Endesa, S.A. (ELE) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to our 2022 Capital Market Day. As you can see in the agenda now on the screen, our CEO, Jose Bogas, will illustrate our vision on Endesa in the energy context as well as the main strategic actions. Our CFO, Luca Passa, will detail the main targets and financial figures of the 2023, '25 plan. And after some closing remarks, we will then open the Q&A session. Thank you. And now I will give the floor to Jose Bogas.

Okay. Thank you, Mar, and good morning to everyone. Over the last 3 years, we have endured unprecedented economic, social and geopolitical disruption. The combined effect of COVID-19 pandemic and the Ukrainian war have drastically accelerated the need of energy transition. Energy market, design and supply chain restrictions force -- have clearly emerged, and governments are still struggling to find ways to ensure affordability of prices, security of supply and environmental sustainability. In this context, the acceleration of the clean electrification of energy consumption appears as the way forward to enhance European energy system predictability to reduce energy price volatility and to contribute to the economic recovery. In Spain, the National Integrated Energy and Climate Plan 2021-2030 set target for greenhouse gas emission reductions, renewable energy penetration and energy efficiency. This effort is consistent with the increase in European ambitions for 2030 as well as with the Paris agreement. The package of initiatives launched this year to mitigate the impact of the energy crisis point to a likely increase in 2030 emission reduction targets, which could rise from 55% to 57% through further development of renewable and energy efficiency. Moving to Slide #5. Our long-term vision relies on 3 main macro trends, decarbonization acceleration, coupled with a cleaner electrification of the economy speed up, a clear customer-centric commercial focus and digitalization reforms of the networks. Throughout 2022, we have continued to advance across all of our pillars reaching new milestones. On decarbonization, since 2014, we have doubled our renewable capacity and reduced our carbon emission by 70%. This continuous renewable development allow us to accelerate energy independence and to benefit from a more competitive commercial strategy, which in the last 7 years has resulted in a 50% increase of power-free customers. Finally, on networks, we remain committed to digitalization as a key factor to further improve security supply and grid resiliency as well as to accommodate additional demands from new generation technologies and customer needs. We adopted the strategical managerial decisions very early to embark on a deep transformation of the company in order to gain an edge in the energy transition and position ourselves at an advantage to meet the challenges of new business opportunities. On Slide #6, we show the evolution of our financial metrics since 2014. Our strategic decision deriving a strong economic performance during the last years as proven by the resiliency of our integrated business model even in the most challenging and adverse years throughout our business plans. Our CapEx has more than doubled focusing on renewables and networks in accordance with our energy transition long-term goals. EBITDA like-for-like is set to reach a range from EUR 5 billion to EUR 5.3 billion, increasing about 6% annual compounded rate versus 2014 level. For 2022, as we advance in 9 months '22 call, the closing estimate is much higher than the targets in the previous CMD based on the solid 9-month results and with a fourth quarter that we expect will be in line with the third quarter. Leverage is expected to remain at a healthy level at 1.9x by year-end, well below the sector average. Certainly the best recognition of the value we have created across the period is the 138% total shareholder return we have achieved since 2014 secondary offer. Endesa has been providing its shareholders with one of the most attractive returns in the industry, which compares very favorably with main stock market indexes. This performance has been also supported by the increased participation of socially responsible investor, reaching almost 15% of our total shareholding as of December 2021 or around 50% of our free growth. Let's take a look at our main strategic actions over the plan period on Slide #8. Our integrated model provides a unique advantage to quickly respond and adapt to different market scenarios. Our aim is to cover a higher amount of fixed price customer contract with our increasing greenhouse gas-free output, lowering our risk return profile and granting competitive prices to our customers. We will continue to progress in our energy mix decarbonization boosting its competitiveness and sustainability as well as our security of supply. We will keep reinforcing and developing new electricity distribution infrastructure as it is one of the fundamental enabling factors for the decarbonization and electrification of the economy. Moving to the Slide #9, between 2023 and 2025, we will invest around EUR 8.6 billion to maximize returns, leveraging on our integrated position and focused on decarbonization and grids. 50% of the CapEx is devoted to continuing the decarbonization of our generation fleet with a total amount of EUR 4.3 billion. In electrification, as a result of the increase in consumption together with the progressive customer migration to free tariff, we are developing a wider range of services, and therefore, we are allocating 10% of total CapEx. The integration of growing renewable generation will be supported by EUR 2.6 billion investments in network to provide reliability and quality services to -- service to customers. The investment plan of this update increases total CapEx versus previous plan by 15%, supporting our commitment to clean decarbonization of the economy. When it comes to the first strategic action on Slide #10, we need to increase our fixed price share on total power sales to 71% by 2025. More importantly, we plan to boost the greenhouse gas free sources over the next 3 years in order to cover more than 95% of these volumes under fixed price contract, implying a lower risk associated with [indiscernible] market volatility, better sourcing costs and an improvement in our margins going forward. In addition, this will allow us to broaden our commercial strategy to meet the growing appetite of our customers for new and more advanced value-added services based on cleaner electricity and the most efficient service at the lowest possible cost. Moving to the next slide. Over the next 3 years, we will continue to create value for our customers by strengthening our commercial strategy with new products and services at affordable prices. Our strategic value creation for customers foresees a reduction of final selling price by 10% -- minus 10% over the planned period. We will spend a total of EUR 0.9 billion to mainly boost our product range offer through the deployment acceleration of charging points that will increase by fivefold