Iberdrola’s path to sustainable energy

César Pérez Ruiz — You started with a small Spanish utility 23 years ago that has since grown into the second largest in the world, with activities in the Americas, the UK and continental Europe. What was your vision and how did you drive this growth?

Ignacio Sánchez Galán — When I joined, we were a traditional company, traditional in the sense that we were generating electricity with coal, oil and gas. The 1997 Kyoto Protocol on climate change had already been adopted a few years before, and we saw it not only as a social responsibility to protect the planet but also as an opportunity. Since then, we have closed 17 oil and coal power plants and invested more than USD160 billion in new power generation, networks and supply. We are now the world’s largest producer of wind-generated electricity and have expanded our activities from Spain to France, Germany, Brazil, Mexico, the US, Australia and beyond.

We understood that providing electricity in a cleaner and more efficient manner was not only good for our customers but also good for our investors. Our company, which is 120 years old, has always generated hydroelectric power. Our sales benefited and we saw a seven-fold increase in our business value. We are now the largest utility in Europe and the second largest in the world.

But generating electricity is not enough; we need to bring it to consumers with an ever more reliable and capable transmission and distribution grid. At the same time, we are using our hydropower capabilities to store power when other sources, like solar or wind energy, generate more electricity than needed. We reverse the process by pumping water up to a reservoir for periods of higher demand.

César Pérez Ruiz — Consumers are benefiting from stable electricity prices. But there are both supply and demand risks. For instance, data centres account for 1.7 per cent of total demand, but that’s projected to go up to 7 per cent. How do you see this demand developing? Is demand as a function of the size of the economy going to change significantly? Have consumer habits changed post-Covid-19?

Ignacio Sánchez Galán — When we talk about energy, most people think about electricity, but it only accounts for around 20 per cent of total energy consumption. This means we have a tremendous opportunity to electrify the economy. So, while economic growth is a driver of electricity demand, there’s also this transformation.

We’ve largely generated heat by burning things, but that’s no longer necessary. Heat from heat pumps is five times more efficient than boilers. When people realise this, it not only helps the planet, but also helps their pockets, which I think is very important. Additionally, new battery technologies also make storing electricity more convenient.

A few months ago, I spoke at a conference on digitalisation at Bilbao University. People there were much more knowledgeable about digitalisation than I was. I pointed out that the digital world is all very good, but without electricity, there is no digitalisation. And we need to provide this additional electricity in a sustainable manner.

Europe was hit by an energy crisis because of our reliance on Russian gas. Why not use our own resources instead? We have renewable sources like hydro, wind and solar energy.

César Pérez Ruiz — Let’s talk about the supply side. Does oil still have a role to play? Is nuclear energy part of the answer? 

Ignacio Sánchez Galán — Oil and gas still have a role to play and will do so for a long time. The story is different with coal. Some argue that coal is cheaper because the power plants are fully depreciated, fully amortised. But when it comes to building a new power plant, it’s more convenient, cheaper and more efficient to build renewable sources. The investment is lower and there are no variable costs. Maintenance costs are lower as well. This applies to offshore wind too. And all that will make coal obsolete.

As for nuclear power, we already operate nuclear reactors. The key consideration is whether to extend their lifespans. From a technical standpoint, there is no doubt that they can stay operational for longer. The question hinges on economic factors. If governments continue to impose taxes and charges on nuclear power, those reactors will have to be shut down.

The second aspect to consider is the substantial investment per megawatt in nuclear power, which is three times higher than the amount required for the most expensive renewable source, namely offshore wind. In the UK, new reactors cost more than double their planned capital expenditure. As such, I would not recommend this for private investors unless governments can ensure adequate pricing mechanisms to allow for a proper return.

César Pérez Ruiz — I have an investment question. Europe wants to be energy independent, so they are putting a lot of capacity in place. And we’re starting to see some countries with negative electricity prices. What do you think about the industry overinvesting and possibly not getting the required returns for investors?

Ignacio Sánchez Galán — Negative electricity prices occur at certain hours of the day due to an excess of non-manageable renewable production, mainly from solar energy. But this excess energy can be stored and allocated to other time periods. We saw this potential and started making our hydroelectric power plants reversible 23 years ago. This means when prices are very low, we use the electricity to pump water. Right now, we have more than 100 million kilowatt hours in pumping installed capacity, equivalent to more than two million domestic batteries. When prices are cheap, we pump; when they are expensive, we send the water back to the generators.

We have incorporated this process into our financial models and focused our investments in assets and geographies that will not be adversely affected by this trend or may even benefit from storage solutions.

César Pérez Ruiz — How do you handle regulatory changes when the rules of the game change in so many countries? 

Ignacio Sánchez Galán — Let me provide an example. We recently presented our plans for the next three years, which include a total investment in the range of USD45 billion by 2026, with 60 per cent allocated to regulated power networks.

We are focusing on countries where we already have regulatory agreements on what investment is needed, and what the return will be, so the risk is minimal. If you look at the regulatory frameworks being approved in the US, the UK and Europe, you can see that regulators recognise the huge need for additional investment.

For instance, we have been in the US for the last 20 to 25 years, with 80 per cent of our business there in regulated electricity networks. We provide electricity to the citizens of New York, Connecticut, Massachusetts and Maine. These investments are made based on 3- to 5-year tariff frameworks, depending on the respective state, so they are not even affected by the federal government. Additionally, 30 per cent of the total investment will be allocated to renewables and we will also not be relying on spot prices because we sell our energy to customers through long-term power purchase agreements (PPAs) or regulated contracts such as contracts for difference (CFDs). This allows us to avoid unexpected surprises, our business is not centred around price volatility.

For instance, in the US, our customers range from Google and Amazon to Nike. There is already huge demand to power their data centres, so the risks are minimal.

We also benefit from geographical diversification. If a country were to change its rules, we have the flexibility to invest elsewhere. We have a truly international footprint. Our investment allocation depends on regulation and investment needs, driven mainly by demand. It is not just the push for decarbonisation; countries also want to diminish external dependencies and increase the competitiveness of their energy sources. In Europe, this means more indigenous renewable electricity. Most large consumers in most countries are already learning the lesson of what can happen if you are dependent on other parties. Since the last energy crisis, the number of large corporations knocking on our door to sign long-term contracts has boomed.

César Pérez Ruiz — What are the biggest risks you face? Is it that storage technology is not advanced enough?

Ignacio Sánchez Galán — When we make investment decisions for our projects, we approach them pragmatically. Revenues are generally secured through multi-year contracts. We also prioritise the security of our supply chains. We have long-term agreements with our vendors, and we are financially secure – 80 per cent of our debt is fixed, with most of it having long-term maturities. We also issue debt in the same currency in which we receive our revenues, which further reduces financial risks.

All in all, our growth plans are well secured. We are in the right sector, at the right time, with booming demand prospects due to electrification. And we command a leading market position.