Mark R. Kramer

Bhanuteja Nadella

Enel: The Future of Energy

The real change we made is to couple sustainability and innovation – and sustainability is the engine of innovation, not the other way around.

Introduction

– Francesco Starace, C.E.O, Enel

In 2017, the Enel Group was a global producer and distributor of electricity and gas with assets in more than 34 countries. The company employed 63,000 people and served 72 million end customers with revenue of €74 billion and ebitduh of €15.6 billion. (See Exhibit 1 for Enel's historical financial performance.) At the time, Enel had a net installed capacity of more than 88 gigawatts (G.W), of which 42 G.W were from renewable energy sources. Production capacity was primarily located in Italy (34%), Spain and Portugal (28%), and Latin America (23%). (See Exhibit 3 for ebitduh by region, Exhibit 2 for power generation by region and Exhibit 4 for percentage of renewable power by region.)

Originally formed as a state-owned monopoly to provide electricity to Italy, Enel issued shares to the public in the late 1990s and began to acquire power companies in other countries. In 2008, Enel Green Power (E.G.P) was formed by consolidating the various renewable energy operations of Enel and its subsidiaries into a separate company under the leadership of Mr. Francesco Starace. In 2014, Starace was appointed C.E.O of the entire Enel Group and the following year, E.G.P was re-integrated into the Group. In late 2016, Starace presented a new strategic plan with a goal of eliminating all carbon emissions by 2050.

During this time, the fundamental economics of the electricity business were changing rapidly. The cost of renewable energy was becoming competitive with traditional fossil fuel generation. European governments were imposing strict limits on carbon emissions, and customers with solar panels were starting to sell energy back to utilities, replacing centralized power production with a distributed model. The power grid itself had to be digitized to support constantly changing bi-directional energy flows.

The shift to renewables was held back by the high cost of storing electricity at scale to overcome the intermittency of wind and solar power. As electric cars started to become popular, Enel saw an opportunity to use car batteries as a distributed storage system that could supply power to the grid as needed. Merging electricity with mobility could create many new and profitable power management services, although it would be a radical departure from Enel's historical model of centralized power generation and distribution. The question Starace faced was whether to develop this new vision within the existing business or to create a separate company.

Senior Lecturer Mark R. Kramer and Research Associate Bhanuteja Nadella prepared this case. It was reviewed and approved before publication by a company designate. Funding for the development of this case was provided by Harvard Business School and not by the company. Enel is a former client of FSG, a nonprofit organization that employs Kramer. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

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The Electrical Power Industry

The electric utility value chain encompassed four distinct functions: production, transmission, distribution, and retail. The production of electricity involved powering turbines from energy sources such as thermal (fossil fuels such as coal, oil, or gas), nuclear, hydro-electric (powered by the flow of water), geo-thermal (powered by heat from the earth's core), solar (photovoltaic) or wind. The transmission business managed high-voltage power lines that transmitted power from the production facility to medium-voltage substations. Distribution involved distributing power more widely throughout the power grid.

Retail involved the monitoring, servicing, and billing of individual commercial and residential customers. Generation, transmission/distribution, and retail each accounted for roughly one-third of the cost of electricity to the end user. Energy companies could choose to operate in all or certain parts of the value chain.

Methods of Electricity Production

Early power production often came from renewable hydro-electric or geo-thermal sources. As the demand for electricity grew, these sources became inadequate, and new technologies were developed.

Thermal energy was the cheapest way to produce electricity and the major source of power generation in developed markets. Nuclear power offered an alternative source of energy, however, concerns about safety, liability and the high cost of disposal of nuclear material led to strong opposition throughout much of the world that restricted its use.

Both thermal and nuclear power plants typically required many billions of dollars in up-front capital investment and more than a decade of permitting and construction before they began to generate revenues. Governments typically authorized electricity companies to operate as regulated regional monopolies on a 'cost-plus' system that set prices based on the cost of recovering the capital investment plus operating costs and a reasonable rate of return. The 'cost-plus' system incentivized energy companies to maximize their capital investments, offered a decades-long predictable return on investment, and discouraged unproven innovations or cost-cutting efficiencies.

