Good morning and welcome to our First Half 2019 results presentation, which will be presented by our CEO, José Bogas, and by our CFO, Luca Passa. Following the presentation, we will have the usual Q&A session open to those connected both on the call and on the web. Thank you very much for your attention, and now let me hand over to José Bogas.
Thank you, Mar, and good morning, ladies and gentlemen, and thank you for joining us today. As usual, let me start this presentation with the main highlight of the period: EBITDA increased by 5% compared to last year, mainly due to the positive performance of the liberalized business. Flat EBITDA evolution in the distribution business. Fixed costs have remained almost flat, as our continued focus on efficiency has absorbed the increased investment effort. At the bottom line, net ordinary income increased by 3% compared to the first half of 2018. Finally, it is worth taking into account the progress made so far on developing our strategic pillars aimed at leading the energy transition. In that sense, moving on to slide number three, let me now comment on the achievement recorded so far on the main operating target of our business plan.
Our focus on renewables has resulted in an acceleration of the development of the 879 MW obtained in the two auctions held in 2017, which are expected to be on stream before end 2019. Apart from renewable projects on the mainland, Endesa participated in auctions held in the Canary Islands and Balearic Islands, where we intend to invest also outside the auction scheme. A sound pipeline of 9 GW in renewables is being developed, reinforcing our leadership in the energy transition. When it comes to grids, we continue digitalizing our networks. During the last 18 months, we have devoted a CapEx of EUR 370 million, around 37% of the committed amount for 2018 to 2021. The effect of this investment has a direct positive consequence in efficiency indicators such as OpEx per customer.
Our customer strategy, oriented to value creation, remains successful with first half 2019 integrated margin reaching EUR 27.5 per MWh, an 8% increase versus last year. We keep on progressing in our digitalization effort to manage our customer base while improving the cost to serve. Finally, we are meeting our efficiency target when containing our fixed costs during the new investment cycle, in which digitalization is playing a key role in leading progress evolution throughout the company. Focusing on the first pillar of our strategy on page number four, as you may know, the Spanish National Energy Plan was submitted to the European authorities last February with a 2030 emission reduction target and the energy sector objective to reach the European Union environmental target. These are one of the most ambitious in the European Union, reflecting the willingness of the government to lead the energy transition in Europe.
We are strongly supportive of the energy transition and the ambitious Spanish target, and aim at being the leading player throughout this evolution. In the short term, and as I commented on before, Endesa is developing 879 MW of renewable projects awarded in the 2017 auctions, devoting more than EUR 800 million of CapEx, which are expected to be on stream before end 2019. Being fully committed with sustainable financing policies, 80% of these CapEx has been secured through loans with the Instituto de Crédito Oficial and the European Investment Bank at very competitive terms and conditions. Endesa is a pioneer in this kind of financing in Spain. We are also working on developing a sound pipeline of around 9 GW , out of which 1.8 GW with commercial date until 2021.
Most of the capacity in the advanced phase of development will be solar, around 85%, with an evident switch from the wind technology. Moving now to slide five, let me now explain our smart networks being our second strategic pillar. On the fifth of July, the CNMC published seven circulars with its proposal for the second regulatory period of electricity distribution and transmission for the period 2020 to 2025, and gas distribution, transportation, and regasification businesses. The main effect in power distribution is the proposal of a reduction from 6.5% to 5.58% in the remuneration rate, now based on a WACC formula, in line with its November 2018 proposal, a gradual cut in OpEx efficiencies, and a new incentive scheme. The 50 basis points cap and floor in the regulated return changes over two consecutive years remain the same.
These drafts are open for consultation until August 9, and the CNMC expects to have the final document by the last quarter of this year, 2019. New regulation will be enforced from the 1st of January 2020. We are currently working on the allegation report to make improvements on the proposals. From our point of view, an adequate regulation should encourage companies to prepare their investment and operation plans in accordance with national energy policy objectives. We should all focus on achieving the objectives of the Integrated National Energy and Climate Plan to advance in the decarbonization. For these targets to be achieved, a proper remuneration for the electricity network is crucial, specifically concerning investment in digitalization, where an adequate retributive framework should be established.
As the third pillar of our strategic plan is concerned, now on slide number six, the strategy implemented in the retail business has so far had very positive effects on all of the business indicators, which are flat churn rates in electricity, despite growing competitive pressure. To the contrary, and most notably, the gas churn rate improved versus full year 2018, exceeding our expectations. The number of contracts with e-billing rose by 67% versus full year 2017, up to 3.5 million contracts. The proportion of digital interaction rose from 68% in 2017 to 86% in the first half of 2019, while the number of digital contracts has grown to 4.5 million, both metrics already exceeding the 2021 target. All of the above has allowed a relevant reduction of the cost to serve, paving the way for additional savings in the upcoming years.
Moving now to slide number seven, to make a quick follow-up of our efficiency program, which is consistently proving to be an effective tool to achieve efficiencies across all our business lines. Our OpEx evolutions remain stable versus previous year, with efficiencies, including IFRS 16 effect, more than offsetting inflation, perimeter, and growth, with higher CapEx in a new investment cycle. In generation, the optimization measures put in place allowed us to keep on containing our generation unitary costs. In the same way, regarding Enel Green Power España, cost synergies incentive allowed us to deepen the fixed cost control reaching EUR 42,000 per MW in the first half of 2019, with an improvement of 2% versus full year 2018.
