International Journal of Sustainable Energy Planning and Management Vol. 18 2018 53International Journal of Sustainable Energy Planning and Management Vol. 18 2018 53 1Corresponding author - e-mail: marta.guerra@ismai.pt International Journal of Sustainable Energy Planning and Management Vol. 18 2018 53–68 ABSTACT During the 2008–2016 period, Europe experienced successive crises, namely the 2008–2009 global financial crisis, the 2010-2012 sovereign debt crisis and the 2014–2016 commodity prices crisis. The year 2010 therefore signalled the beginning of recovery in the financial markets, as well as the outset of significant economic and social changes. Having to deal with an increasingly challenging scenario driven by EU policies, European electric utilities (EEU) were heavily affected. This article intends to characterize the effects of financial crisis on EEU’ business performance. It is assumed that corporate indicators may reflect the impact of the financial crisis on businesses. They can also help characterize the economic and social scenario that preceded the sovereign debt crisis. An analysis of the environmental, social, economic and financial data was performed, as generally reported by EEU in 2010. Using the Principal Components Analysis technique, a set of indicators was identified to represent the drivers and challenges of a particular period of time that was determining in upcoming developments. The results obtained made it possible to identify the most significant issues and the indicators with greater explanatory power that represent the concerns and priorities of the companies under study at the threshold between two successive crises. 1. Introduction “The last decade has been punctuated by a series of broad-based economic crises and negative shocks, starting with the global financial crisis of 2008–2009, followed by the European sovereign debt crisis of 2010– 2012 and the global commodity price realignments of 2014–2016” (United Nations 2018). Several economists consider the global financial crisis of 2008–2009 as the worst economic crisis since great depression of the 1930s [1]; [2]; [3]; [4]) due to its economic and social impacts. This “unprecedented event”, given its “severity, speed and international scope lead to deep and protracted recessions in both developed and developing countries” ([4]; [1]; [5]). In fact, some authors also regard the global financial crisis as a determining contributor to the ensuing sovereign debt crisis in Europe [1]; [3]. Others, such as Geels [6], have presented a different perspective, proposing that the financial–economic crisis could involve the positive or negative impact on boosting sustainability transitions. The author concluded, “the early crisis years (2008– 2010) created a window of opportunity for positive solutions” in order to promote sustainable development in the EU countries. The year 2010 marked the beginning of recovery from the global financial crisis. It also marked the emergence of the sovereign debt crisis, which mainly affected peripheral EU countries. Nonetheless, Financial crisis: Understanding the effects on European electric utilities’ performance Marta Guerra-Motaa*; Thereza Aquinob and Isabel Soaresc aDepartment of Business Sciences, ISMAI - University Institute of Maia and UNICES, Maia, Portugal bDepartment of Industrial Engineering, UFRJ - Universidade Federal do Rio de Janeiro, Rio de Janeiro, Brasil cFaculty of Economics, University of Porto and CEFUP, Porto, Portugal Keywords: European electric utilities; Financial crisis; Corporate indicators; Principal components analysis; URL: http://dx.doi.org/10.5278/ijsepm.2018.18.4 http://dx.doi.org/10.5278/ijsepm.2018.18.4 54 International Journal of Sustainable Energy Planning and Management Vol. 18 2018 Financial crisis: Understanding the effects on European electric utilities’ performance demand, decreasing spreads for generation and funnelling of production subsidies towards renewable to the detriment of fossil fired generation [16]. In fact, the increase in the renewable share has helped lower the wholesale price of electricity, reducing the margins of thermal generation [17]. The prices for consumers remained the same due to renewable production subsidies. Thanks to incentives for decentralized production at household level, alternatives to centralized power generation and distribution emerged during the last years of the twentieth century and the first decade of the present century. The previous points may lead to questions about how companies in the electricity sector have reacted to these changes and how they have affected corporate performance. Electric utilities are a good example as they have to handle challenges emerging on a global scale and by their own nature and scope they are intended to be accountable to various stakeholders. Because they provide a public service and have large- scale impacts, electricity companies have accrued responsibility for reporting to their stakeholders. A current challenge for companies is measuring social, environmental and economic performance, which, in the corporate scene, is considered fundamental for business success. Furthermore, corporations are recognized as significant actors of environmental disturbance due to direct and indirect action by producing social and economic effects. Therefore, the disclosed information is subject to careful scrutiny and analysis. The objective of the present work is to understand the