In addition to capital investment, thermal power plants incurred substantial ongoing costs for fuel, ranging from 40% to 80% of the total lifetime cost of a power plant. Utilities could manage fuel costs by shifting generating capacity among power plants that used different types of fuel based on the relative costs of coal, oil, and gas. Fluctuations in demand and in the cost of fuel led to significant variability in the price of electricity.

At every moment in time, the power grid had to be balanced, meaning that the amount of electricity produced had to be equal to the amount consumed. Large-scale technologies to store electricity were limited and costly, so electricity producers had to build sufficient power generating capacity to meet the peak demand, then shut down generating capacity when demand decreased. The cost-plus pricing model enabled utilities to earn a return on their investment in power plants even when they were shut down. However, the time and costs to start up or shut down power generation made it extremely costly to balance the power grid second-by-second through frequency regulation at the margin.

By the mid-1980s, a global consensus among scientists had concluded that burning fossil fuels correlated with the rise of C-O 2 and other greenhouse gases (G.H.G) in the atmosphere which led to global warming. Coal, although the least expensive fuel, was also the highest in producing C-O 2 , generating 50%-60% more carbon emissions than natural gas. Globally, 25% of G.H.G emissions were attributed to electricity production, 70% of that from coal. The Kyoto Protocol, adopted in 1997, committed 192 nations to reduce G.H.G emissions and phase out coal-powered electricity production.

At the same time, the costs of G.H.G-free renewable energy generation were significantly declining. Compared to thermal generations, solar and wind energy required a much smaller upfront capital investment and much shorter planning and construction time. Renewable generation could be built at any scale and began generating revenue quickly.

Given uncertainty in the future price of electricity, power companies generally built renewable energy assets only when fixed price contracts of 15 to 20 years, known as power purchase agreements (P.P.A's), were locked in with a government or major purchaser. Many governments also encouraged investment in renewables through an ever-changing assortment of subsidies and tax incentives. Regulators also authorized "feed-in" tariffs, enabling customers who installed their own solar or wind production facilities to sell excess energy back to the power company.

Unlike the very large companies that dominated thermal and nuclear power, the majority of renewable power sources were owned and operated by end customers or small independent operators.

As countries such as Denmark, Germany, Japan, and China increased their reliance on renewables, the increase in scale combined with rapid technological advances led to dramatic reductions in cost. The costs of solar energy, for example, dropped from 76 per watt in 1977 to 0.57 in 2015. By 2016, solar and wind technologies had achieved near parity in cost with thermal production, even without subsidies. In 2017, Germany approved the first major wind production contract without any subsidy or price guarantees.

Changing Patterns of Demand and Regulation

For more than a century, G.D.P growth was closely correlated with an increase in energy demand. In recent years, greater efficiency in energy use by developed countries had decoupled this relationship, reducing the demand for electricity even in growing economies. The global recession of 2008 further curtailed demand. In Italy, demand for electricity declined 9% from 2007 to 2016.

In developing countries, the correlation between economic growth and energy demand remained, as increasing populations and rising incomes led to greater demand for electricity-based services, such as cooling, heating, refrigeration, cooking, lighting, communication and computing. In 2017, more than 1.2 billion people in emerging markets still lacked access to a steady supply of electricity. As a result, nearly all of the growth in global demand for electricity was projected to come from emerging markets (see Exhibit 5 for growth in demand by region). However, the lack of infrastructure, combined with poverty, pollution, government corruption, and a widely-dispersed population in rural areas presented a serious challenge to traditional models of power production.

In the late 1990's, Italy and other countries in the European Union (E.U) began moving to a competitive market for electricity by breaking up monopolies, separating regulated activities such as transmission and distribution from competitive activities such as generation and retail, moving from cost-plus to market-based pricing, and privatizing state-owned utilities. At the same time, the European Union (E.U) adopted regulations that required member states to promote renewable energy, improve energy efficiency and reduce G.H.G emissions. The 2009 renewable energy directive mandated that 20% of electricity throughout the E.U come from renewable sources by 2020.

