confirming that we intend to be a leading enabler of the transition moving toward the use of green gases, like for example biomethane, also sees us providing concrete answers on the other items on the new agenda.
Gas infrastructure takes a key role in the resolution of this trilemma”. If used efficiently, grids allow for the transportation of different types of gas, including renewables. Therefore, it is essentially a matter of investing in our assets while maintaining a technology-neutral attitude and avoiding ideological approaches to the role of electricity. In fact, by leveraging the sector coupling – that is, the convergence between the electricity and gas sectors – we will be able to balance the three European objectives in terms of decarbonization, security of supply and competitiveness of the cost of energy.
After all, the REPowerEU Plan, launched by the European Commission in May 2022 to guarantee secure, sustainable and affordable energy for Europe, explicitly indicates the expected contribution from the gas sector by 2030. Biomethane production is set at 35 billion meters cubic meters in 2030 – more than double the 17 billion cubic meters envisaged in the Fitfor Plan55 on the same date – and 88 billion cubic meters in 2050. The contribution of hydrogen is also expected to increase sharply: 20 million tonnes in 2030 according to the REPowerEU and 85 million tons in 2050. Similarly, Energy Efficiency is expected to have an even more significant weight, with a target of 13% in 2030.
As our CEO said “The strategy remains focused on transforming our assets to deliver the energy transition while we aim to maximize returns for our shareholders”.
Despite the complexity of the scenario, thanks to a careful allocation of investments, we believe we can increase net profit and EBITDA at an average rate of 8% per year over the period of the plan. At the same time, the cash flows generated will allow us to bring the gearing level back below 60%. The dividend policy was also confirmed, which provides for the distribution of the higher of a minimum floor of annual growth of the dividend per share at 4%, now compared to the 2022 level, or the distribution of 65% of adjusted earnings per share. Payment of a dividend based on the payout allows shareholders to benefit from the expected growth of the business
In Italy, we will continue investments to complete the digitization of the network by 2024, also with a view to distributing green gas in an efficient and sustainable way. We will also dedicate a substantial portion to ATEM tenders. Despite the delays in tenders experienced in recent years, in the long term we always aim to achieve a 45 percent market share.
In Greece, it will be necessary to invest in expanding and improving the potential of the network to increase service penetration and make the assets more digitized. We will also be very focused on making the integration process with the Group as effective and fast as possible, leveraging the consolidated know-how gained in the Italian operations.
On the Energy Efficiency front, Italgas intends to build a strong competitive position. As the Italian government’s Ecobonus incentives are set to run out, we will aim to preserve attractive margin levels through a shrewd selection of new projects to be included in the portfolio and through targeted M&A transactions.
In the area of water networks management, following the closing of the acquisition of Veolia’s water assets in Italy – for which we signed a preliminary agreement on June 9, 2023 – Italgas Group will come to serve 6.2 million people, or about 10 percent of the Italian population: an ideal platform on which to plug future acquisitions in this business in which we can deploy the solid experience gained in gas distribution in the coming years.
Over the 2023-2029 period, Italgas will invest a total of 7.8 billion euro. Of these: 4.6 billion euro will be allocated to the development, digitization and repurposing of the gas distribution network in Italy; an additional 0.9 billion euro for the development of the gas distribution network in Greece, in line with the country’s decarbonization goals; 0.8 billion euro will also be dedicated to accelerating growth in the water and energy efficiency sectors; and finally, 1.5 billion euro will be allocated in ATEM tenders.
For sure. In fact, we need to intensify the process of transformation and technological innovation. If we look in more detail at how the total 4.6 billion dedicated to distribution in Italy will be allocated, we see that 1.6 billion euro are earmarked for investments that by 2024 will allow us to have a 100 percent digitized network and 90 percent remotely controlled through proprietary software, which we have called DANA, or Digital Advanced Network Automation. With these CapEx we will also be able to connect about 400 biomethane plants to the grid and we will develop a reverse flow technology to the transportation network that will allow us to accommodate the biomethane not consumed locally. We are also working on the development of a proprietary “H2 ready” smart meter. Therefore, starting in 2025, we expect to have about 5 million new meters installed by 2029.
The largest portion of investments in this area, equal to 2.9 billion euro, will be allocated to the continuation of repurposing, development and upgrade of the existing infrastructure, including investments in centralized assets.
The aspect of fundamental difference from the investment plans made in the past concerns the way we are going to identify individual investment projects. And we will move more and more toward smart maintenance.
About 170 million euro will then be invested to complete the process of methanization in Sardinia, with the construction of the latest “digital native” networks and the conversion to natural gas of the networks currently supplied with propane air and LPG.
Finally, 100 million euro are dedicated to targeted M&A operations.
That’s definitely the case. That is why we will have great care in implementing the 900 million euro of investment planned over the period with a well-defined logic, leading us to have a fully digitized infrastructure by 2029, as smart as the Italian one, to enhance the path of technological innovation and digitization made in recent years in Italy. Therefore, in Greece we will also go to install the new meters, which are already set up to measure the consumption of new gas on about one million Redelivery Points that we estimate to reach by 2029.
We want to extend the network from 7,491 to about 11,000 km and increase gas distribution penetration, particularly in the Athens area. This should bring us, in terms of RAB, from 0.7 to 1.2 billion.
To make the integration process as efficient as possible, we will act to have a lean and functional organization to leverage economies of scale. The infrastructure of two of the three DSOs we have in Greece has already been migrated to the cloud, while we are working on the plan to merge the three operating companies into a single entity, replicating the Italian model to enable more effective sharing of expertise and experience.
Based on the current timetable, we plan to invest 1.5 billion euro over the Plan’s period to participate in ATEM tenders and for the subsequent development of the concessions we will have acquired. However, we are aware that due to delays on the part of those who have to hold the tenders, there will be significant growth opportunities for Italgas even beyond the horizon of this Plan.
These are resources that will feed into development in the water and energy efficiency sectors.
Overall, compared to the previous Plan, we have doubled planned investments in the water cycle management business to 400 million euro. The closing of the acquisition of the assets held by Veolia in Italy, with companies active in Lazio, Campania and Sicily, will entail an outlay of about 115 million. Leveraging the critical mass achieved, we will select new M&A deals and apply the best practices and technologies we have developed in the gas distribution business to all the assets that will gradually enter our perimeter, taking advantage of the similarities between the two businesses and the overlaps from a geographical point of view.
We also continue to invest with conviction in energy efficiency, which is expressly mentioned as a tool for achieving REPowerEU objectives, allocating more than 300 million euro for the development of Geoside, the Group’s ESCo. This will be done mainly by carrying out selected M&A transactions, which will enable us to strengthen our competitive position in our target sectors: condominium, public, industrial-tertiary and captive – concerning the Group’s assets. The goal is to achieve a market share in Italy of between 6 and 8 percent in the medium term.
The sum of the CapEx that will be made in Italy and Greece, together with ATEM tenders, will fuel the growth of the RAB, the Regulatory Asset Base, at a rate of 4.8 percent on average per year over the Plan’s period, until it reaches €11.3 billion in 2029. Even excluding the contribution of tenders, the average growth rate would remain sustained, in the range of 3.1 percent per annum, enabling the RAB to reach 9.9 billion euro at the end of the Plan.
Italgas market share in Italy would accordingly increase from 34 percent in 2022 to about 45 percent in 2029, including tenders, through an increase in redelivery points, which would rise from 7.8 million in 2022 to 9.7 million in 2029, with a weighted average growth rate of 4.1 percent. Excluding the contribution of scope tenders, the number of redelivery points would stand at 8.4 million in 2029.