Iberdrola's Shift in Strategic Focus a Precursor to Waning Appeal in Renewables? 

The renewable energy industry is quite volatile, with constant new developments that alter projections and defy expectations. In the recent news, Europe's leading utility company by market value, Spain's Iberdrola, is poised to shift spending focus to grid expansion and upgrades over the next three years. 

The strategic shift in investment comes amid a flurry of challenges in the energy sector, including rising costs of renewable projects. However, Iberdrola has demonstrated resilience and financial strength, positioning itself as a market leader with a robust cash reserve.

Following the cancellation of its planned acquisition of U.S. energy firm PNM Resources, which would have amounted to approximately $12 billion, and the sale of gas assets in Mexico for $6 billion, experts expect the company will maintain the annual double-digit investments now redirected towards strengthening its grid infrastructure. 

In a move that will further underscore Ibderdrola’s strategic intent to enhance its network business, the company has also offered to acquire the remaining 18.4% stake in its U.S. subsidiary Avangrid for $2.5 billion. With a goal to increase exposure to the growing demand for grid infrastructure in the United States, Iberdrola's investment in Avangrid signifies a significant step towards consolidating its position in key markets.

Executive Chairman Ignacio Sanchez Galan has emphasized the attractive returns offered by power grids, highlighting the potential for sustained growth and profitability in the region. Although Sanchez did not give any specific numbers, sources have indicated grid returns are in the range of 6.5%- 7.5%. This strategic alignment with high-return markets, coupled with Iberdrola's cautious approach to renewable projects, reflects the utility's commitment to maximising shareholder value while mitigating risks associated with project uncertainties.

In addition to the U.S. market, Iberdrola is also exploring opportunities in Brazil, Britain, and other less restrictive markets where grid investments promise higher returns than Spain, where legal restrictions limit the amount a company can invest in power networks. By prioritizing investments in regions with favorable regulatory environments and growth potential, Iberdrola aims to capitalize on emerging opportunities while diversifying its revenue streams.

Iberdrola is not alone in its cautious approach to investing in renewable projects. Late last year, Italy's Enel announced it was also taking a cautious approach to renewable projects. Analysts indicate that such a growing trend could be due to the stiff competition in renewables where someone is always competing with someone for each project unlike in the grid infrastructure where natural monopolies allow companies to invest and reap the benefits without competing with anyone.

Besides, renewable energy companies are also facing difficulties in getting timely connection points for new clean energy projects. The influx of green energy, including from rooftop solar installations and large-scale wind farms, has overwhelmed the capacity of existing grid infrastructure, making it difficult to uptake all generated energy at once. Some developers argue that the situation amounts to negligence, given the government’s long-standing focus on climate action.

 In the UK for instance, green energy projects are caught in limbo due to grid constraints. Wind farms, solar arrays, and battery projects face delays of up to 15 years as the electricity grid struggles to keep pace with the growing appetite for clean energy. Renewable energy developers are frustrated by the backlog, which threatens decades of investment in clean energy. 

The UK’s grid modernisation efforts have not kept up with the surge in demand. Companies like Octopus Energy, a major investor in renewable energy, have been told to wait for connections far beyond the government’s 2035 target.

Although the European Commission estimates that there is a need for an invest of 584 billion euros ($637 billion) in power grids and storage infrastructure over a 10-year period, to solve the problem and not slow the green energy transition, urgent reforms are needed fast to address the queueing system for renewable energy projects while simultaneously upgrading the grid infrastructure. Otherwise, the Iberdrola and Enel announcements will only be the first pieces of the domino.