In distribution, the digitalization initiative of our processes and assets brought additional reduction in our operational cost, with unitary cost per client at EUR 42 per customer, that is - 2% versus full year 2018, close to the 2021 target. Lastly, regarding supply, levering on the digitalization initiative, we have trimmed the cost to serve to EUR 10.6 per customer towards our EUR 8.3 per customer target for 2021, which has been adjusted for the social bonus cost. Moving to slide number eight, you can see how the execution of our strategy affects our sustainable KPIs. Endesa's strategy deepens our commitment to the sustainable development goals set by the United Nations. In relation to SDGs, we have achieved around 60% of CO2-free energy production against a target of 52%.
Also, in digitalization, we have forecasted a total investment of EUR 1.3 billion during the period 2018 to 2021, of which EUR 102 million were invested in the first half of 2019, being 30% of the annual target. Regarding our commitment to ensure electricity supply to all vulnerable customers, we are implementing 38 initiatives that have so far helped 330,000 people to gain access to energy. In relation to our engagements with local communities, Endesa has implemented a third transition on the Compostilla and Teruel coal plants phase out, consisting of a project to give a second life to the Compostilla site and to build a 1,000 MW of photovoltaic capacity in Teruel, the biggest solar plant in Europe. Besides this project, we are promoting local employment, jointly with other social, environmental, and energy efficiency initiatives in the renewable project we are setting up.
Finally, our involvement with our employees, where we are almost reaching the 2019 target for diversity, appraisal performance, sustainable mobility, and health and safety. Let's take a look at slide number nine. Beyond our commitment to sustainable development goals, I would like to underline some achievements in the environmental, social, and governance dimension. Regarding the environment, the Spanish Climate Change Office has selected Endesa to develop new climate projects to reduce emissions. Also, it has certified us as the first Spanish energy company to offset its carbon footprint. We launched a zero plastic campaign to reduce single-use plastic by 75% over five years. Endesa has been the first Spanish utility to obtain green loans from the Instituto de Crédito Oficial and the European Investment Bank.
In relation to the social dimension, the creating shared value approach in our deployment of the photovoltaic plants has succeeded in creating 660 jobs in Extremadura. Our successful RetoTech project to foster educational innovation through technological enterprise in schools has been selected for the European initiative Enterprise 2020. Finally, when it comes to governance, Endesa has improved its governance model with the election of a non-executive independent chairman, as well as increasing up to 55% the independent board members. Management remuneration includes CO2 emissions reduction and safety target. The independent organization Fundación Compromiso y Transparencia awarded Endesa as the best company on tax transparency in Spain and confirmed our foundation as the leader of the Transparency and Good Governance Index. Our sustainability plan embedded in our strategy allowed us to renew our presence in FTSE4Good and Euronext Vigeo indexes.
Now, on slide number ten, I would like to comment on the market context in Iberia for the period of these financial releases. Spanish electricity demand showed a decline both in growth, - 2.2%, and adjusted terms, - 2.3%, affected negatively by milder temperatures during the period, as well as by a closure of aluminum factories in northern Spain. In Endesa's concession area, gross demand decreased by 1%, slightly better than mainland figures, and remained almost flat in adjusted terms. This development is mainly driven by the service activity, which could not offset, in non-adjusted terms, the drop in the residential segment for safe temperature reasons. Electricity pool prices grow slightly to EUR 51.8 per MWh on average during the period, below 2018 full year price references and 3% higher than first half 2018.
Behind this price scenario lies the combined effect of hydro scarcity, lower wind load factor, and the material increase of CO2 prices seen during this period. In this context, Endesa's total output dropped by 13%, largely due to the reduction in hydro and thermal generation, - 47% and - 32%, respectively, while nuclear output, which was fully normalized after last year's stoppage, partially offset this reduction. As a consequence of all these effects, CO2-free technologies increased their share up to about 60% of our generation mix versus 53% in the first half of 2018. Moving to power operational highlight on slide number 11, total growth sales decreased 1.5 TWh, that is - 3%, mainly due to the drop in Spanish demand as a consequence of mild temperatures, as I mentioned before. Consumption by segment shows a drop in residential volumes, while industrial sales maintain a more moderate decline.
Note that our commercial strategy is targeting the retention of high-value customers that trigger the exit of some industrial customers, which has narrowed margins over the course of 2018. To the contrary, electricity customers remain almost in line with last year's figures, although improving the mix following the switch from regulated to the liberalized segment, whose customer base increased by 2%. Our objective is keeping our overall market share stable. Moving to slide number 12, electricity sales in the liberalized business decreased in Spain and Portugal by 2% in terms of volume, that is - 0.9 TWh The unitary integrated margin in the electricity business increased by 8% to EUR 27.5 per MWh. The result of this remarkable evolution is mainly due to the higher OTC reference prices, the positive impact of the temporary suspension of the generation tax in the first quarter, and higher nuclear production.