in 2025, reaching around 66,000 public and private, and the ongoing focus in e-Home contract with an increase of 12% in 2025, reaching 2.8 million contract. In the retail business, we will aim at promoting the adoption of highly to fully electric behavior with active customer portfolio management focused on increased value of products and services. Starting from our large power portfolio -- power customer portfolio of 6.9 million customer expected at the end of 2022, we target an increase of around 0.4 million customers in the free market to 7.3 million, while liberalized fixed price power sales will increase to around 51 terawatt hour. As regard investment allocated to our renewables, and I am now on Slide 12, we are progressing at a fast pace towards an objective of becoming a 0 emission company by 2040. We will invest EUR 4.3 billion by 2025, 39% more than previous plan, to add around 4.4 gigawatt to our installed capacity, out of which 3 gigawatt are in solar and 1.4 gigawatts in wind. Expected unitary CapEx in 2023 to 2025 will be affected by the current macro scenario, pricing inflation and raw material costs resulting in an estimate of around EUR 0.7 million per megawatt in solar and around EUR 1.1 million per megawatt in wind. Renewable production will reach up to 85% of the total, reducing the overall cost of sourcing and support increased renewable energy customer demand. We expect CO2 emission-free production to represent 91% of mainland output, 19 percentage points above the current share and in a prominent position to fulfill carbon neutrality. And finally, we are expecting an additional 70% reduction in 2025 mainland direct emission versus 2022 year-end figure. And continuing with renewables. And regarding the pipeline, and I am now on Slide #13, the ambitious renewable capacity growth is supported by a solid product portfolio, which we keep on building. Our growth pipeline currently stand at 85 gigawatt, one of the largest and most diversified development project -- portfolios in the industry, with solar technology representing the majority of this project mature, and in execution project with COD 2023 to 2025 are able to cover our capacity deployment by 2025 by 2x. Around 30% of the 2023 to 2025 target additions are already addressed and 1 gigawatt currently in execution, we exclude from the pipeline, the capacity additions that are due to come online by year-end, roughly 0.8 gigawatts. The residual capacity addition are supported by a mature pipeline that excluding batteries, cover 4x the target. We continue to support the growth in storage with a relevant growth pipeline, who is important in providing short-term storage and flexibility services is becoming clearer. And we will be gradually incorporating them into newly installed renewable capacity. Moving to Slide #14. Our renewable strategy allows us to confirm our decision to bring forward our net 0 target by 10 years to 2040. This goal is even more ambitious than just achieving net 0 as we foresee to achieve it across all scope without using any carbon removal technology or natural-based solutions. As of 2025, we estimate lowering our Scope 1 specific emission to under 145 grams of CO2, which will represent a reduction of roughly 80% versus 2017 base year. This allow us to configure our 2030 target of below 95 grams per kilowatt hour. We are developing a business model in line with the goals of the Paris agreement, a commitment that remains at the very center of our strategic plan and include the mitigation of all 3 Scope across our value chain according to the 1.5 degree centigrade pathway. In relation to Scope 3, we expect to reduce from 12.2 to 10.7 million tonnes CO2 in 2025 and to 6.6 million tons of CO2 in 2030. In addition, and in line with our aim to exit carbon-intensive activities, we plan to take advantage of the current exceptional market environment to crystallize the value of our [ gas asset ]. Looking at how much CapEx is needed to deliver reliable and safe electricity to our customers, and I am on Slide #15, the creation of resilient and digitalized infrastructures will result in a better service for our customers. More than 75% of our CapEx will be deployed into ongoing digitalization and quality and resiliency of our asset as a key driver of efficiency and reduced network interruption resulting in a reduction of TIEPI and NIEPI of 26% and 11%, respectively, as well as the lower 2% percentage point in losses. The remaining CapEx is devoted to increasing connection, accommodating the future pickup in distributed energy resources. Our commitment to [ grid ] is -- to [ grid ] as enablers of the energy transition plan foresees investment of EUR 2.6 billion, slightly below the previous plan, adapting to a context of highly -- of higher uncertainty and [ risk ]. RAB at the end of 2025 will decrease to EUR 11.3 billion. On the Slide #16, you can see a brief snapshot of what Endesa will look like in 2025. An attractive commercial strategy implementation will result in a remarkable increase in our free customer base for 2025, reaching a total of 7.3 million clients. Likewise, the growing sale of generation free gas sources will allow us to cover more than 95% of our fixed price contract reducing sourcing costs, [ grid ] exposure and improving profitability. Renewable capacity will amount to around 14 gigawatts, 66% of the mainland generation fleet with an emission free output of 91%. As key enabler of the energy transition, [ grid ] will play the crucial role. 42% of the total distribution CapEx will be in digitalization, improving network performance. As a result of our quality improvement effort, the time of [ interaction ] metric will go down to 42 minutes. Moving now to Slide #17. Our strategic vision will create value to our stakeholders. The integrated commercial approach will result in a sound increase of at least 300 basis points of our return on investment capital for all of our stakeholder. In addition, it will allow our customers to reduce the overall energy spending by 10%, while benefiting from an increase in service quality levels. The decarbonization of our generation mix and customer electrification in the 2022 to 2025 period will allow us to reduce the Scope 1 generation greenhouse gas emission intensity by 33%. Circular economy is integrated in our strategy as an additional feature to our long-term vision, our direct and indirect investment as well as an array of share value creation projects developed in the local communities, where our projects and assets are located, will enable accumulated increase of the gross domestic product of around EUR 10 billion. We will also continue to pay particular attention to the supplier qualification process, which incorporates strict requirements in decarbonization safety and human right -- related rules. Such policies imply that 62% of our suppliers' value is currently guaranteed by carbon footprint certification, and we expect to extend this criterion to the 75% of our suppliers. And now I will hand over to Luca to explain the strategic plan over the next 3 years.

