| Energy Projects to Struggle for Investment in 2009? Location: New York Author: Martin Dunlea Date: Tuesday, February 24, 2009 It is virtually impossible to pick up a magazine, view an online report or read about infrastructure developments in the utility transmission and distribution industry that do not touch on smart meters and smart grids. Whether utilities are engaged in implementing technology locally or in the process of implementing solutions on a large scale, the number and cost of utility infrastructure projects is proportionally higher when compared to investments in other industries. In spite of the ongoing credit difficulties that exist, the projected spend on large scale utility projects continues to grow and with industry and world leaders incorporating energy initiatives as part of their economic recovery programmes, significant energy investments are anticipated. The good news for utilities is that they continue to enjoy a more favourable reputation that many other industries in an economic downturn. Utilities, by and large, are not experiencing the same damaging fall in valuation or reputation that financial institutions are currently experiencing. Utility business operations or regulatory obligations are not coming under scrutiny and few, if any, utilities are lining up to ask governments for bailout payments. This can be attributed in part to the regulatory environment in which they must operate. In spite of the challenges that the current global crisis presents, utilities continue to offer value, profit, and reliability when the market is at its worse. U.S. President Obama recently announced a $150 billion green energy economy initiative that targets dependency on foreign oil imports, environmentally friendly policies and a massive five million jobs creation over the next decade. So while businesses around the world continue to struggle, and find it increasingly difficult to get banks and investors to part with their money, utilities are outlining development and replacement programmes built around massive capital investments and the promise of future gains. But utilities are not immune from downturns in a sinking market, and so as they continue to work with governments, regulators and financial institutions, some will struggle to secure investment for their projects. Exemplary Performance Utilities are less likely to fall precipitously under difficult economic conditions. In comparison to the market in general and to specific sectors of the market, utilities have performed well. When compared with the industrial average, the utility average has matched or outperformed the market on average by some 12 percent over the past 8 months. To put this in perspective the NYSE financial performance when compared with the industrial average shows an under-performance of some 23.60 percent for the same period. In Europe on the London Stock Exchange, the story is similar and although utilities have underperformed over the past eight months, they have outperformed the market by some 3.8 percent. In contrast to other sectors of the market, utilities enjoy a relative advantage, and by comparison have yielded far smaller losses. A recent utilities sector map for the US top five performing utility stocks shows an average gain of 4.34 percent, with the best performing utility stock showing a market value increase of 9.03 percent . At a time when finance, automobile and construction companies are experiencing market devaluations of several hundred percent, utility stocks are displaying exemplary performance under very adverse market conditions. Today investors are becoming increasingly selective in the projects that they support and with finance and construction opportunities on the decline, the superior performance of utility companies places them in a favourable position to attract investment and yield positive returns. As mentioned earlier, utility projects are dominated by infrastructure, green energy and environmentally friendly policies. The projects are particularly attractive to investors and governments because they also present opportunities to tackle environmental issues, energy conservation and job creation. Projects tend to be well-managed, are built on reputations and stable business models and designed to operate for long periods with established and well documented yields. In short, utility projects are displaying the type of stable, definitive and low risk characteristics that investors and the markets yearn for. But utility investment and infrastructure build opportunities also face some challenging times. The cost of capital is on the increase making it expensive and difficult for energy companies to secure fresh investments. The European inter-bank lending rate (Euribor) rose to a new high recently of 5.005 percent. However, the U.S. dollar Libor inter-bank rates recently fell towards the Fed's 2 percent benchmark rate, meaning the cost of borrowing dollars overnight has fallen back toward the Federal Reserve's 2 percent Federal funds target. It would appear that for now, the twin approach of the U.S.'s green economy initiative and the slightly cheaper cost of borrowing money favours U.S. utility companies. A word of caution however, as recent reports appear to suggest that wind farms are failing to deliver value for money and distorting the development of other renewable energy sources. A study by the Renewable Energy Foundation (REF) suggests that excessive subsidies make them an expensive and inefficient way of reducing greenhouse gas emissions. Summary In a recent IssueAlert article, "What is Happening to Utility Investment Plans?" January 28, 2009, UtiliPoint's Mark Burlingame examined if renewable investments would be reduced, since in many cases these are merchant investments. He also posed the question if utilities would reduce planned investments to conserve capital and liquidity, given uncertain or limited access to capital. Of equal importance was the issue of whether smart grid investments would also be impacted. He concluded that almost half of the top ten utilities in the United States have announced reductions to planned 2009 capital expenditure. Prudence and conservation of capital seem to be the watchwords of the utility industry today. Of particular interest was the fact that riskier investments such as in renewable generation are being postponed or shelved. So in spite of the favourable reputations and performance results those utilities are currently enjoying, investors will continue to become increasingly selective in the projects that they support. Utilities in turn will need to be careful in choosing the correct projects to invest in and as mentioned in the opening paragraph of this article, few if any of the utilities currently involved in smart meter trials have announced any reductions in smart grid investments. Smart grid investments are popular and receive favourable regulatory and rate treatment. In fact, many are looking to increase investment as a part of the stimulus program and to aid job creation. So it would appear in difficult times, utility stocks offer good value and as a vehicle for ongoing investment, measure up as well as in most cases, better than other industries. Utility stocks do well when the economy gets rocky and in contrast to other industries perform very well under adverse market conditions. In 2009, governments will continue to support green energy economy initiatives, environmentally friendly policies and job creation opportunities. Utilities are ideally positioned to play a major role in these environmental and economic recovery programmes, and as a consequence will continue to offer good investment opportunities. UtiliPoint's IssueAlert® articles are compiled based on the independent analysis of UtiliPoint consultants. The opinions expressed in UtiliPoint's® IssueAlert® articles are not intended to predict financial performance of companies discussed, or to be the basis for investment decisions of any kind. UtiliPoint's sole purpose in publishing its IssueAlert articles is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy issues. © 2008, UtiliPoint® International, Inc. All rights reserved. To subscribe or visit go to: www.utilipoint.com |