Multi-utility hits EU targets 5-15 years early

Do you think Italy has the potential to become a focal point of an integrated energy system in the Mediterranean?

When we talk about energy in the context of the Mediterranean area, we have to consider electricity and gas separately.

Electricity requires certain networks to be deployed. Northern African renewable production may be transferred to Italy but it would require significant investments in the interconnection grid and some further technology development would also help in reducing power losses.

Most notably, the power sector is now facing other major trends that need to be well understood before committing to a huge investment cycle. The way the new business models are emerging – I refer here to the “sharing economy” and all energy efficiency models – will change the structure of the power demand side.

However, in the gas market the picture may be different. First of all some infrastructure is already committed to be deployed to increase the transportation of natural gas to Europe via the Mediterranean. The new TAP pipeline project will bring Azeri gas into Europe, passing through Italy, and it will be a key turning point for the EU diversification of gas sources. In this context Italy will become the Azeri gas entry gate to central Europe, where the largest part of the consumption will take place.

Further, it is noteworthy to consider how the geopolitics will change. The Azeri network will be a direct competitor to the doubling of the Nord Stream pipeline promoted by Russia and Germany, who want to keep their strong grip on the European gas market. Therefore, the European Union will definitely play a role on this issue: as far as the overall strategic objective is confirmed to be the diversification of gas sources, then Italy is the most convenient route to bring Middle Eastern gas into Europe.

Could you please briefly explain the genesis and transformation of Hera since 2002?

Hera was established at the end of 2002, merging 12 or 13 different local entities into one. The shareholders at that time decided to establish this new entity to promote the industrialization of these kinds of services, as they understood that these services could represent a real driver for our local economy. There is a competitive advantage for companies that intend to invest here, as they can find a very efficient and effective asset management.

The first strategic decision we made was to maintain a multi-service portfolio. We put our customer at the center and we recognized that keeping all the business management together would have given us the opportunity to leverage on remarkable synergies. As you can see, we decided to move with this balanced portfolio over time, and it guaranteed us a continuous organic growth through efficiencies and top-line development, further underpinned by a remarkable number of acquisitions, 24 in total.

I think ours is a really unique example. When I come over to the United States to meet our investors and shareholders (20% of our shareholders come from the US) the best story I can tell them is that Hera is a company having a perfectly balanced multi-service portfolio, a strong track record on M&As, and it has been able to post growth year after year thanks to it.

How would you describe Hera’s contribution to the socio-economic development of the region?

I will describe it to you with three examples.

By June 2016, we will have distributed €20 billion of wealth to our territories. And when I say wealth, I am talking about the sum of the value generated by the company summing up salaries, payment of the different local entities, taxes and purchases from local suppliers. If you combine those factors, we give back €1.6 billion/year to our territories. I think that makes Hera the most important company in the region, in this respect.

The second example comes from a couple of recent investment decisions that were taken by foreign companies. Philip Morris and the Audi Group have decided to establish new plants in Emilia-Romagna. We knew very well what they were looking for across Europe before choosing our region as the area for their new sites: quality of supply, quality of environmental services and connection capabilities to the new site within a defined timeframe. We were able to guarantee that kind of performance they were looking for, and when I say “we” I refer to Hera and to the whole territory.

I will give you one more example providing you a feeling of the role of the company in our territory. Let’s refer to smart cities. If you look at the national ranking made by EY, based on the smartness of different cities in Italy, Bologna is top of the list, and Modena is sixth in the ranking (they are the two largest cities where we operate). Furthermore, if you look at the variables considered by EY to score the smartness of the cities, almost a half of them refers to aspects dealt by Hera.

Could you please give us some details about Hera’s waste management solutions?

We are the leader in waste management in the country, and we have the largest asset base: we have more than 85 plants for waste management and so we are able to deal with any kind of waste.

In the waste management sector, our company action can be split into three phases. The first phase was to renew the asset base to guarantee the safety of waste disposal. In 2002, 45% of urban waste in this region was disposed into landfills. Last year, it was 8.6%, marking the achievement in 2015 of the target set in the European directive for 2030.

The second phase was to set up an asset base able to manage and to handle the sorted collection that was progressively growing. Last year, we sorted 55% of urban collection, far above the Italian average. Our asset base allows us to select the sorted collection and bring it to the recycling industry in the most effective way: we recycled/recovered 94% of the waste separately collected.