Thank you, Pepe. And good morning, ladies and gentlemen. Let's get into the details of the plan, starting with CapEx on Slide 19. As Pepe mentioned before, our capital allocation has 2 clear purposes: support our integrated commercial strategy, devoting EUR 5.9 billion along the period, and leverage on networks with EUR 2.6 billion CapEx as a key enabler of renewable penetration and energy efficiency for our customers. In total, we plan to invest around EUR 8.6 billion during the next 3 years, an increase of 15% compared to the plan presented last year. We continue to apply sustainable criteria in all our investment decisions with around 90% CapEx aligned with the UN SDG directly targeting SDG 7, 9 and 11, while all of them contribute to the wider SDG 13 to fight against climate change. In addition, and according to our estimate, based on the common framework provided by the European Union, more than 80% of our CapEx is aligned to the EU taxonomy criteria due to their substantial contribution to climate change mitigation. This percentage does not include conventional generation, retail and other CapEx. On Slide 20, we present EBITDA evolution along the business plan with ranges of around EUR 0.3 billion due to the extreme volatility of regulatory and energy market context. EBITDA like-for-like will be growing by 4%, moving from around EUR 5.3 billion to EUR 5.5 billion, mostly due to the distribution once it recovers from the negative [ nonrecurring ] book in 2022, while the integrated commercial strategy, defined as power generation in Endesa X and retail, is expected to stabilize along the business plan after an extraordinary expected 2022 year-end performance. Renewables EBITDA, including [ large other ] assets will increase EUR 0.5 billion, supported mainly by the ongoing capacity expansion driving larger volumes and expected normalization of other conditions compared to 2022, one of the driest of last decades. Customer EBITDA, which includes Endesa X, will expand a sound EUR 1.3 billion, supported by a plus EUR 1.1 billion of better supply margin, thanks to lower sourcing cost by EUR 1.5 billion, around minus 40% in [ unitary ] terms, driven by the positive impact of the replacement of market purchases and thermal output with new renewable output for 10 terawatt hours at EUR 65 megawatt hour and lower ancillary services that compensate the fixed selling price reduction by minus EUR 0.5 billion due to the decrease of minus 10% of unitary fixed selling price, Endesa X marginal increase and the absence of negative gas retail margin booked in 2022. Finally, conventional generation and others experienced a sharp reduction by EUR 1.7 billion, affected by the absence of nonrecurrent items, thermal margin reductions once combined cycle productions comes to a normalized level for EUR 0.5 billion, minus EUR 0.2 billion in nuke due to higher variable costs, no mainland reduction driven by RAB decrease, gas wholesale normalization for minus EUR 0.3 billion and lower mark-to-market for minus EUR 0.3 billion, which is not expected along the plan. On Slide 21, we represent EBITDA evolution in accordance with the integrated generation strategy taxonomy, introduced yesterday by Enel in their CMD. Over the plan, we will invest close to EUR 6 billion in our integrated commercial strategy, being 90% allocated to power generation and the remaining 10% to customers and expecting to achieve a spread over WACC above 300 basis points, also considering regulatory risk. The EBITDA evolution within the integrated strategy includes the integrated power margin that I will deep dive on the next slide; the regulated generation and retail, including mainly non-mainland and regulated power retail; OpEx, excluding direct fixed cost in generation that are considered under the integrated power margin as industrial sourcing costs; in gas and trading and other businesses that I have just explained are impacted by the absence of nonrecurring items, gas wholesale normalization, lower mark-to-market, [ short position ] decrease and others. Focusing on the evolution of the integrated power margin, and I'm now on Slide 22. As Pepe explained, the growth is driven by our commercial strategy based on a higher coverage of our fixed price sales with our clean production sold to customers at affordable prices. From a commercial perspective, we are forecasting a slight increase in fixed price retail volumes of 1 terawatt hour and better results from Endesa X offset by minus EUR 0.5 billion due to lower fixed selling price that are expected to decrease about 10%. From a sourcing perspective, EBITDA increases by EUR 1.2 billion, driven by minus EUR 0.3 billion from scenario impact, consequence of higher variable cost in infra-marginal technologies due to higher taxation, plus EUR 1.5 billion in generation mixed sales coverage from lower sourcing cost of around 40%, driven by the positive impact of market purchases and thermal output replacement with new renewable output for about 10 terawatt hours to cover 95% of fixed price sales. Moving to networks on Slide 20 -- on the Slide 23. We plan to invest around EUR 2.6 billion with an expected return of plus 100 basis points over WACC, which we estimate around 4.3%. The regulatory context has resulted in lower CapEx by 10%. That implies a progressive reduction in the regulatory asset base to EUR 11.3 billion due to early investment being lower than allowed D&A. The lower regulatory remuneration due to RAB decrease is offset by the increase of other margin that includes the rental meters, connection, facilities ceded by clients among others. Total fixed costs are expected to be flat as inflation effect in fixed cost is compensated by efficiencies. Moving now to efficiency on Slide 24. The focus on efficiency remains at the core of our strategy. Fixed costs increased around 5%, impacted by the exceptional inflationary context, now above 80% -- 8%, doubling the [ planned ] estimates. The CPI effect amounting to EUR 0.2 billion as well as the growth effect are partially offset by the efficiency improvements, mainly renewable generation. In networks, the unitary cost increased by 7%, considering only recurrent OpEx. And cost to serve is expected to grow by 5% in the [ current ] inflationary context. On net ordinary income evolution on Slide #25. Net ordinary income will come in at around EUR 2 billion to EUR 2.1 billion by 2025, down 9% versus 2022 year-end on year. The EBITDA to net other income conversion ratio evolved from 43% in 2022 to approximately 38% estimated in 2025 due to the following effects. D&A will increase by around 16% with higher amortization due to growth investment efforts focused on distribution and renewables for about EUR 210 million. Customer amortization increased due to volumes by around EUR 80 million. And maintenance CapEx amortization of thermal activity on an [ aged ] fleet with shorter residual life by around EUR 130 million. On the other hand, bad debts provision remains mostly flat in absolute terms from the increased figures of 2022. Net financial charges will increase by EUR 0.1 billion, mainly as a result of higher expected cost of debt despite a sharp reduction in gross debt from 18.8% in 2022 to 13.2% in 2025, as I will explain later on. Taxes, which show a reduction of EUR 0.1 billion, mainly due to the lower results before taxes. I remind you that we are assuming that the new tax on utilities may not impact 2022, while it's contemplated in the intermediate years of 2023 and 2024 impacting EBITDA and net ordinary income as the tax is not deductible. And finally, minorities will remain flat along the period. Now moving to the financial management section. And I'm now on Slide #27. Concerning cash flow generation and evolution on net debt on Slide 27, as anticipated in our 9-month results call, with no further regulatory intervention and stabilization of the market scenario, we expect to close 2022 with a net debt of around EUR 10 million to EUR 10.5 billion. Generation of funds along the business plan will be at EUR 10 billion, being affected by the new tax on utilities and need to be approved for 2023 and 2024, with an estimated impact between 0.5% and 0.6% according to the new draft. We expect net debt to increase slightly over the plan horizon of around EUR 1.6 billion, considering a cash flow -- outflow for investment of EUR 7.7 billion and dividend payment of EUR 3.8 billion. Gross debt is expected to substantially decrease to a range of 12.7% and 13.2%, mainly as a consequence of the balance of collaterals, reaching EUR 1 billion in 2025. As commented in our 9 months 2022 results presentation, we expect collateral volumes to notably reduce as derivative materials starting from 2023 at a rate of around EUR 400 million per month, assuming the current forward prices. As a consequence of the macroeconomic context and the raise of interest rates, the cost of debt is expected to increase from 1.5% expected at the end of 2022 to 2.7% in 2025. Finally, we will see an increase of the cash conversion of EBITDA measures as FFO to EBITDA by 20 percentage points. Regarding credit metrics, and I'm now on Slide 28, we have put in place a number of financial initiatives strengthening the liquidity position, reaching levels we find sufficiently comfortable both in the short and the medium terms. Current liquidity position amounts to EUR 8.4 billion, with maturities averaging 3.1 years as the fixed rate gross debt represents 62% once excluding collaterals. Net debt will increase by 1.6%, as I said before, along the period, leading to the leverage measures as net debt-to-EBITDA ratio to 2.1% by 2025, slightly higher than in 2022, but still at a healthy levels and well below the industry average. Thanks to the progressive improvements in generation in funds, the FFO to net debt ratio is set to increase by 7 percentage points, reaching a healthy level of 31% by 2025. Now focusing on the financial strategy. We will continue to tap sustainability-linked instruments to support our growth, and I'm now on Slide 29. This year, we have implemented a number of instruments for a total of EUR 13.6 billion. The most remarkable transaction to date are the increase in the limit of our SDG 7 Euro Commercial Paper program from EUR 4 billion to EUR 5 billion and the first sustainability-linked EIB loan for the development of Smart Grids in Spain. Our aim is to progressively refinance upcoming maturities and raise new funding via sustainability-linked instrument. The sustainable finance source now represents more than 65% of our gross debt. And over the plan, it will increase to more than 85% in 2025. And now let me hand over to Pepe for his conclusion on the presentation.