crisis’ effect on the performance of electric utilities by identifying the indicators that are most representative of their situation in 2010, the year of the end of financial crisis and assumed to be a key year in the transition process in the European electricity sector. The analysis performed was based on an extensive set of data collected from the financial and non-financial reports published by selected companies, which brought together a selection of companies with the greatest representation at European level. An attempt was made to obtain a heterogeneous sample in terms of size, shareholder structure, business area and territorial coverage, which was comprehensive of the diversity of the European energy business community. The use of comparable, relevant and representative indicators for industry critical issues was taken as a suitable way of characterizing sector dynamics in a challenging context and to understand the moves and strategies of individual companies. significant economic and social impacts propagated through the entire eurozone. In 2010, the world economy showed timid signs of recovery, which presented different uneven patterns across countries. Western Europe’s economies showed the first signs of emerging from the recession as early as the third quarter of 2009 [7], but economic activity was almost stagnant in most developed economies, while some developing countries presented better growth prospects [8], [7]. The recession brought a reduction in global demand, containment of financing, credit supplies and consequently an excess of unused productive capacity [7]. The banking crisis has forced the largest institutions in the banking sector to reduce access to credit, devaluate and clear their balance sheets [14], [6] and [3]. In this phase, the EU countries are generally characterized by weak labour markets with a reduction in employment and domestic demand [7],[3]. From a microeconomic perspective, the turbulence generated by the crisis has impacted the energy sector at two levels. It has affected the policy framework and it has brought new challenges for the agents operating in production, trading and distribution of energy. By 2010, several trends were happening in the European energy sector, namely: liberalization and integration of the electricity and gas markets; concentration of private capital into mega clusters with a large diversification of activities; vertical integration and privatization of public companies. From 2010 onwards, there was: some stabilization of concentration movements; private financing of companies or groups with significant public shareholding; increased participation of citizens in corporate management; increased mobility of customers between electricity suppliers; arrival of new energy retailers with no connection with production assets on the market; increasing importance of Asian investment in the EU. However, in 2011, the EU remained quite dependent on fossil fuels for electricity production, with 51% of electricity generation coming from fossil fuels [15]. Other apparently abundant energy sources have been discovered worldwide in recent years. The exploitation of new sources of conventional and unconventional fossil fuels, namely shale gas and oil shale, has launched new players into the raw materials markets, changing the trade flows of primary energy and reorganizing the energy landscape. Until 2012, the European economic scenario for electric utilities was characterized by some steadiness in trends. Electricity producers have to deal with decreasing International Journal of Sustainable Energy Planning and Management Vol. 18 2018 55 Marta Guerra-Mota; Thereza Aquino and Isabel Soares In order to condense a large amount of data into a set of indicators representative of the electricity industry with the least loss of information possible, multivariate techniques were used. The use of the Principal Components Analysis (PCA) technique identified, from a large set of indicators, those with the greatest explanatory power, which act as representatives of all the others. The methodology proved to be adequate and provided valuable outputs, making it possible to identify the most representative industry indicators in 2010. The structure of the article comprises several sections. The first presents a brief literature review and presents the electric utilities scenario. In the second, following the previous explanation, a characterization of the panel is given. Next there is a brief presentation of the analysis method, its application to the panel, and a short discussion of the results. We conclude the article by signalling limitations and presenting avenues for future research. 