This factor partially offsets lower hydro availability and lower thermal spread as a consequence of the significant increase in CO2 prices. It is also worth underlining the solidness of our liberalized supply margin with the stats at around EUR 9 per MWh from close to EUR 8 per MWh in first half 2018. We have already hit 100% of our 2019 estimated output at an average all-in price of EUR 72 per MWh. For 2020, we have hit around 70% of our estimated output at an average all-in price of around 76, corresponding mainly to hydro, nuclear, and renewable production. This price reference corresponds to low-voltage customers. Therefore, prices will gradually normalize along the year at around 72, similar to 2019. Regarding slide number 13, the backdrop for global gas is still affecting the performance of our gas business.
Milder temperatures during the period impacted total sales with a 6% drop, mainly in the retail activity and, in particular, in the international market. On the other hand, sales of CCGTs sharply improved by 20%. At the bottom of the slide, however, you can see that the number of customers increased by 2%, consolidating levels of 1.6 million. The increase in the hedged selling prices carried out last year outweighed the higher procurement costs, allowing the unitary margin to increase to EUR 2.3 per MWh. Let me mention that we hedged 100% of our 2019 estimated sales among retail, CCGTs, and diversions. Concerning 2020, this figure amounts to around 53%. Now, Luca, we continue with the financial results.
Thank you, Pepe, and good morning, ladies and gentlemen. Now, on slide 15, deep diving in the main financial results for the period. EBITDA and net ordinary income increased by 5% and 3%, respectively, compared to first half 2018. The main drivers behind this performance are remarkable evolution of the liberalized business in a challenging market context for both electricity and gas businesses, while at the same time, regulated businesses remained stable.
The continuous efforts in efficiency led to a 2% decrease in the fixed cost. Net ordinary income increased 3%, affected by higher financial cost and D&A in the period, as I will detail later on. Finally, net debt increased by 18% over full year 2018 to EUR 6.8 billion, mainly driven by higher CapEx, the first adoption accounting entry of IFRS 16 for EUR 186 million, and the interim dividend of 2018 results paid in January this year amounted to EUR 741 million. Moving to the detailed analysis on the EBITDA, and now on slide 16, let me summarize the main drivers.
Endesa reported an EBITDA of EUR 1,894 million, + 5% versus first half 2018. An increase which has been driven by the good performance of the liberalized business and stability of the distribution business, as well as by the ongoing efficiency drive with a 2% reduction in OpEx, 1% in adjusted terms. Generation and supply EBITDA rose by 21% to EUR 745 million, supported by the sound increase in integrated electricity and gas margin, jointly with a fixed cost reduction. Distribution EBITDA came in at EUR 1,025 million, increasing 1% thanks to the improvement in gross margin, mainly from the consolidation of Ceuta and lower OpEx. Finally, non-mainland generation EBITDA reached EUR 124 million, as I will comment in the following slide. Regulated business contributed to total EBITDA with 61%, and I'm now on slide 17.
EBITDA decreased by 3% to EUR 1 ,149,000,000 , affected by a lower regulated margin of EUR 37 million, while fixed costs remained flat. Distribution slightly increased by 1%. The non-mainland generation gross margin was EUR 45 million lower due to the reduction of the revenues related to fuel and CO2 compensation as a result of the settlement mechanism in non-mainland, which uses references with six months of delay. Additionally, a lower financial remuneration income was also booked in the period. These results, despite the drop year -on -year, are in line with the plan for the first semester. As a consequence of the high seasonality of the non-mainland business, we expect performance acceleration in the second half, meeting our guidance for the full year of EBITDA above EUR 300 million.
Fixed costs remained flat year -on -year, which is notable considering the activity increase required to accomplish our network automation and digitalization commitments. Net CapEx amounted to EUR 213 million, mostly devoted to distribution, where the digital transformation of our network continues to be implemented according to our business plan. Moving now to slide 18, on the liberalized business, EBITDA reached EUR 745 million, or a 21% increase driven by EUR 104 million improvement in gross margin and higher efficiency. In power, the increase in the integrated margin, as commented before, was driven by higher OTC reference prices, the positive impact of the temporary suspension of the generation tax in the first quarter, and higher nuclear production, partially compensating lower hydro availability and lower thermal spreads. Within the integrated margin, Enel Green Power España had a positive contribution, also partially thanks to the Gestinver integration.
In gas, the already mentioned last year hedges with better price references versus the evolution of procurement cost triggered a 35% increase in gross margin to EUR 89 million. Endesa X gross margin remained stable compared to last year. Fixed cost decreased around EUR 25 million, mainly due to lower O&M cost in a context of acceleration of growth investments, mainly devoted to renewables for EUR 441 million. Moving now to slide 19, on the P&L evolution from EBITDA to net ordinary income. Starting from the EUR 1, 894 ,000,000 of EBITDA, net ordinary income increased by 6% to EUR 794 million. This is mainly due to the investment effort in digitalization and grid optimization, the update of the useful life in relation to the domestic coal plants, the acquisition of Gestinver and Ceuta, as well as the impact of IFRS 16 implementation, which accounted for EUR 13 million.
Net financial results increased mainly due to the update of financial provision derived from the workforce restructuring in plants and facilities dismantling, which accounted for EUR 22 million, together with the adoption of IFRS 9 for EUR 6 million and IFRS 16 leases for EUR 2 million. Stripping out these effects and other minor adjustment, net financial results would have just increased around 5% due to the reduction in the cost of debt that partially compensated the higher average gross debt. Associates and other items had a positive amount of EUR 10 million, mainly for the sale of minority interest in some renewable assets closed during the quarter. Income tax expenses amounted to EUR 232 million, 2% higher than in first half 2018, basically explained by higher profit before taxes. The effective tax rate of the period stands at 22.9%, slightly lower than the 23.2% recorded in first half 2018.
