Italian energy company, Eduardo Raffinerie Garrone (ERG) used to be an outlier among renewable energy companies. Up until 2008, the company was mostly refining oil and distributing fuels. But when the management had a chance to divest its oil assets and switch to greener technologies, it did not think twice, embarking on a decade-long journey to become a renewable energy player. 

Initially, ERG’s strategy faced headwinds. When oil traded above $100 in the years following the financial crisis, its stock sank. The oil boom was short-lived, though, while the case of renewable energy, and wider net-zero strategies, got stronger year-by-year.


Fast forward to 2021, and doubts have vanished. With the world coming to terms with climate change, not only is ERG more valuable than it has ever been, but its trajectory has also become a blueprint for most of its peers from the oil and gas industry to follow.  

Paolo Luigi Merli assumed the role of CEO earlier this year, as ERG finds itself at another pivotal juncture, with plans to sell off gas and hydro assets to become a pure renewables player.

Q: You expect to increase your installed capacity of renewables by 1.5GW across your operations in Europe by 2025. Where and in what technology are you investing?

A: At the beginning of the year, we launched an asset rotation programme to dispose of our hydro and combined cycle gas turbine assets. Why? Because we want to transform ourselves into a pure renewables player, which means wind and solar. We perceive this as the best way to accelerate our development and sustain the UN’s sustainable development goals.

When you look at national energy plans, all nation states are setting targets based on these two technologies. We are mainly focused on onshore wind. We think offshore wind is too complex for a mid-size company like ours and we are also looking at storage as a potential opportunity to strengthen our asset base of intermittent sources. 

Q: Is there a risk for you to not keep some of your gas assets online, especially as various European countries have been shown to be quite reliant on gas in recent months?

A: We believe — and I personally believe — that gas is and will remain important to accompany the energy transition.

But we think this role should be played by other companies, like Enel and Iberdrola: the big names with an integrated portfolio. We want to play the role of renewables in the energy transition on one side, bringing new installed capacity. 

It’s an opportunity more than a risk. And the most important hurdle to this is the permits process, which is bottlenecking government plans to deploy megawatts of renewables in Europe, especially.

Q: Repowering [upgrading] existing wind assets has been a large part of your strategy. Why did you buy up Engie’s wind assets in 2013?

A: In 2013, we bought a large portfolio from Engie — at the time named Gaz de France — of roughly 550MW, which was made up of old-fashioned wind turbines. This was one of the best investments we’d ever made. It was a time when all these big players were escaping Italy, during the sovereign wealth crisis. 

There was a liquidity crisis and we were lucky because we had a lot of cash in the bank, as we had just finished getting rid of our refineries and oil assets. Cash was king and we used that money to buy assets on the cheap. Our energy transition started at a time when the economic conditions could not be repeated now, having sold oil assets at the golden age of refining. 

Q: Going back further still, why did you start selling your oil assets in 2008?

A: At the time, ERG wasn’t present along the entire oil value chain, but only in the segments of refining and distribution. Its profitability depended to a great degree on the increasing instability of oil prices.

We signed an agreement with Russian energy company Lukoil in June 2008 to sell 49% in the ISAB refinery in Sicily a couple of months before the subprime mortgage crisis, which brought down the oil price. Fortunately, we structured the contract with Lukoil with put options to sell the remaining stake. As the crisis continued into the 2010s, we decided to exit the refinery in 2013 because it was unsustainable for us.

I always say that there were three factors that drove this transition: the vision of the management and the shareholders who wanted to move towards renewables, and were worried about sitting on a single asset; the execution; and luck.

Q: What can other big energy companies learn from ERG’s experience in both the divestment and investment moves you’ve made over the past decade?

A: Now all the players, especially as the major oil companies, are jumping into the picture eager to buy assets. They are inflating the market in a way that is not unsustainable, but is very challenging. 

This affects us in two ways: one in a positive way, our stock price is now at roughly €30, when it used to be around €5 in 2012; on the negative side, over the past two years we have competed in a beauty contest with these big champions and we cannot compete with the likes of Eni, Total, BP or Engie.

When we understood that the mergers and acquisitions (M&A) environment was getting tough, we diverted our strategy to cherry-picking in M&A by selecting smaller assets. When I say ‘small assets’, I’m talking about a portfolio that can be valued at below €500m. 

Q: Is it fair to say that your pace is not accelerating then? You’re not planning to scale up as these big energy companies pivot to renewables?

A: We are scaling up, but by doing it small deal by small deal. Take, for instance, this year — we silently revised upwards our capital expenditure guidance for 2021, because we made a small acquisition in Sweden at €100m on a bilateral model. In October, we signed another agreement to buy a portfolio of 150MW for €200m. But with these smaller price tags, we do not find competition from BP or Total.  

Q: How have your sources of capital changed over the past few years?

A: This is a very good question given we’re talking about the differences between ERG and the big names. We have looked at the possibility of expanding our scope of business many times, but we’ve decided that we want to remain as simple as possible, because simplicity means velocity in adapting to new scenarios.

One thing we have worked on from a financial point of view over the past three or four years is to move from a project finance structure to a debt capital markets structure. To do this, we obtained an investment-grade rating, which is unusual for a company as small as ours, which allowed us to completely reshape our financial structure. Right now, we have €1.6bn in green bonds with great success.

Q: ERG signed a power purchase agreement (PPA) with telecoms company TIM earlier this year. Do you see untapped growth potential in PPAs with telecoms or big tech companies?

A: Absolutely. Our model is to sell energy through mechanisms that stabilise revenue. When we do not have the possibility to participate in auctions, like in the UK, PPAs are the best alternative.

Going forward, corporate PPAs will become more and more in demand. We have been approached by many corporates across Europe because of their environmental targets, they need to show and demonstrate that they are buying energy from green players like us. 

Q: In the wake of COP26, and faced with this current crisis, do you think the dynamic between corporates and governments will change?

A: I think private corporates can play a major role — and this is exactly what we want and are trying to do. But what governments need to do most is engage with the regions and local communities. In Italy, right now, the government has set out the target of 60GW in 10 years. This means 6GW per year, and over the last three years we’ve installed less than 1GW.

And we are missing a regional plan. To do this, you need to share with the regions where we are going to put all those megawatts. 

My personal opinion on COP26 is that it was a little bit disappointing, with China and Russia missing in action and India postponing its energy targets to 2070. I’m sceptical that the Glasgow Climate Pact will achieve 1.5 degrees warming given the pace at which we are moving. But I take the positive and the positive is that every state believes in the opportunity and necessity to become zero-carbon. 

Paolo Luigi Merli is CEO of ERG

This article was first published in the December 2021/January 2022 edition of fDi Intelligence magazine. Read the online edition here.