2. Literature review According to Jin et al [8], the treatment of company performance during the crisis and recovery has still not been adequately dealt with in the literature, and, in particular, firm-level treatment is lacking [2]. However, given the importance of the theme, a considerable body of literature has already been produced. Jin et al [8] have performed a firm-level analysis to “define the recovery of firms’ performance after the 2007–2008 global financial crisis”, focusing “in particular on the relationship between firms’ recovery and their financial constraints”. Using a probit model, the authors found that companies with weaker financial constraints usually see faster recovery from the financial crisis than those with stronger constraints. Zhao et al [1] have investigated the impact of the economic crisis, focusing on the financial performance of multinational corporations. They found that firms adopted aggressive commercial strategies and redirected their sales to Asian countries were less affected by crisis than other domestic counterparts. Jin et al [8] have explored the recovery in the Market Value Added (MVA) of European companies after the global economic crisis in 2008–2009. Using a panel dataset, they aimed to “introduce empirical evidence that intangible-intensive strategy in human and relational capital reinforces speed of the after-crisis correction for companies”. “The study demonstrates that intangible- intensive strategy did not always enable faster recovery speed, but provided year-on-year acceleration of MVA growth after the crisis.” Andriosopoulos et al [9] have researched the influence of events in financially troubled EU markets (Greece, Ireland and Portugal) on energy prices. They tested for contagion effects of bond prices on energy/commodity prices during the EU financial crisis, which was confirmed by the results. Sidhoum et al [10] have investigated the relationships among performance dimensions associated with corporate social responsibility (environmental, social and economic) regarding the U.S. electric utility sector. Using a statistical copula approach, they concluded utilities’ economic performance is compatible with environmental, social, and governance performance. As far as we know, references to the recovery of electric utilities have not been found in the available literature. However, Guerra-Mota et al [11] have performed an analysis using ANOVA to identify significant differences in corporate performance indicators during the pre-crisis period, crisis period and post-crisis period using a sample of European electric utilities. The Kruskal-Wallis test showed that variables relating financial and operational issues were the ones with the greatest differences during the period under analysis, which may be due to the very nature of the financial crisis. From a methodological perspective, Jiang et al [12] have proposed a three-dimensional (economic, environmental, and social) sustainability assessment model to analyse corporate sustainable performance based on PCA. They concluded that the proposed method could assess a company’s overall sustainability performance, and “that the method is theoretically sound and practically applicable”. It was also suitable for uncovering strengths and weaknesses in order to define adequate strategies for improvement. Mota & Soares [13] have proposed the use of PCA to identify key performance indicators to assess the sustainability performance of European electric utilities. They concluded that the technique provided a valuable output when used to address environmental, social, economic and financial information generally reported by European electric utilities in order to “concentrate that information on a limited set of indicators, suitable for widespread application”. 56 International Journal of Sustainable Energy Planning and Management Vol. 18 2018 Financial crisis: Understanding the effects on European electric utilities’ performance A considerable number of mergers and acquisitions also contributed to restructuring and reshaping the European electricity and gas sector to face finance needs. Companies’ main strategies consisted of concentrating assets in electricity and gas and focusing on vertical integration (generation, transmission and distribution), while continuing to control firms in other sectors [21]. Therefore, by 2010, several trends had been designed for European energy sector: • Liberalization and integration of electricity and gas markets. • Concentration of private capital in mega clusters with a large diversification of activities. • Vertical integration – targeting activities in different areas of business in different companies, although they may belong to the same group (production, distribution and marketing). Enhanced productive capacity for most companies and the linking of several business areas in the same group. • Privatization of national groups. Some reforming countries have sold their public companies or admitted new players into national energy markets. These actions were supported by the view that increasing diversity in ownership could facilitate competition, provide comparability of performance and boost regulation [22]. Privatization can also provide significant immediate revenue for the government and reduce its future liabilities. On the other hand, they lose a strategic asset and a source of revenue. Privatization is not a necessary requirement for market liberalization and it is also questionable whether it is a condition needed to achieve better performance. Some companies in 2010 maintained a share of public ownership above 80%, such as Eesti (Estonia), EDF (France), Electricity Supply Board (Ireland), Eneco (Netherlands), Stratkraft (Norway), and Vattenfall (Sweden) (see Table 1). However, some authors, such as Castro et al [21], expressed their concerns about this: “authorities are more cautious and more aware of companies’ market power and their consequences for social welfare”. Since energy markets were deregulated, the European Union “has not given emphasis to putting mechanisms in place to control moves towards concentration”, considering that legislation and institutions did not follow the pace of market power concentration. This situation was particularly dramatic in the 2008–2012 crisis scenario, when decision-making and concerted strategies at EU level were urgently needed. 