As a result, the net ordinary income increased by 3% over the period. Moving to slide 20 on cash flow evolution from EBITDA to free cash flow. Cash flow from operating activity increased by 42% versus first half 2018, reaching EUR 907 million, which has been almost sufficient to finance the important investment effort we are carrying out. This increase is due to the following effects: higher EBITDA after provisions paid of around EUR 50 million, working capital and others improved by 33% to EUR 705 million, mainly due to the decrease of the negative net trade balance and lower inventories, partially offset by lower cash in from trade receivables and lower cash in from non-regulated compensation. Income tax decreased EUR 144 million, mainly due to lower funds than in the first half 2018. Net financial expenses paid decreased 18%.
The increase on non-cash-based CapEx by 37% as a consequence of the development of renewable capacity and the digital transformation, almost entirely financed by the cash flow from operation increase, led to a free cash flow negative for EUR 84 million. These figures remain flat versus first half 2018. Moving now to slide 21, on the evolution of the net financial debt. Net debt amounts to EUR 6 , 795 ,000,000, EUR 839 million higher than the previous year, once considering the first adoption accounting entry of IFRS 16 for EUR 186 million. The increase is due to free cash flow negative for EUR 84 million that I commented in the slide before, and the payment of EUR 748 million in dividends corresponding mainly to the interim gross dividend against 2018 results amounting to EUR 0.70 per share. The leverage ratio was 1.8 x.
The regulatory working capital increased by EUR 58 million, up to EUR 868 million, once considered EUR 238 million collected at the beginning of July. This amount is affected by delay in non-mainland settlements that accumulates a balance of around EUR 650 million. Net debt by year-end is now expected to be around EUR 7.2 billion, which is EUR 100 million lower than the guidance given in the first quarter, as a result of a lower IFRS 16 impact on the new LNG tanker that is expected. Our gross debt structure shows an increase of the fixed income interest rate share of 4 percentage points versus 2018 closing, as a consequence of a strategy aiming at taking advantage of the current context of historical minimum interest rates to close long-term fixing hedges.
Gross debt has an average lifespan of 5.3 years and an average cost of 1.8% at historical lows, which implies a further reduction versus 1.9% reported at the end of 2018. Financial liquidity amounts to EUR 3.582 billion, out of which EUR 544 million in cash and EUR 3.128 billion available in credit lines. After the first green loan with the EIB for EUR 335 million in the first quarter, we have also signed another green loan with the Instituto de Crédito Oficial for EUR 300 million, leveraging on our sustainable finance strategy. Now, moving on slide 22, let me now hand over to Pepe for the final conclusion.
Thank you, Luca. To close this presentation, I would like to conclude underlining some remarks on our performance within this first half.
The resilience of our liberalized business, despite the adverse market condition and coupled with a stable regulated business evolution, underpin the positive EBITDA results and cash flow generation. Our strong investment endeavors, mainly in renewable capacity development, enabled us to confirm that the 879 MW of renewable capacity obtained under the 2017 auctions will be in operation by year-end or even earlier. We continue to maintain extremely high standards of efficiency in this new investment cycle. Lastly, we are confident that this set of results will allow us to meet our 2019 announced guidance while keeping our commitment to sustainability and the United Nations Sustainable Development Goals. Ladies and gentlemen, this concludes our first half 2019 results presentation. Thank you very much for your attention, and we are ready to take some questions.
Thank you, Pepe. We are now open to answer all the questions you may have.
Ladies and gentlemen, if you wish to ask a question, please press star one on your telephone keypad. Please be informed that in order to assure audio quality, we recommend that all questions are asked from landlines. For a reminder, it's star one to ask a question.
The first question comes from Harry Wyburd from Bank of America Merrill Lynch. Please, Harry, go ahead.
Hi, morning everyone. Three questions from me, please. So firstly, on the regulatory proposals, I'm sure there'll be lots of questions on this today, but just a very narrow one. If you look at the proposals as they've been published, how do they compare to your expectations? I know that you had quite conservative expectations for the outcome here.
So do you think it's fair for us to assume that these are in line with what you'd expected, and then if there was any improvement in the regulation, that would be upside to what you concluded in your guidance? And then secondly, on gas, I was surprised at how good the numbers and the margins were in the second quarter. Obviously, the pricing backdrop's quite challenging, and I think most people assume that the midstream gas and gas supply is under pressure in the remainder of the year. So if you could comment on why that second quarter was seemingly quite good, that'd be very useful. And then finally, just on the unitary margin in electricity, I noticed it was EUR 27.5 in the first half.
I believe your budget for the year was about EUR 25, so you're a good EUR 2.5 or so ahead of that in the first half. Do you think that things are looking even better than they were at the first quarter? And then does that mean that your full year net income guidance now looks even more conservative, I guess, if you add in the fact that gas has been good in the second quarter? And then looking forward to next year, obviously it's a difficult hydro year this year, but if hydro normalized next year, things would then look even better. So if you could just comment on where you think you are versus your full year net income guidance for this year and next year, given the strong unitary margin numbers. Thank you.