Okay. Thank you, Luca. Progress in our operations is reflected in our target for the period -- I'm on Slide #31. After an extraordinary 2022 that will be the target set in the last year's CMD, we expect to reach in 2025 an EBITDA of 5.2% to 5.5%, which implies a CAGR of 8% 2023 to 2025. Net ordinary income is expected to range around EUR 2 billion to EUR 2.1 billion by 2025, explained by the growth in EBITDA and the negative evolution of the D&A and financial resolvement before. This implies a CAGR of 18% over the 2023 to 2025. 2023 and 2024 results are heavily impacted by the regulatory context, specifically by the new expected to be approved tax on utilities by around EUR 300 million per year at EBITDA and net ordinary income level. Dividend policy will be maintained or only period with a payout ratio of 70% offering an estimated dividend per share of EUR 1.4 per share by 2025. 2022 dividend per share is estimated around EUR 1.5 per share, which will be paid in a single payment, unlike what has been done in recent years. The decision has been adopted under a proven criteria, considering the current context and the temporary liquidity situation that we expect to improve in the coming months. From 2023 onwards, we intend to resume ordinary dividend distribution into payments, January and July. To end this presentation on Slide 32. I would like to share some closing remarks. We are embarked on a deep transformation of the company towards a net 0 emission target by 2040 and ready to face the challenges from the energy transition. This plan update has been affected by the unprecedented price scenario that has triggered several regulatory intervention, both at the European Union and country level, which will be affecting our financial performance in the short term. We expect our integrated business strategy to allow us to successfully navigate this complicated scenario, while offering sustainable and attractive returns over the medium to long term. Ladies and gentlemen, that concludes our strategic update presentation. Thank you very much for your attention, and we are ready to take some questions.

Okay. Many thanks, Pepe and Luca. Now we are open to answer all the questions you may have.

[Operator Instructions] Mrs. Mar Martinez, Head of Investor Relations. Please go ahead.

Okay. We'll start with the first analyst, Alberto Gandolfi from Goldman Sachs. Please Alberto, go ahead.