In the third phase—the current one—we are trying to understand how to further develop recycling and reuse. We are experimenting with certain initiatives in reuse and the circular economy, promoting initiatives like ‘Change the Destination’: we collect furniture and all kinds of stuff and through some non-profit companies we recycle them for reuse (more than 5,000 items).

Last but not least our focus is not only on urban waste but also on industrial waste recycling. Last year, we acquired a company called Waste Recycling, located in Tuscany, exactly to tackle this kind of opportunity.

I will provide you with another example of big achievement: last year we recycled 66% of the packaging we collected, above European targets set for 2020, and positioning Hera five years ahead of EU policies. These are valuable KPIs to support our keen and effective approach to the environment.

Can you give us an overview of Hera’s investments in technological improvements to improve the distribution networks in water, gas, and electricity?

A multi-utility service company like Hera has to play its role as an enabler in the smart city context. We are present in the backbone of the city, through our networks, and we can collect a huge amounts of data related to the city at every single moment. Through the intelligence we are deploying in our networks, we can make this kind of information available to the city.

With respect to the public lighting network, we are thinking and testing how to use “smart towers” – they can be equipped to provide Wi-Fi internet coverage, to detect the level of emissions along the roads, to provide information to the city through screens.

One more example comes from smart meters. We are carrying out some tests to deploy multi-service smart metering in Modena (namely in an area where we can have smart metering for district heating, water and gas) and we have built up the transmission network to collect all this kind of information.

If you look at the most advanced cities in the world, such as Seoul, Rio or Los Angeles, you will see the target is to keep the city under control and they have set up physical operation centers with remote access to sensors where people are looking at screens and controlling what is going on in the city. We are figuring out how to make such an operational center as an open-source gateway easily accessible.

You have earmarked €2.2 billion for investment over the next five years. So, where would you say are the main areas of investment that you are looking at?

The main areas we will address with our investment plan are: further progression in the evolution of waste management, a further enhancement of the network management, and a further expansion of our customer base. These targets will capture the most of our capital expenditure plans, again in a balanced perspective taking into consideration the return opportunities.

Sustainability is one of the key assets we have been increasing over time through intensive investments and evolving practices. Because of the progressive development we have achieved in that direction—we have been adopting the GRI guidelines since 2014, and we have been part of the global compact of the United Nations since 2005—we are already ranked as advanced in this sense.

There is one concept that is clear to me—we are in a really delicate transition phase. And the way you manage the transition phase can make the success of a country or company. I fully agree with the European Union when they say this transition phase has to be done in the next 15 years. And in those 15 years, there is a lot of time to make the change. Nature doesn’t do big jumps. Nature evolves over time.

Companies and economic systems have to progressively evolve. They have to be clear on their direction and take a step-by-step approach. I don’t think revolutions can have great success. We have the added advantage of having started 10 years ago. But looking forward, we still have some changes to make, but not something that has to entirely change the company’s modus operandi.

What would you say are the main reasons why our business community should look at Italy as their next investment destination?

I believe in the past two years a new energy has been transferred to companies. Some changes have been introduced along the expected path, such as the new Jobs Act and the Public Administration Reform, having an impact on our businesses. Other important issues relate to the general tax system, which was significantly penalizing operations in the country, and some significant steps forward have been made in this direction to make it more favorable for foreign investors.

Italy has one of the most reliable and favorable regulatory systems. Foreign investors usually do not have a high-risk appetite, as the more you move away from your country, the lower your risk appetite is. Therefore Italy is a significant opportunity for low-risk investors.

Even in the toughest years the national authority for energy and water stuck to its position consistently, and I think this is an important point to be factored in investment decisions.

A second and more business-related aspect refers to the quality of the customer base. Our experience shows the customer base in Italy is largely reliable in terms of payment of bills (we report an unpaid percentage between 1% and 2% of the turnover).

Thirdly, the resilience of the industry base is one of the key factors making Italy a desirable investment destination. Italy shows an industrial structure that is totally different from other countries, characterized by medium and small-sized companies. Our SMEs are probably unable to compete effectively with large corporations on a global basis, but they are flexible, reactive, and they dispose of technological leadership in several market niches.

Last but not least, some words on the general economic recovery: Italy has not yet shown data in line with expectations based on the country’s efforts. But I firmly believe this slow reaction will bounce back more effectively as soon as necessary reforms kick in completely.