Okay, thank you, Harry. Let me say, with regard to the regulatory proposal, and if this fulfills our expectations or not, let me say that it is your preliminary proposal and public consultation, and therefore subject to judgments. So I would say that it is still very early to comment on the potential impact. In any case, let me say that this new regulatory proposal brings some positive and some negative, the estimated impact being almost neutral. The second thing with regard to the gas business and our performance in the second quarter of this year, I should say that the improvement is the better sales prices reference that we have had versus the evolution of the Brent and Henry Hub indexes of our procurement costs.
You know that we have, as we have commented in previous results presentation, that the gas business is facing this year a very tough and volatile scenario, yes, because we have an excess of gas due to low Asian demand and mild temperatures in Europe, resulting in very low prices of LNG and TTF index generating and decoupling of Brent and LNG TTF prices. Nevertheless, we have been able to obtain this gross margin, as I have said, yes, because of the evolution of our procurement costs and the sales price reference, sorry. We think that we will continue during some time in this very tough scenario, but we are convinced that this scenario will gradually improve in the future because prices will tend to rise, but with huge volatility. In any case, we are expecting, yes, to be slightly below our target or our guidance for the year 2019.
In terms of the unitary margin, you should take into account that in the EUR 27.5 per MWh, we have around EUR 40 million that comes from the 7% tax that we don't have in the first quarter. So that is something around EUR 26.5, and we are expecting around EUR 26 per MWh at the end of the year. Yes, and to complement on that, basically, as Pepe said, we are expecting a EUR 26 MWh as an overall unitary integrated margin for 2019, which is slightly better than the EUR 25 that we have in our business plan that obviously allows us to cover some shortfall, one is gas that we have for the full year.
So as far as net income, we confirm the 2019 guidance at 1.5, and for 2020, what we can comment that we are, as far as the liberalized business, already hedged 70% at quite healthy oil-linked price at EUR 76 per MWh. So we have good visibility, and at this point, we can only confirm guidance also for 2020.
Thank you, Harry. Next question comes from Alberto Gandolfi from Goldman Sachs.
Good morning, it's Alberto Gandolfi, Goldman Sachs. I have three questions, please. The first one is a little bit of clarity on your renewable pipeline on slide four. Out of the 1.8 GW for 2020 and 2021 and on the 6.9, can you please tell us how much you intend to develop via auctions and how much you intend to develop, let's say, merchant, forward selling to your portfolio of customers?
Maybe there's a third way, which could be through corporate PPAs. So I'm trying to understand the risk profile of these. And if you go contracted, maybe if you can specify if you expect a different framework versus the existing one in Spain, which merely provides a floor. The second question is, if you can comment on your potential interest for EDP hydro assets, what's the strategy? What's the philosophy? Is it really replacement of coal and medium-term nuclear you're thinking about here? How would you think about the evolution of the cash flow of these assets if interested in the context of 200 GW of renewable pipeline in Spain? So how do you really think of it from a power price perspective? And the last question, I'm slightly surprised by your comments about distribution.
I forgot if you said revenues or returns, lowest in Europe, some of the lowest in Europe. And I think that you said lowest remuneration for distribution assets in Europe. However, we have seen Sweden, U.K., Germany moving towards nominal returns of 3%-3.5%. And borrowing costs may be slightly different, but 5.6% looks quite healthy compared to borrowing rates in the industry between 0.2% and 1%. So I was wondering, what am I missing in this framework? Thank you.
Okay, Alberto, I will give you some comments on your question, and then I will leave to Luca to answer precisely. With regard to the EDP hydro asset, what I should say is that, as you know, there is a formal process going on where we have been invited to participate.
The 31st of July is the date that has been set as the deadline for the presentation of the non-binding offers. As with all the opportunities arising in the Iberian market, we are interested, of course, but always looking for value creation for our shareholders. In terms of the distribution and this comment around the lowest remuneration in Europe, well, first of all, let me say I don't agree with you that 3% or 3.5% is a good remuneration. Even more, what I think is that, first of all, I agree with the CNMC in the methodology of the work. When I try to think about this work, I should say that the current risk-free rate used in this work is lower than the state bonds. So I think that one of our comments on this proposal will be asking for a little increase in this remuneration.
Looks healthy, as you have said, but we think that it is not enough. And now, Luca will answer your questions.
Yes, hi Alberto. On the first question regarding our pipeline, how much we expect to build and on what basis. I mean, as you know, in the plan, we have beyond 2019, basically 1 GW of renewables to be built in 2020 and 2021 in total, so 500 MW each. How much of this is merchant? I mean, when we go to the investment committee for this kind of builds, basically, what we are assuming that maximum 40% of the energy produced by these plants will be merchant, and the remaining 60% is hedged through in two ways, basically.
A component through PPA sold to customers, and there is enough demand by our, let's say, corporate customer base, and the remaining by our what we call price-insensitive customers, which basically remains in our client base for more than three to four years. That's basically the assumption. You should assume 40% of the energy produced is the one that could be defined as merchant. Just to clarify on Pepe's comment on distribution, what Pepe was saying, that the risk-free rate in the WACC calculation is at 2.97%, which is slightly higher than basically the cost of debt at 2.63%. Therefore, what we deem appropriate is an alignment of these rates in the WACC calculation methodology for distribution.