I have 3. The first one is -- was a favorite topic of the [ parent ] company yesterday. Can I ask please on assumptions? I know you look at the business on an integrated basis. But I think some people misunderstood and mistook some of the power price forecast that you have with the achieved price, you're actually using your earnings target. So could you tell us in an imply -- on an implied basis on an embedded basis, what is the power price you're using throughout 2023, 2025? Are you using the current cap of 65, again, as an implied embedded price or a 67 or what are you using there? And maybe if you can be a bit clear on also scope. What disposals are you taking out of your forecast, if at all? And I think you were very clear on regulations, so no questions there. So that's the first on power price disposal. The second one, I think the bridge Luca presented was very clear, but could magnify a little bit retail here? Because it seems like the biggest novelty is that now you're targeting retail margins that you seemingly have never achieved before. So can you maybe explain what type of tariff increase have you put through in the second half of 2022 and/or you expect to put through at the beginning of 2023, coupled with renewable additions to cut procurement costs so that these 2 elements underpin the increase in retail margins. That will be very helpful. I think it's quite clear on volumes. And the last question is, you still remain short generation. So my question is, you have a big pipeline, you have a very strong balance sheet, what stops you from adding 2 to 3 gigawatts of plants per year, given you're mostly adding on a merchant basis. So is it permitting the bottleneck? And do you expect this to change?

Okay. Thank you, Alberto, for the question. I would try -- I don't know if I clarify or not, but I will give the word to Luca Passa to really try to clarify a little bit more. But let me say with regard to the assumption that we have in our power prices or power -- for our power prices of the wholesale, well, yesterday, it was a little surprised with our, if I'm right, EUR 117 per megawatt hour. Let me say that it is based in our assumption. And in our assumption, one of the main assumption is the gas price for the year 2025. We are using PVB. We don't have, at least, I don't know, now this quotation is forward for the year 2025, but we have the one of the TTF. And the one of the TTF is something around EUR 70 per terawatt hour. So that means that it has since -- if the price of the TTF is 70, this price of 61 of the PVB is at the right price. Taking into account this, the price, the whole -- the power price, the forward power price in the year 2025 could be, would be or will be 117. That is the first thing. And in my opinion, that seems to indicate that the [indiscernible] market generally very liquid are trading at a discount, at least in my opinion. That is the first thing. The second thing is that our inframarginal output is being sold during all the plan that is 2023 to 2025 at EUR 65 per megawatt hour as we have tried to explain in the presentation. In spite of this, we never use the reference of the macro context assumed in the business plan, that is the 117, to define our commercial strategy, where final prices are lower than those embedded in the plan. With regard to the second one, and I will give the floor to Luca. If I'm right, you can fax -- if we have increased our retail price in the second half of the year or in the beginning of the next year. Well, Luca, if you want to...

Sure. Alberto, regarding the expansion on margin, basically, this is driven mainly by the reduction in sourcing cost, which basically decreased along the plan in the region of 40% while -- and this obviously reduction is driven by the substitution of market purchases and thermal output, which accounts for around 11 terawatt hours with 10 terawatt hours of renewal productions. Now when it comes to the final fixed selling price to customers, we are actually envisaging a trend downwards for about 10%, so the repricing that was done last year and this year is already embedded in this scenario, whereby starting from next year, actually final fixed price to customers is going down by 10%. And then regarding the third question, the short generation position, and let me say, the optionality to potentially increase our trend in renewables addition already with this plan, we have increased, let's say, the overall amount. We have a trend of around 1.1, 1.5, 1.8 gigawatts addition in the next 3 years. And beyond that, obviously, we are targeting a 2 gigawatt addition. Now you need to understand that obviously, this period has been heavily affected by regulatory measures, regulatory interventions. So the optionality for us is always there. I think the balance sheet support this optionality, and we could be in a position to increase obviously when the situations normalize.

Okay. Next question comes from Jose Ruiz from Barclays.

I just have 2. The first one is on the assumption of the energy tax, the windfall profit tax, are you taking the all the assumptions, which is the total revenues in Spain or the new assumptions which are basically just excluding regulated businesses and renewables. The second question, basically, you're pretty sure about cutting thermal production next year? Or that's what I understand, please correct me if I understood it incorrectly. What is driving that? What are you expecting in 2023 in terms of this replacement to happen?

Okay. Thank you, Jose. With regard to the -- our assumption on the windfall tax, I should say that our business plan consider this impact of this extraordinary levy. In accordant with the last included amendments that is without the regulated businesses, it is what we have a draft only. This draft is under discussion in the parliament. But it is clear that at least today excluded regulated revenues and also results from foreign subsidiaries. What we have done -- what we have booked in our plan is at the EBITDA level in 2023 and 2024, an impact -- and also in the net ordinary income and impact of around EUR 300 million per year. And that is all what we have. With regard to the second question, well, I think it is clear, but Luca, would you...

Yes. The assumption, as we mentioned before, inframarginal technology is passed on to the supply business at EUR 65-megawatt hour along the business plan when it comes to combined [Indiscernible] thermal generation production, obviously, we will see a decrease because also the increase that we've seen this year was driven by the cap on gas for the Iberian exception that is in place up until May 2023. So from there onwards, the volumes -- extraordinary volumes that we see in 2022 should become lower when it come basically to combined cycles. And that's what we have in terms of assumption for the plan.

Okay. Next question is coming from Jorge Guimaraes from JB Capital.

I have 3 questions, if I may. Firstly, if you can elaborate on the relation between the evolution of the average selling price and the evolution of supply margin. I understand that even 10% below 2025 versus 2022 still represents a higher price than 2021. And now this interacts with the supply margin, which seems to be above EUR 10 megawatt power by 2025. And just another one on the tax. Some of your competitors are including it and you are putting it in 2023-2024. Why the difference in 2022?