3. Context of the European electricity sector in 2010 The European electricity sector has always been very dynamic, in particular in the performance of mergers and acquisitions, and it also has a remarkable ability to adapt to increasing economic, social and environmental demands. Between 2000 and 2012, the European electrical sector underwent a period of mergers and acquisitions, mainly by consolidating large groups, trying to expand their markets, improving performances and achieving economies of scale in the generation, transmission and distribution segments. The European Union (EU) regulatory frameworks for the electricity sector, which stimulate both the operational efficiency and the increasingly complex new generation and transmission projects, helped consolidate these negotiations among domestic companies and allowing new players into national energy markets. In the context of the 2008–2011 crisis, the EU’s economic objectives were: creating an integrated energy market (for electricity and gas); reducing the carbon footprint associated with the production of electricity; increasing energy efficiency; promoting energy independence and providing affordability of electricity. These needed well-defined political support to provide security to investors and businesses so they could correctly implement the measures [18,19]. To attain the defined objectives, the European regulatory framework’s demand long-term investments relating to the decommission of the most polluting power plants, targets for renewable sources, and defined goals for gas emissions. This means that the electricity industry, which was a very capital-intensive sector, needed to maintain, increase or modernize its production capacity, investing in some cases in new technologies or markets [20]. The crises in the capital markets displaced private funds from the periphery to central European countries [16]. This brought about both difficult financing and credit access for economic agents, namely electricity players, and a change in the perception of the risk level in the electricity industry. Having to deal with increasing regulatory risk, high debts and narrow operating margins, electric utilities encountered increasing difficulties in financing themselves in the markets. However, electricity companies maintained the same level of investment in tangible assets while reducing financial investment [16]. In a fragile context for financing, most of the investment needs were covered by corporate debt. International Journal of Sustainable Energy Planning and Management Vol. 18 2018 57 Marta Guerra-Mota; Thereza Aquino and Isabel Soares 4. Generation utilities in EU scenario The present study is mainly focused on European Union member countries, since they fall under an umbrella of global policies and goals for energy and under a common energy regulatory framework. However, some companies based in other European countries but outside the Union were also included in the study because the scope of their activities with EU member states means they are also subject to EU rules. The selected energy firms included both public and private entities, but also investor owned companies and cooperatives. The selection criteria were: • Companies with headquarters in Europe, in order to limit the study to firms with a greater role in European territory. • Companies with core business related to electricity production, although they could distribute their activities over a variable range of business areas (e.g., electricity production, distribution and transportation of gas and/or electricity, oil and gas exploration and production, sanitation and water supply, environmental services and others). • Availability of non-financial information disclosed in published corporate reports (sustainability, citizenship, corporate respon- sibility or annual reports) or posted on the companies’ websites. Companies with unpublished non-financial information were excluded. Other exclusions were due Table 1: EU generation utilities (corporate, production, financial and labour indicators) Installed Share of generation renewables in Revenue Share of capacity electricity (106 Public Name Headquarters (MW) generation Euros) Employees Ownership Acciona Spain 7 587 97.26% 6 263 31 687 0.00% BKW FMB Energy Ltd. Switzerland 2 532 37.24% 2 586 2 914 52.54% Centrica UK 4 672 1.50% 25 114 34 969 0.00% CEZ GROUP Czech Republic 15 018 3.68% 7 954 32 627 69.78% Dansk Olie og Naturgas A/S Denmark 6 654 19.80% 7 331 5 874 75.00% Drax UK 4 000 0.00% 1 887 1 150 0.00% Edison Italia 12 586 0.00% 9 685 3 939 0.00% Eesti Estonia n.a. 0.00% 796 2 608 100.00% Electrabel Belgium 11 233 3.13% n.a. 7 213 0.00% EDP Energias de Portugal SA Portugal 21 990 64.43% 14 171 12 096 25.00% Electricite de France SA France 140 100 1.65% 65 200 158 842 84.48% Electricity Supply Board Ireland 5 600 0.00% 2 740 6 980 95.00% EnBW Energie Baden-Wür AG Germany 15 489 10.50% 17 509 20 952 46.55% Endesa SA Spain 40 141 35.48% 31 177 24 732 0.00% Eneco Netherlands 2 200 44.00% 4 922 6 545 100.00% Enel Societa per Azioni Italy 97 281 31.74% 73 377 78 313 31.20% EON AG Germany 68 475 10.00% 92 863 85 105 (*) ESSENT Netherlands 4 048 12.10% 6 120 5 872 0.00% EVN Austria 1 787 39.02% 2 752 8 536 51.00% Fortum Corporation Finland 14 113 41.28% 6 296 10 