Thank you. Moving to the next question, we have Javier Suárez from Mediobanca. Javier, the line is open.
Hi, good morning to everyone, and thank you for taking my questions. The first one is coming back to the regulatory proposal. If you can elaborate a little bit more on your proposal to the regulator, apart from the comment you make on a slight increase on remuneration, what other items on the regulatory formula can be in the regulatory framework can be improved from your point of view? And also a related question is, which is your calculation of the clawback that Endesa may suffer in the period 2000 to 2025 under the current framework? That is the first question. The second question is moving into the contribution from non-mainland generation. During the first half of 2019, it has been EUR 124 million. During the presentation, you mentioned EUR 300 million as the full year contribution.
If you can remind us what needs to happen for which is the reason for this underperformance on non-mainland generation during the first half, and what needs to happen for you to reach EUR 300 million by the year end? And then the third and final question is on the net debt evolution in slide 2021. I think that during the presentation, you mentioned that the slight improvement in the year-end target for debt at EUR 7.2 billion . If you can elaborate on the number, the assumption on the regulatory working capital assumption, including in that number. I think that by the end of the first half is EUR 1.1 billion . What are you assuming the regulatory working capital to be by the year end? Many thanks.
Thank you, Javier. Let me say, trying to answer your first question that beyond the financial rate or return, I should say that our main comment is that the new methodology, in our opinion, must be applied for the investment expenses executed from January the 1st, 2020, not those incurred in 2019 and 2018. I mean, actions carried out during the first regulatory period based on the current methodology must be recognized and remunerated accordingly. Lastly, let me say that perhaps network digitalization investment with this methodology could be at risk, in our opinion, given that the proposed methodology does not include a specific remuneration framework. That is more or less the main issue, and I will give the word to Luca to answer the questions.
Yes, hi Javier. Regarding the non-mainland basically evolution in the first half, let me comment on the effect that I mentioned before. We had basically a gross margin EUR 45 million lower, mainly related to the fuel for EUR 19 million, 1.9, CO2 compensation for EUR 12 million, and as far as financial remuneration, income lower for EUR 12 million.
So in total, basically EUR 45 million lower in terms of gross margin. We expect an evolution of an acceleration in the second half because this business is seasonal and basically recover a bit of the fuel cost delay with basically a margin increase by almost EUR 50 million in the second part of the year and containment in terms of cost, which basically brings to our EBITDA the guidance of over EUR 300 million in the second part of the year. And for the third question and that evolution, yes, we improved to EUR 7.2 billion our year-end guidance, mainly on lower impact of IFRS 16.
The assumption of regulatory working capital is EUR 1.3 billion at the moment, which is composed by EUR 1.1 billion in terms of non-mainland and about EUR 200 million for distribution.
Next question comes from Anna Maria Scaglia from Morgan Stanley.
Good morning.
Probably we can move to the next question.
Iberian market, we are interested, of course.
Advantage in renewables. So you mentioned that you plan to invest around 40% of your pipeline in merchant assets. So if you can elaborate a bit on your view on the kind of returns that you think that can be achieved through investments in merchant capacity compared to the one can be achieved in the auctions. And also in terms of technology, you showed that most of your pipeline is in the solar technology.
If you can elaborate also on, you say, your expectations in terms of the return of this technology compared to the wind. Second question is related to slide 12. The average revenue that you show in the first half is around EUR 68 per MWh . You confirmed your indication of EUR 73 for the full year. So can you provide us some details of why I guess you expect an acceleration in the average revenues in the second half of the year? And the third one is related to the impact of CO2 that you had in the first half. If you can provide some details on your hedging policy for CO2 and the outlook that you can expect for the second half, also for next year, if you expect that the shift of production from coal to gas will continue and the possible impact on your margins. Thank you.
Okay, thank you. Thank you, Enrico. I would say something about the CO2 impact in the merit order and our policy and expectation for the future. And then perhaps some comments on the renewables, and then I will give the word to Luca. Well, as you perfectly know, during the second quarter of 2019, imported coal has been displaced from the merit order by CCGTs. This change, in our opinion, is due to a combination of three factors: the very high CO2 prices, low gas prices just because of the excess of gas in the market, and the removal of the Green Cent tax of CCGTs or the Green Cent in coal. All in all, what we think is that this situation in the year 2019 will last up to the last quarter of the year in which prices of gas will rise just because of seasonal reasons.
In any case, volumes and margins of the thermal coal imported coal output will be reduced in the future. We don't know what could happen in the future, taking into account that once domestic coal power plants are closed, imported coal power plant should remain in the system for security of supply reasons until a new storage system, that is, the large-scale batteries, are available, and moreover, the Spanish Energy and Climate Plan considers that up to 1.3 GW of imported coal could be needed in the system in 2030, even though working very few hours. We expect these levels of CO2 prices in the future, that is, something between 25 and 30 in the future, and that means that prices in the power prices in the wholesale market will be high, aligned with our expectations.