Okay. Thank you, Jorge. With regard to the second question, well, our understanding now I'm having the opinion of the different expert is that this tax will be based on the revenues, not regulated revenues of the year 2022, that will be applied when we take into account [Indiscernible] in the year 2023 and the same 2023 and '24. That is the reason why once we have been aware of these expert opinion, we have decided just to move from 2022 to 2023. And this is one of the reasons why we have this step down in the results in 2022, 2023 instead of reducing the 2022 extraordinary result that we have, we are reducing the results in the year 2023. Let me say, if you allow me just to say that we are advancing results in the year 2022.

And regarding the first question on the evolution of the selling price and supply margin, Jorge, what again comment there is that, yes, we have a reduction of 10% around the business plan. Clearly, the starting point in 2023 is higher than 2021. The reduction is 10%, will end in a region of just over EUR 100-megawatt hour for fixed price, final selling price to customers. And in terms of supply margins, what I can comment is, obviously, we are having at a depressed 2022, given the higher sourcing costs, as explained before. And also, this will expand along the plan quite materially driven by the lower service cost around the plan around [Indiscernible].

And now we have Javier Garrido from JPMorgan. Please go ahead.

I have a few questions. First question is if you could clarify and explain a bit what's the mean of crystallizing value in the gas business, specifically what you are specifically planning to do there? And how will impact your business once you have to crystallized that value? The second question is whether you can elaborate a bit more on what are your expectations for the Islands business -- the non-mainland business, the contribution to profit of that business and what is embedded into your targets? The third question is, unfortunately, you are not showing any longer what is your assumption for the integrated margin through the period. It used to be EUR 39 per megawatt hour for 2022 -- sorry, for 2024 in the previous plan. Could you let us know or at least give us some indication of what are you expecting now for 2025? And the final question, I mean, it's been extremely useful to -- that you provided the bridge between '22 and '25, but I am really [Indiscernible] about the evolution in '23 and '24 because you mentioned biggest drivers, the increase in renewable production and the decline, the cut in the price to the final customer. But if I look at your appendix, the increasing renewal production in 23 meant to be significantly higher than in '24. And the reduction in thermal production in '24 is bigger than in '23. And in '23, the price decline has not started. So what I wonder is how you can give us some bridge or some indication of how you can grow your EBITDA by around EUR 500 million in 2024 given all these inputs?

Okay. Javier, thank you very much for your question. Let me try as to clarify what does this mean crystallizing value. It's a very good question. But let me try to explain the rationale of this operation, and then I will try just to clarify this. First of all, well, that you perfectly know, yesterday, announced the sale of the gas portfolio, they said that it is transaction in which we are currently working on. So we don't have definitive vision of this operation. The rationale -- the rationale is very clear for me, just to reduce the rig profile. And you know that the rig is strongly affected by the gas volatility, which lead to a predictable prices and also customer behavior that we are seeing now. The second reason, strategic reason is just to accelerate our decarbonization bringing forward the goal of net zero emission, and the last one, but not least, let me say, to take advantage of the higher gas prices scenario that we have today. We have just carried out the first assessment of this transaction with ambitions around 50% of our integrated portfolio of clients and shops in contract. Let me say, it is expected to be closed by the end of 2023. Then with all this introduction, let me say, and perhaps I'm not going to clarify anything, but as of today, we have considered a neutral impact along the plan, taking into account all the effect, the perimeter that at the end would be -- the one that we are going to use and all the effects associated to this divestment. But on top of all the things, we are going to reduce our rigs, and we are going to accelerate our decarbonization and we were -- and we will take advantage of the high prices, gas scenario that we have today. With regard to the non-mainland business, Luca?

Yes, Pepe. On the second one, contribution at EBITDA level on the plan is around EUR 200 million at EBITDA level of the non-mainland business. When it comes to the third question, which is, let's say, the representation of our old integrated power free margin, obviously, we will lend 2022 in the, I would say, low 40s in terms of interim margins and expansion along the business plan in 2025, we should land in the mid-50s. That's according to our old way of reporting integrated free power margin. Then when it comes to the fourth question, which is the bridge or the EBITDA and then we'll comment also on OIBDA between 2022 and 2023. The drop at EBITDA level is EUR 100 million, as you pointed out. Here, we have an impact of EUR 700 million negative in gross margin and EUR 150 million negative in terms of fixed cost. Within gross margin, we have an improvement in renewables for about EUR 400 million, an improvement on the client side, which is retail and [indiscernible] for about EUR 700 million an improvement in distribution, which is driven by the nonrecurring of obviously of 2022 for EUR 200 million and the margin decrease in the whole generation and other business for about basically EUR 2 billion plus obviously the impact of the tax that we were discussing before for EUR 300 million, which is both at EBITDA and net income level. Now I think the rationale around networks is pretty easy to understand. When it comes to renewables, the EUR 400 million basically increases driven by obviously better hydro conditions vis-a-vis a very dry year and obviously, the expansion in terms of generation from solar and wind capacity, which is expected to be 2.5 terawatt hours that should contribute to EUR 150 million in terms of margins and some increase in fixed cost for about EUR 40 million. When it comes to retail, the increase of EUR 700 million is driven by EUR 500 million in straight retail. And this is mainly thanks to lower sourcing cost in the region of 10% vis-a-vis 2022. And high underlying prices, as I said, there was a slight increase in [in 2023 for] for about EUR 100 million. End of additionally EUR 200 million positive in gas retail, which is reversing extraordinary negative, which affected 2022. I think here, the most difficult part for you to reconcile was the generation and others, which goes down by EUR 2 billion in terms of gross margin. Obviously, we have the absence of the social bonus sentence that we booked in 2022. The impact of extraordinary taxes I mentioned before for EUR 300 million. Then we have EUR 200 million less in nuclear margin to the increase in variable cost. Obviously, taxations basically are being -- is assumed to be in place, again, starting from next year. We have a negative impact of about EUR 500 million in gas [Indiscernible] sale vis-a-vis, obviously, the exceptional performance that we've seen in 2022 and again, also in trading by EUR 400 million negative, of which about EUR 300 million is the positive mark-to-market that we have in power. When it comes to the normalization of thermal margins, obviously, volumes are going down by 4 terawatt hours vis-a-vis the exceptional 11 terawatt hours, 2022, and this will impact in the region of EUR 300 million. And then you might remind that also we have a contribution of the share position in 2022 that will not be there in 2023. So those are basically the lines to reconcile the negative impact of about EUR 900 million of EBITDA decrease from 2022 to 2023. Below EBITDA, what I can comment, obviously, besides the tax that impacts fully also below EBITDA, there is an increase in terms of G&A in the region of just over EUR 100 million and an increase in financial cost, again, in around EUR 100 million. And those are basically the reconciliation regarding your question.