Also in 2009, the Italian government introduced feed-in tariffs that made it profitable to sell solar power back to the grid. Entrepreneurs and homeowners installed over 650,000 solar panels and, by 2015, nearly 40% of Italy's electricity came from renewable sources.

Coal had declined to 9% of Italy's power generation by 2000, however, as oil prices rose from 2000 to 2008, oil-fired plants were converted to coal, increasing the percentage of coal generation to 15% by 2015. At that time, Italy still had 9 G.W of coal-fired power plants and was the 3rd largest importer of coal in Europe. Seventy-five percent of Italy's coal-fired power plants were owned by Enel. Environmentalists complained that there was no concrete plan from the Italian government or Enel to phase out the coal power plants.

Global Context

Historically, the combination of cost-plus pricing, intensive capital investment, and state-owned regional monopolies had eliminated any competitive pressure among utilities. As European nations privatized power companies, shifted to competitive pricing, and encouraged new entrants in renewables, the industry struggled to reduce costs, spin off less promising divisions, and add renewable production capacity. In the face of flat or declining demand for electricity, growth came primarily from acquisitions outside home markets. This led utilities to operate in overlapping geographies, however, they tended to concentrate on specific parts of the value chain in particular regions, minimizing direct competition.

E.ON, Germany's largest utility had annual revenue of €116 billion across more than 30 countries, with a concentration in central Europe. The company operated along the entire industry value chain with 40.8 G.W in capacity, of which 18.7% was in renewables. In France, E.D.F had sales of €75 billion and generating capacity of 97.2 G.W of which 65% was nuclear and 21% was from renewables. In Spain, Iberdrola, operated in five countries with a net installed capacity of 45 G.W, of which 58% was from renewable sources.

United States power companies generally operated only in North America. Duke Energy, the largest utility in the U.S., posted annual revenue of 25 billion in 2016 with 7.5 million customers and an installed capacity of 58 G.W, of which 7% was renewable. By 2016, only 13% of the total U.S power generation came from renewables. Although a few power companies and states had aggressively promoted renewables.

Shareholders were often skeptical. N.R.G Energy C.E.O David Crane had championed a largely successful shift from fossil fuels to renewables, only to be fired in 2015 when N.R.G's stock price dropped. Other utilities along with the fossil fuel industry had lobbied regulators to discourage the proliferation of rooftop solar power. In 2015, Arizona and Wisconsin passed a surcharge of 50 per month for customers who sold surplus solar energy back to the grid. By 2016, 27 states had reduced or were considering reductions in the feed-in tariffs for solar customers to discourage them from selling power back to the grid.

History of Enel

1962 to 1996: Italian Powerhouse

Enel, which originally stood for National Entity for Electricity (Ente Nazionale per l'Energia Eletrica), was established as a state-owned entity in 1962, when the Italian government decided to reduce costs by consolidating and nationalizing the country's multiple energy companies across the entire electricity value chain. Despite consolidation, each of the original utilities served different territories and continued to operate quasi-independently.

The international oil crisis in the 1970s led Enel to explore a shift to nuclear power, however, the Chernobyl disaster in 1987 led to a nationwide referendum against nuclear power, and forced Enel to abandon its plans for nuclear energy.

In 1991, Enel became a joint-stock limited company, with the Italian Treasury as the sole shareholder. In 1996, Franco Tatò joined the Group as C.E.O and re-organized the company into nine divisions representing different parts of the value chain such as production, transmission, and distribution, plus support functions such as research and I.T, all reporting to Enel Corporate.

1996 to 2000: Liberalization of the Power Industry

In Italy, the 1999 Bersani Decree authorized other power companies to compete with Enel, established competitive pricing, and allowed industrial customers to choose their electricity provider. The Decree also forced Enel to sell off a significant part of its Italian power generation assets and unbundle production from transmission and distribution. Later that year, the Italian Treasury raised roughly 16 billion by selling 32% of Enel in an I.P.O on the Italian Stock market.