Also, in the future, in the next decade, that we will have these prices above 50 or around 50. We had CO2 in the market, and the impact is what I have said, an increase in the power prices and change in the merit order, changing or switching coal for gas. In relation with the renewables and the return that we could obtain with merchant or auction, I would say that the auctions, as far as I know, only give you a floor that is a guarantee. But if you believe that the prices are going to be in line with our expectation, there is no any difference between the return being merchant or being auctions.
Yes, and to give you some numbers, Enrico, I mean, what we're expecting in terms of average equity level IRR for the auction capacity, it's about 11%.
For the remaining basically gigawatt for 2020 and 2021, we are assuming 9%. Obviously, that's an assumption as far as power prices, not only for the periods of the plan, but also beyond. As we said many times, we expect power prices to remain around EUR 50 per MWh up until 2030. When it comes to basically the CO2, just the hedging policy part of your question, I mean, basically we don't take any position on CO2. We hedge CO2s as long as we are hedging the production from CO2 emission type of generation. So we don't take any position in that respect, and we will continue to hedge in this way.
As far as your second question, how do you compare basically the final revenue numbers in the integrated margin vis-à-vis what is the all-in price at which we hedge our basically output, the difference or the deltas between the two where you have an all-in price of hedging higher than the final revenue margin is driven by the fact that we have basically some capacity or some generation that we need to buy into the market and some of this generation that we sell to B2B customers, which are indexed to pool. Obviously, marginality of these two parts of the business lower the final revenue, basically income of the integrated margin. You always will have a negative differential between what we say in terms of all-in hedged output and what is the final revenue number.
And this has been ranging, I would say, between EUR 2 and EUR 4 depending on the year.
Thank you. We have now Javier Garrido from JP Morgan. Please, Javier, go ahead.
So my questions have already been answered. So just two small follow-ups. The first one on the gas supply business, which is, in your view, going to be the impact of the commissioning of your first LNG tanker, what will be the impact on your numbers? If this will mean more flexibility going forward, but at a cost of higher depreciation or am I missing something? And then the second question is on the evolution of fixed cost in the liberalized business. There has been a significant decline in the second quarter. I think that Luca mentioned in the call that the acceleration in the investment in renewables was also linked to this factor.
Should we see this as the impact of bigger capitalization of cost, or is the acceleration in the reduction in fixed cost a sustainable trend? Thank you.
Okay, Javier, with regard to the gas business and the LNG tankers, you are right that mainly the main advantage that we obtain with this LNG tanker is flexibility. That is very important for us. Flexibility is more than for sure we are going to have a slightly cost reduction, but that is not important. The important thing is the flexibility. And Luca will answer the next question.
Yes, hi Javier. Regarding fixed cost, I would say that the two drivers are one is some delays, about 50% to this reduction is driven by delays that we will recover during the year.
Another 50% is actually of real efficiencies that we are managing to basically achieve this year, which we will, let's say, a fixed cost evolution for the year is slightly better than what we expected at the beginning of the year. And this differential, you take into account a number which goes around EUR 30 million, I would say, for the full year. Obviously, maintaining cost at these levels or reducing cost at these levels, as I commented, while we are building almost 100 MW of renewables this year, is not an easy task, but obviously the management is fully committed to basically achieve this efficiency target for the full year.
We have now Jorge Alonso from Société Générale. Please, Jorge, go ahead.
Good morning to all. Just a couple of questions, maybe if I may. The first one is related to the regulatory working capital.
Would it be possible to securitize it, or it is not because of legal issues or how it is built that you cannot securitize and get back the money from the system? Second one is related to the non-mainland assets. Do we expect, because honestly, I'm not sure here, the regulator to publish something impacting or reviewing the remuneration of the islands? The third one is regarding the CCGT plans and displacing the coal plants Pepe mentioned. I would like to understand how these impact your thermal margins and if that would mean that you may produce a little bit less and then your open or your long position in the supply will be a little bit higher and if you are comfortable with that. The final one, please, it's about, I mean, the political landscape. We have a lot of noise about some Podemos entering the government.
What's your view there and if you perceive any risk in terms of the energy policy if that may happen? Thank you very much.
Okay, thank you, Jorge. And I will try to answer some of your questions. The first one, if you want, with regard to the political landscape, let me say who knows. But in any case, let me say that the new government, whatever it could be, in my opinion, should continue with the energy policies that were set out in June 2018. So we don't expect any relevant, let's say, relevant changes neither in the draft law nor in the plan with any government. That is what we really think.
In terms of the CCGT plans displacing coal, well, thermal production will be reduced and also thermal margin and our long position will increase or could increase, let's say, in the next year about something below 5 TWh or something like that. With this, very easy with the liquidity that we have in the market just to cover this position. So we don't feel there is risks just to manage this situation. We feel comfortable with what we are doing up to now. And with regard to the non-mainland asset and then the regulation, well, as you know, this regulation continues in the hands of the government, of the ministry. We will or we would expect something before the end of the year. Well, the main thing could be the adjustment of the financial return in line with what had happened with distribution, transmission, etc.
Nevertheless, we think that this business is a little bit more risky than, let's say, distribution, so we would expect better remuneration tax, but in any way, it's something that we will discuss with the ministry in the near future,
and Jorge, regarding your first question, whether the regulatory working capital is something which is potentially securitizable. I mean, we're working obviously with the regulator in order to make these swings nearer basically smaller than what is the current practice, and to be honest, I don't think these are assets really first appealing to the financial markets for several reasons, and second, I mean, being the largest operator in non-mainland, I think this is something that we need to deal with the regulator rather than with the financial markets.
