Articles / Rubric: Companies and Markets

Turn Off the Lights When You Leave
May 2013 | Companies and Markets

Investors are leaving the Spanish energy sector and its administrative instability is all to blame. In trying to ensure a comfortable existence for the energy sector, the Prime Minister changed laws governing the sector six times last year. According to experts, only deep reforms in the energy companies themselves will improve investment returns.

Foreign funds have left renewable energy and electricity companies behind. “The sector today is mired in managerial chaos and complete legal insecurity. Investors have lost their patience with the ever-changing regulatory laws, which are too big a risk for them,” says economist David Ruyet.

A year ago, Spanish authorities passed a decree approving a moratorium on renewable energy. In March of last year, a number of measures were adopted to help reduce the gap between income and expenditures in energy companies; in September there were tax breaks; and in December, restrictions on the budget deficit were abolished. After all of these changes, investors were expecting at least a few months of peace and quiet. Major financiers even began assessing the objectivity of tariffs in the energy sector and rating agencies considered improving the ratings of players. 2013 began with more changes: The government will save €600-800 million thanks to changes in the cost of transportation and the electricity quotas. Consequently, companies’ already huge debts will grow equal to the amount the government is saving.

Urgent problems Spain is facing include exporting its energy “surplus” and the administration of renewable resources. Since 1997, the government and companies themselves have invested billions of euros in developing infrastructure and providing stability and security for the power grid. “There is no competition in the energy sector,” says Maria Guerra, President of the National Energy Commission of Spain, “and companies made unjustified and ineffective decisions without making long-term investments. The high costs not only affect the final product, but also hinder new players from entering. The energy sector needs to be reformed from top to bottom. We need to prioritize energy efficiency, because developing new technologies is a vital issue. Innovation in energy should be radical in nature and everything that has been done up to now hasn’t produced any positive results.”

In Spain, it is fairly difficult to develop innovative solutions and the blame lies with an unstable national market, governmental administrative barriers, and a lack of qualified personnel and research centers. In 2010, I+D investments in energy were 3.5% of total investments in innovation. More than half the budget that energy companies spend for innovation goes to fixing the existing infrastructure, rather than creating a new one.

“The trend is that Spanish energy companies are replacing internal I+D centers with external ones with the goal of lowering costs,” Guerra said. “Spain beats the other European countries in terms of sales in energy services, but significantly less so in research and development. There is no simple business structure for creating a new business, especially in energy, but in other countries it is being created, so it’s by no means an impossible task.”

Given the changes in the market and the urgent need for innovation and an increase in the number of companies in the industry, Spanish energy companies are providing funds to  small businesses to buy new ideas that could be profitable for them. Back in 1996, Iberdrola began optimizing its products, thanks to the Perseo investment program. Risk capital is made available to new companies and in exchange, the technologies they develop are implemented at Iberdrola itself. Allocating €6 million annually to this project, the company aims to become the leader in new technologies: using solar and wave energy, converting CO2, and energy efficiency. The company’s strategy involves breaking up the I+D corporate group into small working groups which would deal with the creation of new technologies, and the development of research centers at Spanish universities. In 2012, Iberdrola invested €145 million in R&D, with only €6 million of that going to implementing significant innovations.

The Repsol company took it even further. The global energy leader is implementing a program called the Entrepreneurs Fund (Fondo de Emprendedores Repsol), which supplements the innovation strategy, to increase the number of projects exclusively aimed at energy efficiency. The Repsol program is positioning itself as an engine for business initiatives related to optimizing exploration, production, and use of energy resources. The relationship between the Fund and its “protege” isn’t governed by any contract, but as long as the small companies are participating in the program, Repsol expects to apply their inventions in its own business. “The Fund’s main objective is to get ideas for its own Repsol research group,” says economic analyst Antonio Brufau Himenes. “This program is essentially an incubator for projects within the same theme. For the second year in a row, we will choose the 10 best in order to contribute to the development of the industry and compete with the ‘sharks.’ We provide a financial base, coaching, equipment, and the possibility of simplifying bureaucratic procedures. Throughout this whole period, Repsol is in close contact with the entrepreneurs, thereby making use of their experience.”

Endesa, a member of the Italian group ENEL, decided to create a business incubator in 2012 in addition to their own research projects. “There are 180 scientists, three specialized centers and since last year, a business incubation program,” says President of ENEL Lab Juan Antonio Carrasco. “We pay attention to projects dealing with the development of new sources of energy, ‘smart’ networks, automation, solutions for controlling CO2 emissions, and the mobile system. Of the 218 proposals we received, only six were chosen. They will get €600,000 in financing, along with the office space and logistics system required to translate ideas into action. ENEL, in turn, becomes the owner of 30% of every company once it reaches the ‘maturity’ stage, in order to ensure its own participation in innovative projects and to expand its own business.”

This form of acquiring innovation isn’t news, but didn’t exist in Spain until recently.  Iberdrola’s practice has shown that by investing in innovative models, you can significantly decrease I+D expenses and increase the quality of applied technologies. That, in turn, can help reduce the budget deficit in the future and stabilize at least the part of the sector that depends on the energy companies.

Text: Valentina Rinkon

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