Unable to expand its energy business, Enel sought other avenues for growth, moving into telecommunications, water, gas, engineering, real estate, and financial services. In 2000, Enel became the first utility company in the world to adopt digital metering on a massive scale, replacing the 32 million mechanical meters in Italian homes. The new digital metering system served Enel's vision of becoming a"multi-utility" by allowed Enel to use a single meter to remotely monitor water, gas, and telecommunication usage in addition to electricity. The digital meters made Italy's power distribution system one of the most advanced in the world by increasing the efficiency and quality of electrical service, eliminating the costs of manually reading meters, and enabling bi-directional flows of electricity in the grid.

Many of Enel's new ventures were highly successful; however, regulators repeatedly raised monopolistic concerns and required Enel to divest of its most successful new businesses. Enel then refocused its growth on power generation outside Italy.

2000 to 2013: Global Markets and Renewables

In 2000, Enel made its first international acquisition by purchasing Chi Energy, a small U.S. renewables company. In 2001, the new management, led by C.E.O Paolo Scaroni, entered the Brazilian market with the construction of a cross-country high-tension transmission line. The company also invested in El Salvador's geothermal sector, acquired Electra de Viesgo in Spain, and acquired a 73% stake in Energy Power Bulgaria. Enel's footprint outside Italy expanded from 5% of its power generation capacity and 3% of ebitduh in 2002 to 20% of capacity and 11% of ebitduh in 2006.

In 2007, Enel along with Acciona (a Spanish utility company), acquired Endesa, the largest utility company in Spain for an estimated €42.5 billion, including €12 billion in debt. Endesa had 11 million customers and power generation capacity of 25 G.W, including nuclear and renewable power sources, as well as operations in South America including Chile, Argentina, Peru, Brazil and Colombia. In 2009, Enel bought out Acciona's stake.

Enel also expanded its investments in renewables which constituted 19% of its power generation. The company was recognized for its efforts by inclusion in the F.T.S.E4Good Global 100 and F.T.S.E4Good Europe 50 lists and the Dow Jones Sustainability Index.

Enel Green Power In 2008, Enel combined all its renewable energy operations into a separate entity named Enel Green Power (E.G.P), led by Starace. A nuclear engineer by training, Starace had spent much of his career supervising the construction of power plants. After leading the gas turbine business at A.B.B, Starace joined Enel in 2000 to help oversee the liberalization process as Head of Business Power.

Starace explained his move to E.G.P: "For me, it was not an ideological point about liking renewables. It reminded me of when I was selling gas turbines. The new technology was just beginning and even though it was better, there was a lot of resistance from utilities that preferred to stay with steam turbines. Renewables was just the next example of this cycle of change."

Starace continued, “Renewables could not really grow within a company that has a large thermal portfolio. Thermal generation depends on a few key decisions to build very large plants that take a long time to be built, and renewables are exactly the opposite. That takes a completely different mindset. Also, the evolution of renewable technology really started to pick up speed and it required dedicated attention from specialists to stay competitive.”

In 2010, Enel sold 31% of E.G.P in an I.P.O on the Italian Stock Exchange, raising €2.4 billion. E.G.P was then one of the largest European companies in the renewables space with 6.1 G.W of capacity, €1.75 billion in revenues, and €966 million operating profit. Alberto De Paoli, at that time E.G.P's C.F.O, explained"We needed money to reduce excessive debt on our books from the Endesa acquisition. There was a bubble in renewables at the time, and E.G.P had a very attractive valuation."

At E.G.P, Starace assembled a team of young entrepreneurial managers who were attracted by the commitment to 100% renewable power. He focused on driving down the cost of renewables to make them competitive with other energy sources. "For us," Starace said, "the competition from other power companies was very mild; the real competition was between renewables and thermal power."

E.G.P engineers disaggregated the many different components of renewable generation facilities and redesigned each element to be as cost-effective as possible. The company also leveraged its scale to negotiate better prices from its suppliers and lower-cost capital. Although thermal power plants could be built anywhere, wind and solar generation depended on location-specific weather patterns. As one of the first global players, E.G.P was able to develop a diversified pipeline of solar, hydro, geothermal and wind projects in strategic locations around the world. Enel's global scale also mitigated the impact of political and regulatory changes in any one country. (See Exhibit 6 for E.G.P's financial performance.)

