Europe’s energy transition has entered a critical phase. As renewable projects multiply, investors face a contradictory scenario: dysfunctional energy pricing, declining returns among major utilities, and an increasingly uncertain regulatory environment.

For Fernando Cabo Díaz, independent financial expert, what is at stake is not the future of renewables, but rather the viability of the current energy model—and with it, the entire investment landscape in the sector.

“Investing in renewables today is very risky. There’s an artificial price incentive, but it’s not sustainable,” he warns in an interview with Strategic Energy Europe, explaining that the European marginal pricing system, where the cheapest energy is paid at the price of the most expensive, is causing deep market distortions.

One of the most critical effects, according to Cabo Díaz, is the surge in zero or negative prices in the power pool. In 2024, the Spanish electricity pool recorded 784 hours at zero or below, with 247 of those hours at negative prices.

In other words, renewable energy was forced out of the system due to oversupply or the grid’s inability to absorb it. Cabo Díaz stresses: “In Spain, some producers are forced to shut down their installations for eight or nine consecutive hours because they have to sell at zero or negative prices. The grid simply cannot absorb any more,” directly hitting the profitability of renewable projects—even in a country with abundant solar and wind resources.

The marginal pricing model: a paradox of inflated profits… and growing risks

In the marginal pricing system, the price of all electricity is set by the last megawatt dispatched, which is usually the most expensive: combined-cycle gas turbines.

Cabo Díaz details how Spain’s leading utilities—Iberdrola, Endesa and Naturgy, which together account for 70% of power generation—can manipulate market dispatch:
“They can curtail renewables to force gas generation to enter the market and raise the wholesale price. Then they reconnect renewables and sell at the higher gas-based price. This is legal for now, but it has an expiry date.”

This inflationary pricing not only leads to artificial windfall profits, but also undermines demand and industrial competitiveness.

At the same time, energy-intensive industries—steel, ceramics, chemicals, cement—are shutting down or relocating, slowing the growth of demand and deepening structural market imbalances.

“High energy prices have driven major consumers out of the market. This destruction of demand is already underway,” the adviser points out.

This context affects not only the system’s operational efficiency, but also the financial sustainability of energy companies.

ROIC vs WACC: the equation behind value destruction

One of Cabo Díaz’s most pressing financial insights is the growing gap between return on invested capital (ROIC) and the weighted average cost of capital (WACC). According to him, many European energy companies are now entering structurally risky territory.

“Capital costs have risen significantly due to regulatory risk, inflation, and high interest rates. Meanwhile, returns from energy operations are declining. As a result, many companies are now destroying shareholder value,” he explains.

He cites Repsol as a case in point, where ROIC is estimated to be below 8%, roughly in line with its WACC—meaning that every euro invested is no longer generating meaningful returns.

A fragmented market: Europe lacks a common energy system

Adding to this equation is a fundamental structural weakness: the absence of a truly integrated European electricity market.

“Spain has one market, Italy another, France a third. There is no interconnected system to distribute renewable surpluses where they are needed,” says Cabo Díaz.

As a result, some countries pay record prices while others waste available energy. This not only blocks regional optimisation, but also further weakens Europe’s position against blocs such as the United States or China.

Targeted opportunities: technologies, not physical assets

Despite the challenging outlook, Cabo Díaz identifies two concrete areas of investment opportunity:

1. Grid stabilisation systems – including grid-forming inverters, synchronous condensers and batteries that ensure frequency stability in renewable-powered grids. “Spain will need between 5 and 10 GW of these systems. The minimum investment required is between €3 billion and €8 billion,” he estimates.

1. Next-generation storage technologies – “The lithium-ion battery market is saturated and facing regulatory bottlenecks, but there is still room for companies developing more efficient technologies with lower reliance on critical materials,” he notes.

He highlights particular opportunities in companies developing batteries using alternatives to lithium, as well as electrolysers that do not rely on the platinum group metals, both of which are currently dominated by China.

Hydrogen: potential with caution

Cabo Díaz also takes a cautious stance on green hydrogen.

“There is currently no one to sell it to. Producing it via renewables and electrolysis is just too expensive,” he states.

He adds that the supporting infrastructure is undeveloped and that the technology is still at a low Technology Readiness Level (TRL). Major automakers like Toyota and BMW have frozen hydrogen vehicle programmes, focusing only on heavy transport applications such as freight or rail.

The US and South America: contrasting alternatives

Cabo Díaz concludes with a stark contrast between continents. While Europe grapples with reforms, regulatory uncertainty and shrinking demand, the United States is experiencing an unrestricted energy expansion, driven by shale gas and nuclear for data centres.

“Right now, the place to invest in energy is the United States. And South America has enormous potential—if it can overcome its infrastructure gaps and limited industrial demand,” he asserts.

Final thoughts

The European energy model is facing a technical, financial and political crossroads. For investors, the challenge is to distinguish where the hype ends and genuine opportunity begins.

As Fernando Cabo Díaz puts it: “Traditional energy companies are squeezing every last drop from the gas business. But they are not preparing for what’s next: a market with low costs, stable grids, and efficient storage. That will be the real paradigm shift.”