Okay. Thank you, Javier. We'll move to the next question that comes from Manuel Palomo from Exane BNP.

Sorry, but I think that I will insist on this latest point Javier on the integrated margin. I was looking at the past presentation, and you were talking about EUR 75 integrated margin -- sorry, EUR 75 -- it was the unitary revenue and EUR 39-megawatt hour integrated margin for '22. Now you're telling us that you're expecting instead of 75 unitary revenue, 100. So it means that, that integrated margin that you say in the mid-50s could be apparently even higher. Given the situation -- the current situation and the latest in interventions by the different governments, do you think that this is sustainable and that governments will allow utilities to make such huge unitary margin. That is the first thing. And second thing, even if there's no market intervention, dont you think that this is this could have a call effect on other players willing to come to the market and increase competition, hence, maybe reducing margins? That would be my first question. Second question is just -- well, a question on yesterday's renewable option. And whether you could make any comment on that outcome that tells -- or potential outcome that tells that it was a [indiscernible] that only 50 megawatts out of 3.3 gigawatts were awarded.

Okay, Manuel. Thank you very much, and I will leave Luca just to answer the first one. With regard to the second one to the renewable auctions, let me say that in general, given our -- talking about Endesa, even our short position in generation, we prefer to develop and dedicate let me say that our future renewable generation to reduce our short position in generation. That is what has set for us. That is the reason why we are not going to these auctions. Why so low? I don't know, could be as the starting point of the price, if I'm right [Indiscernible] but I don't know. In our case, again, and given our short position in generation, we prefer to develop this to cover our short position.

On the first question on sustainability of the expansion of our supply margin, Manuel, to be honest, I think we took a very cautious approach in respecting current regulation when it comes to the pass-through of our intermarginal generation to supply at 65 along the business plan, which I think is a very conservative assumption. And as Pepe pointed out the final fixed selling price to customers again, is very well below what is the full price assumption within the business plan. Therefore, yes, there is an expansion because it's driven by lower sourcing cost. If the question is, is this will be allowed by regulators and governments, basically, let me remind you that the current regulation in Spain is probably one of the most restrictive across Europe, where obviously the cap on inframarginal technology at European level is almost 3x what we have in Spain. Therefore, we will see. I don't think -- I think we took a fairly conservative assumption on regulatory standpoint with this business plan. And then we will see the evolution of both the macro context, as well as regulation, both at European as well as Spanish government level.

Next question comes from Rob Pulleyn from Morgan Stanley.

Can I revisit the question of the gas disposal? And could you clarify the impact of the -- on EBITDA in the plan. I didn't really understand when you said it's a neutral impact, maybe if it's easier just talk to what the underlying 2025 EBITDA would be without the disposal versus the headline numbers you gave, that would be great. The second one, if you don't mind, correct me if I'm wrong, but I heard that the 2023 in the bridge, which went a little bit fast for us, but you assume CCGT contribution to normalize. Is that correct? And if so, why do you assume that for 2023 at first glance, appears very conservative given the likely environment, but maybe we missed something there? And the third one, maybe this is more of an observation than a question, but interesting to get your thoughts. On the assumptions as everyone agonizes about what commodity to use for 2025, would you agree that it's reasonable to assume that if commodity prices remain high as per the forward curve until 2025, then the government intervention on infra margin caps, windfall tax and everything else will also persist until 2025?

Thank you, Rob. Let me try to give my opinion about the commodity prices remaining high along the period. Well, let me say, who knows. As Luca has said, the government of Spain has given us clear signal that they will try or they would try us to mitigate these prices. But having said that, what we have today in Spain is a gap of EUR 67 per megawatt hour. Also with the so-called cap in the gas price for the combined cycle to the offer in the wholesale market, we have something that evolved from 40 to right, 70 or something like that. When you go to the European Union, what we are talking about is EUR 180 million instead of 67, more than EUR 200 per megawatt hour cap in gas. The difference is that this, in my opinion, that the European Union tried to put some cap, but taking care about not distort the market, not distort the market. In the [indiscernible] the Spanish government put the cap trying to mitigate the impact on the customers. Looking for reasonable profitability of the company, so in my opinion, nothing more will happen if these commodity prices remain higher, higher than the ones that we have in our business plan. So we don't have rigs, in my opinion, in this area, even more could be good news in the future.