E.G.P avoided investing in Europe, where government subsidies and incentives were designed to encourage renewable power, and instead focused its expansion in South America, Africa, and the U.S, where subsidies were generally absent. Starace reasoned that renewables would never displace thermal generation unless they were price competitive on their own.

In many less developed regions, local communities opposed major energy and mining projects. E.G.P began a practice of working closely with local communities, starting up to two years before construction of a renewables facility, to understand the community's needs and to convey the benefits of access to energy. In some remote areas, E.G.P helped residents establish small enterprises to sell food, transport, laundry or other services to the local mining company that purchased E.G.P's power. E.G.P also partnered with N.G.O's, such as the Barefoot College, training local women in remote areas to construct small electrical systems that could provide light and charge cellphones. Enel also created jobs by hiring local residents to monitor the ongoing environmental impact of their facilities.

By 2014, E.G.P had grown to revenues of €3.0 billion and ebitduh of €1.94 billion, with a net installed capacity of 9.6 G.W from 700 renewable power production plants in 16 countries.

Francesco Starace's Vision

In May 2014, Starace was appointed C.E.O of the Enel Group. By then, Enel had a net installed capacity of 37 G.W in Italy, 24 G.W in Spain and Portugal, and 18 G.W in South America, where it was the leading private utility company. Enel controlled the entire value chain of generation and distribution for its installations in Argentina, Brazil, Chile, Colombia and Peru.

Starace's first move was to reintegrate E.G.P into Enel. He believed that technology would advance and reshape the energy industry much faster than analysts were predicting. Success would depend on the company's ability to anticipate and adapt to new trends in order to gain a first-mover advantage. Rather than simplify and focus the company on a particular region or segment of the value chain, Starace believed that the company's ability to handle complexity by pursuing different strategies in different regions would position Enel best. In mature markets such as Italy and Spain, Enel would grow through advanced digital power management services.

In growing markets such as Latin America, Enel would expand its renewable generation and distribution systems. And, in the emerging markets such as Africa and India, Enel would experiment with new business models adapted to local circumstances. This vision required significant internal changes, including the introduction of a matrixed organizational structure.

Matrix structure Historically, Enel had a vertical organizational structure. Decision-making followed a clear hierarchy, divisions operated separately, and managers were expected to adhere strictly to established policies. Many of Enel's acquisitions continued to operate quasi-independently, sometimes even competing against each other in overlapping territories.

The new matrix structure was organized by business lines and regions. Business lines managed and developed assets such as power generation or distribution facilities, focusing on performance and efficiency. Regions developed and maintained relationships with regional regulatory bodies and customers. Global services delivered procurement and I.C.T. Holding functions were centralized across the company, including Administration, Finance, Human Resources and Organization (H.R&O), Corporate Affairs, Communications, and a new department of Innovation and Sustainability. (See Exhibit 7 for diagram of the matrix structure.)

According to Francesca Di Carlo, head of H.R&O, “At the beginning, it was very difficult for people to understand that the matrix structure means you have to share your responsibilities. Also, in bringing over our colleagues from E.G.P, a lot of fresh blood had entered the company, and that really created a new culture. The reality was that a lot of Enel's longtime employees did not have the right mindset, but I also learned that if you want to create a cultural revolution, you cannot forget the people that you already have. You have to mingle the new blood with the old.”

Francesco Venturini, who succeeded Starace as C.E.O of E.G.P, observed “I think that our biggest challenge is to build a change-oriented culture inside the company. When I started here in 1998, Enel had a very steady business and you already knew how much profit you were going to make 10 years down the road. Now, things are changing at a speed that has never been seen before. What we see now is not the same as it was even six months ago.”

Innovation and sustainability Prior to the reorganization, Enel's sustainability team had been part of the government and community relations department. Research and development (R&D) reported to the regulation division, since regulators had to approve any new investments under the old cost-plus pricing system. There was little connection between the R&D department and the operating divisions spread around the world. The company often found it hard to compete for research talent. The best young data scientists and engineers were not always interested in working for a state-controlled utility company.