585 50.76% Gas Natural Fenosa SA Spain 17 305 17.79% 19 919 18 778 0.00% Hafslund Norway NA 100.00% 2 018 1 123 53.73% Iberdrola SA Spain 44 991 30.12% 32 926 29 641 0.00% International Power PLC UK 70 196 0.00% 3 745 3 520 0.15% NUON Netherlands 3 645 8.44% 5 458 2 750 51.00% Rwe AG Germany 52 214 3.95% 47 741 70 856 (**) 5.1% Scottish Southern Energy PLC UK 11 330 15.71% 25 097 20 177 0.00% Statkraft Norway 16 010 88.50% 3 680 3 301 100.00% Vattenfall AB Sweden 39 923 22.72% 23 725 40 363 100.00% Verbund AG Austria 8 638 81.88% 3 308 3 096 51.00% (Data referring to 31 December 2010) Key: n.a. – data not available; (*) Information disclosed did not show the direct involvement of public entities; (**) Treasury shares 58 International Journal of Sustainable Energy Planning and Management Vol. 18 2018 Financial crisis: Understanding the effects on European electric utilities’ performance about 20% of companies show a public shareholding of more than 80%, and 47% of the panel had a public contribution of more than 50% (Figure 1). These holdings are concentrated in northern and central Europe, since the energy business is considered a strategic investment and a structuring asset for the country and should be safeguarded from foreign interests. The countries in southern Europe and the United Kingdom have been withdrawing public shareholdings in their energy firms, leaving the energy business increasingly handed over to private initiative under the supervision of regulatory authorities. Electricity companies play a very important role in society since, besides the products and services they provide, they are also responsible for creating a large number of jobs. In 2010, 50% of the selected companies were individually responsible for more than 10,000 jobs each. A single company is responsible for over 100,000 jobs. About 27% of the panel is responsible for ensuring between 10,000 and 50,000 jobs. These numbers demonstrate a particular responsibility from the industry to society. As previously mentioned, the production of electricity has a significant impact on the level of greenhouse gas emissions and on the consumption of natural resources. The use of renewable energy sources has been promoted in a bid to help minimize these effects and to reduce the negative contribution of electricity production in environmental terms. However, despite all the efforts made at EU level to promote renewable energies, in 2010, 34% of the selected companies still produced less than 5% of their electricity using renewable energy sources. The panel comprises the largest and most representative producers of electricity in Europe and 60% of them still use less than 20% of renewable sources in their electricity production. Only 13% of the to factors such as poorly quantified data in non-financial published reports or recent company integration into a group. In this last case, information on the company was usually reported in the consolidated group report. The application of selection criteria for the end of the year 2010 resulted on the following list (Table 1). In the 2010 European setting, it is difficult to identify energy sector companies engaged in a single key activity because they generally have vertically integrated businesses. Integrated businesses may include some or all processes from extraction of resources to product delivery to the customer, including processing, distribution and provision of support services. Alongside vertical integration, a strong trend has been seen towards a horizontal integration in the sector via the creation of partnerships and/or acquisition within the same market/ sector, both seeking an increase in size (market share) and taking advantage of possible economies of scale. Only 27% of the panel is devoted exclusively to activities related to production, trading or distribution of electricity, or perhaps associated with the production and distribution of heat. The remaining 73% combine the general electricity business with the trade, transportation and distribution of natural gas. On a smaller scale, some companies carry out fossil fuel extraction, provide environmental services, as well as construction and engineering activities, water supply, wastewater treatment and waste management services. Occasionally, selected companies may include telecommunications services (e.g., EVN, Hafslund and Scottish and Southern Energy). About 40% of the selected companies carry out their activities in other continents beyond Europe, with significant participation in Latin American countries, especially by companies based in Italy, Spain and Portugal, which play a key role in the expansion of intercontinental energy businesses. Companies based in the northern and central European countries show a greater tendency for internationalization within Europe, expanding their business into neighbouring countries. There is still a non-negligible investment in electricity production in the U.S., particularly in the renewable sector, which, besides the southern Europe companies, also receives some contributions from the UK companies. The selected panel comprises companies with diverse legal forms and ownership structure. The proportion of public shareholding is still relevant in the broader panel. Public ownership means the state or other public entities such as central, regional or local public authorities holding the company’s share capital. Regarding 2010, Share of Public Ownership (SPO) 43% 20% 27% 10% 80%