Thanks, Pepe. Regarding the first question of the disposal of part of our integrated gas portfolio, the loss in terms of EBITDA contribution is starting in 2024 is about just EUR 100 million, the lending point in terms of what we have in the plan of gas contribution is EUR 200 million in 2025, but the impact is minor, as I said, and this is already embedded in the business plan. That's why Pepe commented that we have basically a neutral impact around this disposal. When it comes to the second question, why we are assuming such a lower combined cycle contribution for 2023, this is mainly driven by the fact that the current cap on gas is in place up until May. And that's the regulation that is currently in place. If you remember when this was approved, that was the agreement with the European Union. So we do not expect this to be extended, although let me say, some of market participants expect potential extension. But according to the current regulation that will end in May 2023, which means the combined [Indiscernible] contribution, at least in our numbers, will contribute 4 terawatt hours less already in 2023. Obviously, if this is not the case, we will have some kind of upside in 2023.

We have now Jorge Alonso from Societe General.

I have couple of questions, please. So the first one is just to confirm that in your estimates, you are considering that the clawback are no longer applied beyond 2023. And hence, the supply margins defined by the regulator are no longer as well applied in your estimates? Second one is trying to simplify things a little bit just to have your clarification. In 2025, EUR 1.6 billion EBITDA will come from the supply side. If we take out the sales in the islands and the regulated customers fully that could take out let's assume between [EUR 100 million to EUR 100] million. So 1.4 would come from selling 50 terawatt hours to the free market that would give somehow an EBITDA margin per megawatt hour of close to EUR 30 per hour, which is, in my view, an expansion -- material expansion from the levels we have today or in the past. Just to be sure that this is the correct way to understand things. And the last one is around the CapEx in renewables. I'm seeing that you keep 1.1 million megawatt on wind and 0.7 on solar. If you see, I mean, risk on those looking at what about the market evolving, especially maybe in solar that could be maybe a little bit lower as information coming from other players.

Thank you, Jorge. We'll try to answer the first one with regard to the clawback. Let me say, during the 3 years of the business plan that is 2023 to 2025, our only from marginal output that is hydro, nuclear and the rest of renewable is [indiscernible] to retail at EUR 65 [Indiscernible]. While our underlying price is expected to decrease 10% as we have said in the business plan. In relation -- with regard to your question to regulatory assumption, this Royal Decree law 17, one these clawback has been, as you know, extended until December 31 of 2023. Therefore, our business plan in 2023 assumes that final price -- selling price is aligned with this measure that is we take into account this clawback. For the year 2024, 2023, we continue deploying our commercial strategy, selling, let me say, at a reasonable price, will below the pool price assumption included. So we don't expect any clawback or any impact of potential extension of a clawback.

Thank you, Pepe. Regarding the second question, Jorge. I mean the expansion in terms of supply margin is there, as I commented before, I think your calculations are more or less okay. I mean you need to take into account that the decrease in sourcing cost is 40%. We decreased sourcing cost by around EUR 29, almost EUR 30-megawatt hour and that is where the expansion is even from. And again, it's a substitution of basically thermal and acquisition on the spot of the energy with basically renewal sources that allow us to cover 95% of our fixed price sales by 2025. Then regarding the third CapEx per megawatt, 0.7 in solar and 1.1 in wind, assuming the plan, this already foresee an increase vis-a-vis a plan of about 50% in solar and around 5% in wind. And let me say that with the current scenario, we foresee this number as conservative. We do not expect, let me say, further increases. And I think it's a very sound assumption when it comes to the CapEx deployment for our renewable additions.

Okay. This was the last question from the call. Now we will answer some questions that we have received from the web. In particular, [Indiscernible] that with 3 questions. The first one in relation to the reason why giving a range in terms of EBITDA. I mean -- I guess that is referring in particular to 2022. But is a range for the whole period of the plan. The second one is which is the rationale of letting the dividend fall in 2023. And if we have considered any alternative to compensate the fall. And the third one is the plan -- just asking about the possibility of the plan, including any acquisitions. And if the answer is yes, in which business.

Thank you, Fernando. Let me try to explain the rationale or irrational reduction of the dividend in the year 2023. Well, it's clear for me that there are 2 main regulatory effects. One of them is the taxation, the win for profit taxation that accounts for something around EUR 300 million. And also, you should take into account the clawback, we are trying to maintain our prices below this threshold. That is, for sure, and something that reduced our margins in the year 2023. Let me say well, that is -- we try as always. As always, if you know us, we try to be very transparent and also conservative, in my opinion. But we prefer to be transparent and conservative. And then if it's possible just to give you better news in the future. But I think that we are living in an uncertain and turbulent days, and that will continue at least the uncertainty during the year 2023 and 2024, and we prefer to be optimistic, but to be conservative in our numbers and in our commitments to the market.

And regarding the first question, ranges, why range is now for EBITDA also for 2022. I mean the market volatility that we've seen throughout this period has been quite, I would say, related. Therefore, we have certain items which moves quite heavily even in recent times. So therefore, that's why basically those are given along the plan. When it comes to 2022, it's not only volatility. Obviously, we have a much better vision for what will happen between now and year-end, but also there are some regulatory receptors [Indiscernible] that might come in, and therefore, that's why we're giving basically ranges. Let me just add a comment in terms of the dividend part. Obviously, we don't like to give ups and downs in dividend distribution to shareholders. But let me say that 2023 and 2024 are heavily impacted by the regulatory environment. Therefore, these are factors which are, let's say, out of our control. And therefore, that's why you see basically such a trend. Then on the third question, the plan do not foresee any acquisition.

Okay. Many thanks. We have no more questions. So just thank you once more time to attend this Capital Market Day. And just remind you that the Investor Relations team is available as always to help you in case you need it. Thank you. Have a nice day.