The new Innovation and Sustainability division, led by Ernesto Ciorra, a former consultant to Starace at E.G.P, chose a model of "open innovation." Rather than expand internal R&D capacity, they established relationships with suppliers, other companies and universities to identify relevant innovations. Ciorra also established partnerships to launch new businesses such as electric buses with B.Y.D in China, vehicle to grid (V.2.G) power-sharing technology with Nissan, frequency regulation with G.E, and residential power storage with Tesla. Enel's Open Innovation website posted the company's most difficult technical challenges and invited anyone in the world to submit solutions that would be evaluated within 30 days by Enel engineers. Although the company did not invest in start-ups, Enel used its expertise and purchasing power to accelerate the development of start-ups that had useful technologies. Ciorra's goal was to build a start-up innovation ecosystem with startup networks in Chile and Brazil, and startup incubators in Israel and California.²⁹ (See Exhibit 8 for diagram of innovation ecosystem.) Enel also funded PhD candidates to do advanced data analysis at Polytechnic in Turino, as well as M.I.T and U.C Berkeley.³⁰

Ciorra claimed “Before Starace, social issues were seen only as a corporate responsibility problem, and it was all just a lot of talk. But social problems are real problems, and innovation comes from solving problems. Without the problems, you miss the opportunities. We aren't sustainable unless we innovate because technology is changing so fast. But to innovate, we have to be sustainable, because the best scientists, researchers, and innovators, aren't doing it just for the money; they want to do something that better the world. That's why innovation needs to be combined with sustainability.”

Announcing the new strategic plan

In 2015, Starace announced a five-year strategic plan to the investment community, committing to invest €21 billion in operating and capital expenditures (opex and capex) over 4 years to improve short-term profitability, expand renewables, explore emerging markets, and create the world's most advanced digitized distribution network to set the stage for electric mobility. The plan called for increased operational efficiency, growth through technology and geographical diversification, portfolio management, and dividend increases for stockholders. Three elements were key:

Short-term performance Enel planned to cut costs and improve efficiency, largely from a major opex investment to install the next generation of digital meters, estimated to save €1.0 billion by 2019. Starace also launched an internal initiative to identify best practices in any division or location throughout the company and then standardize them across all global operations.

To handle excess capacity from reduced demand, Enel committed to close 23 under-utilized thermal power plants that totaled more than one-third of Enel's Italian power generating capacity. Despite the closures, a 2015 Oxfam report pointed out that Enel's percentage of power generation from coal in Italy would not decline substantially through 2019.

Starace also noted that Enel's shareholder base had changed. The extremely low interest rate environment that followed the 2009 recession had motivated bond investors to seek alternative investments, and many of them saw utility stocks as a way to achieve higher yields while retaining some of predictability of bonds. To satisfy these shareholders, Enel committed to increase the percent of profits paid out as dividends from 50% to 65% in 2017 and 70% from 2018 onwards. Net ordinary income was predicted to increase by 14% per year and the minimum dividend per share by 22%. Enel promised that more than 75% of 2019 ebitduh was already committed.

Expansion of renewables In capex, Enel proposed to add 6.7 G.W more capacity, promising that 95% would be invested in businesses with predictable revenue streams, such as distribution networks and renewables guaranteed by P.P.A's. Starace explained:

To accelerate our return on capital, Enel will not invest in any new power plants that take more than 3 years to generate revenues. In an industry changing so quickly, it doesn't make sense to commit capital to projects that take ten years or more to be completed. That essentially takes us out of everything except solar and wind. We will not build any new coal plants and we will shut down existing plants when they do not make economic sense.

Coal is a liability in the future. However, the decommissioning of coal plants can be accelerated only if the price of gas is low enough to displace coal.

Francesco Venturini added "Renewables now have the competitive advantage. It is thermal power that needs to be protected because it's not competitive enough anymore, and Italy cannot afford the loss of jobs from ending thermal power."

Also in 2016, Enel reclassified its older hydro-generation facilities as part of the renewables portfolio, increasing the reported percentage of renewable installed capacity to 43%. The same year, Enel began a roadshow specifically for socially responsible investors (S.R.I). Enel's S.R.I shareholder base had increased from 4% in 2011 to 8% in 2016.