The next question comes from Meike Becker from Bernstein. Thank you. Thank you for taking my questions. I have two.
Looking at slide number seven and the efficiencies expectations target for 2021, you are well on track for distribution and also generation. There's a little bit of a gap for Enel Green Power and supply. So I was wondering what are the levels between today and 2021, which makes you comfortable that you can reach these cost to serve your customer in supply and the fixed cost reduction in Enel Green Power. And the second question is about growth in the distribution network. On the one hand, in the long term, we see a lot of need for investments in the networks on the back of renewables and electrification of the industry, but RAB growth in the current plan is zero. So I'm wondering what will get us to positive RAB growth and when can we expect it?
Well, Luca will answer.
Yes. On the first question regarding fixed cost evolution, the gap that Enel Green Power has between now and 2021 targets, I mean, already reducing, I would say, our fixed cost base by EUR 1 or EUR 1,000 per MW produced in a year in which we are putting down basically almost a gigawatt, I think is a big achievement. I mean, between there and obviously 2021 scale will be the driver in terms of reduction of cost for Enel Green Power, having, let's say, more generation available to Enel Green Power. And as far as supply, I mean, as you know, we are going through a full digitalization process. I mean, 2020, we have changing of all our systems, both the front office and back office system. So from 2020 onwards, obviously the drop will be higher.
I mean, just to mention the system we are changing, the CRM for B2B, the CRM for B2C, as well as basically the back office software, which will go into a submodule called SAP IS-U that obviously will drive efficiency further in the basically last year of the plan.
Thank you. We have now Manuel Palomo from Exane BNP Paribas.
Hello. Good morning, everyone. I just have a couple of questions. First question is on this nuclear tax one-off. Could you please elaborate on the reversal of the Catalan nuclear tax and also share with us whether you foresee any other one-off positive or negative in 2019, and the second one, and sorry to insist on this point, is regarding regulation. What do you think is the rationale for the electricity distribution return to be 5.58% and to be lower than gas distribution 5.53% when the energy transition rather relies on electricity and investments are more needed than in gas? Is this one of the reasons why you believe the electricity distribution return should be higher? Thank you.
Okay, Manuel, let me say you are right and I agree with you. Of course, I think that I don't want to really go against other businesses, but I really believe that the remuneration of the power distribution should be higher than others. But it's my opinion, I agree with you and nothing more. And in terms of the tax reversal, nuclear tax reversal in Catalonia, well, first of all, I should say that is unconstitutional. So I don't know what will happen in the future, but the real thing is that these kinds of tax don't have any room in the tax framework that we have in Spain.
We have now Jorge Guimarães from JB Capital Markets.
Hi, good morning, everyone. Thank you very much for taking my question. I just have two. Firstly, on the hydro assets from EDP, would a possible acquisition be a replacement of other capacity to be developed in solar, meaning if you buy these assets, you'll not develop 9 GW but less? And second, still on the solar, do you see the grid connection rules set out or the draft published by CNMC as a potential threat to your profitability objectives in these solar projects? Thank you very much.
Let me say with regard to the hydro assets of EDP, first of all, we will see what happens in the future because as I have said, well, we are interested, but always looking for value creation for our shareholders. So that means that we will see. In any case, this M&A operation will not replace other capacity that we have in our business plan. And with regard to the connections, well, I would like to say that the draft law, what says is that in this case of third transition, at least the government could have the possibility to really go ahead with a different methodology, just as I have said, to fulfill with the objective of the third transition.
I think we have now Anna Maria Scaglia from Morgan Stanley. Anna Maria?
You can hear me now? Just very quick one on the gas business. You mentioned that part of the reason of the high margin this year is the fact that you hedged forward and that the spark spread is lower. So what's your view? What do you see now for 2020 if you can comment? Thank you.
Anna Maria, well, you are right in what you have said. What happened is in the future we will see. Today, for the year 2020, we have hit around 53% of the forward sales. That is something around 40 TWh compared to the total output expected of 70-something terawatt-hour. We are, as I have said, in a very tough and volatile market. I would say that we will try to do our best and at least we will try to do as successful as we have done up to date. But it is a risk and tough market, as I have said, at least in these years until the year 2022 or something like that.
Meike Becker from Bernstein comes back with some pending question. Please, Meike, go ahead.
Yes. Thank you for taking one more question. So coming back to electricity network, considering the overall need to invest in it, what do you see the long-term rough growth potential for the electricity distribution networks in Spain?
Meike, I mean, to comment on this question, I can only point it out what is in actually in the National Energy Plan that foresees for distribution over the next 10 years about EUR 20 billion of investments in order to accommodate basically both renewables, basically increase in terms of generation within the system, as well as electric vehicle mobility within the system. We currently have just slightly above 40% of market share. So that's basically would be our share in terms of these new investments in the distribution network. Obviously, in order to support this investment, you need to have a regulatory framework that, let's say, allow us to basically get at this type of speed in terms of investments.
Okay. Thank you. At this point, we are done with the questions received from the call. And those received from the web have been tackled during the presentation. So just a reminder that IR team will be available in case you have any further questions. Thank you very much for your attention.