Emerging markets As of 2016, Enel had 19 G.W of installed capacity in Latin America and only 0.7 G.W of installed capacity in sub-Saharan Africa, India and Asia. The company considered emerging markets an important area for growth and experimentation, with plans to invest €6.3 billion in capital expenditures from 2017 to 2019, roughly half of its total capex budget.

Due to the lack of grid infrastructure and to the low electrification rates in some regions of Africa and India, Enel partnered with various start-ups to explore possible business models through its open innovation model. Any solution depended on three conditions: a stable regulatory framework, a standardized power generation system to reduce the cost of installation and maintenance, and a local franchise system to handle maintenance, retail services and payments. Most of the unserved rural population needed only a minimal amount of power to charge a cellphone or use a light, making it difficult for a large power company to profitably provide electricity.

However, Starace believed that Enel needed to explore these markets. "It's like the early years of the Internet," he said. "Nobody can say exactly when the key elements of the system such as broadband and smartphones were sufficiently in place, but then it took off quickly. At some point, the pieces will be in place for energy production in emerging markets and it will suddenly grow exponentially.

It hasn't happened yet, but we need to be working there now in order to be ready when the moment comes."

Digitized and fiber optic networks

In 2016, Enel completed the 15-year cost recovery from the installation of first-generation digital meters in Italy and planned to replace them with 48 million second generation smart meters across all geographies. These meters would enable a two-way connection between the grid and the customer. Customers could optimize their consumption, storage, and resale of electricity by anticipating variations in pricing and demand in real time. Enel anticipated that customers would pay for these power management services out of the resulting cost savings. The new digitized grid would also allow electricity to be rerouted in the event of a power failure, providing power through an alternate pathway almost instantaneously.

Enel also formed Open Fiber, a joint venture with Cassa Depositi e Prestiti, to install fiber optic cable throughout 270 cities in Italy, creating a new revenue stream from providing broadband internet access. Altogether, the company expected to spend €3 billion between 2017 and 2021 on installation of fiber optics and smart meters. Enel envisioned that the smart city of the future would depend on three networks: a 5G mobile network, a fiber optic network, and a fully digitized power distribution network. Italy would be the only country positioned to have all three networks in place in the next five years.

Beyond Italy, Enel anticipated full digitization of Spain by 2017 and Romania by 2018. Enel also began pilot programs to digitize networks in Latin America in order to encourage local regulators to authorize digitization. Enel's ultimate goal was to digitize 100% of its networks.

Looking Ahead: Electric Mobility

A year after Starace's plan was announced, Enel stock price was still depressed. (See Exhibit 9 for Enel's stock performance.) Investors were not yet convinced by Starace's vision. Alberto De Paoli recalled"We know that we have to prove ourselves by delivering on our plan, quarter by quarter." At the same time, Starace, Venturini and Ciorra were pursuing a much larger vision. Enel used the term"electric mobility" to describe the entire ecosystem necessary to design, develop, and deploy electric-powered vehicles and integrate them into the power grid. It encompassed fully electric and hybrid vehicles along with the batteries, charging stations, software, car-sharing services, and regulatory approvals.

In Madrid, Spain, Enel partnered with Car2Go, a car-sharing company in order to offer charging technology, recharging stations and maintenance for a fleet of 500 electric cars, one of the biggest electric car-sharing projects in Europe.

Also in Spain, the Japanese government funded Enel, Nissan and Mitsubishi to implement a pilot program that would enable electric car batteries to power homes, after recognizing that the batteries could have provided temporary power for millions of people following the Fukushima nuclear disaster. The pilot was successful in powering individual homes, but lacked the technology to aggregate car batteries to balance the entire power grid.

Source: Enel and Enel Green Power annual 10K financial reports (FY 2006 – 2015).

Source: Prepared by casewriter based on information from Capital IQ database.

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Table 1 summary: Financial performance of Enel from 2006 to 2017. Total revenue grew steadily from 38,513 million in 2006 to a peak of 84,949 million in 2012, before fluctuating and ending at 74,639 million in 2017. Gross profit followed a similar upward trend, rising from 8,019 million in 2006 to a high of 17,717 million in 2011, with the gross margin remaining relatively stable between 18.6% and 25.1% throughout the period. However, operating and net income showed more volatility. Operating income peaked at 11,366 million in 2011 but dropped significantly to 3,087 million in 2014, recovering to 9,792 million by 2017. Net income mirrored this instability, hitting a low of 772 million in 2014 after a peak of 5,395 million in 2009, and ending the period at 5,329 million in 2017.

Chart 2 summary: A donut chart illustrating the distribution of Enel's power generation by geography, totaling 88 GW. Italy has the largest share at 31.4%, followed by Spain and Portugal at 25.8%, Latin America at 23.3%, Europe and North Africa at 11.1%, North/Central America at 4.0%, and Sub-Saharan Africa and Asia at 0.8%.

Chart 3 summary: A donut chart showing the distribution of Enel's EBITDA by geography, totaling 15.6 billion euros. Italy represents the largest share at 43.21%, followed by Latin America at 23.36% and Spain and Portugal at 22.91%. North/Central America accounts for 5.40%, Europe and North Africa for 5.03%, and Sub-Saharan Africa and Asia for 0.09%.

Chart 4 summary: A bar chart showing Enel's installed renewable capacity as a percentage of total capacity across six geographies. Italy has the highest total capacity, with renewables making up 49.2% of that total. Latin America follows with a higher renewable proportion of 62.3%. Spain and Portugal have a renewable share of 42.7%, while Europe and North Africa's share is 9.0%. North/Central America and Sub-Saharan Africa and Asia both have 100% renewable capacity, though their total capacities are the lowest among the regions shown.

Chart 5 summary: A stacked area chart illustrating the projected growth in future demand for electricity from 1990 to 2035, measured in Mtoe. Total demand increases steadily from approximately 2,000 Mtoe in 1990 to 10,000 Mtoe by 2035. China represents the largest share of this demand, showing the most significant growth over the period. Other contributing regions include India, the Middle East, Africa, Brazil, Indonesia, and the rest of the non-OECD countries.

Table 6 summary: Enel Green Power experienced steady growth in total revenue and workforce from 2007 to 2015, with revenue increasing from 1,536 million to 3,011 million and the number of employees rising from 2,313 to 4,309. However, profitability margins declined over this period. The operating margin dropped significantly from 53.3 percent in 2007 to 29.2 percent in 2015, while operating income peaked at 1,171 million in 2013 before falling to 879 million in 2015. Capital expenditure also grew substantially, starting at 663 million in 2007 and reaching 2,466 million by 2015.

Figure 7 summary: A diagram illustrating Enel's matrix organizational structure. At the top is the Group CEO, supported by Holding Functions—which include Administration, Finance and Control, Human Resources and Organisation, Communications, Legal and Corporate Affairs, Innovation and Sustainability, European Affairs, and Audit—as well as Global Procurement and Global HR. Below these are the Global Business Lines, which include Global Infrastructure and Networks and Global Thermal Generation. These business lines intersect with various Geographies, including Italy, Iberia, Europe-North Africa, Sub-Saharan Africa, Asia, North and Central America, and Latin America. The intersection focuses on managing clients, local stakeholders, regulatory affairs, revenues, cash-flow, EBITDA, best practice sharing, efficiency in capex and opex, and capital allocation.

Figure 8 summary: A diagram of the Enel Open Innovation Model showing Enel Sustainability & Innovation as a central hub interacting with three groups. To the left, External Partners include international institutions, startups, customers, universities and research centers, companies, partners, funds and indexes, and environmentalists. To the right, Internal divisions include Global ICT, Global Procurement, Global Generation, Global I&N, Global Trading, and Upstream Gas. Below the hub are Geographies, covering Italy, Iberia, LatAm, and Eastern Europe.

Chart 9 summary: A line chart depicting Enel's stock performance from January 2000 to 2017. The stock price experienced significant volatility, peaking above 9.00 around 2000, followed by a general downward trend with several fluctuations, reaching its lowest point around 2012 before stabilizing and slightly recovering toward 2017.