Investing in Future Power Production
Financial Times, 23 June 2008 - The utilities sector is at the heart of the global economy, supplying our fundamental needs - water, power and heat - from resources that are scarce and often major contributors to climate change. As such, its challenges are wide-ranging and comprehensive. Equally, the opportunities are significant.
Electricity utilities face a number of problems - they are overwhelmingly fossil fuel-based, making them the major contributors to climate change. Coal, the dirtiest fossil fuel, is also the cheapest and most widely available and its use is expanding because supplies of oil and gas are limited and in politically unstable areas.
Energy utilities have been struggling with rising prices for the last decade - the price of oil was under $20 a barrel in 1998 while it has recently reached $139 a barrel. On top of this, the sector is subject to increasing regulation. In Europe, electricity utilities are subject to the European Union Emissions Trading Scheme, and have to buy allowances to cover the CO2 emissions produced by their power generation. They will soon be joined by companies in the US, Australia, New Zealand and Japan, which are all looking at the introduction of emissions trading schemes.
In addition, the EU’s Large Combustion Plant Directive means that utilities must close fossil fuel installations that do not have flue gas desulphurisation equipment. Further legislation is likely to force companies to invest in carbon capture and storage, which would allow the continued use of fossil fuel, particularly coal, without increasing CO2 emissions. Installing CCS will be expensive, but is seen as imperative in tackling emissions given the amount of coalfired generating capacity being built in emerging markets such as China and India.
Establishing a price for carbon should incentivise low-carbon production of electricity and other ways of “decarbonising” the power sector, such as energy efficiency. The ETS and global policies to tackle climate change have created a renewable energy sector out of virtually nothing and the sector is beginning to see the emergence of companies of real scale, such as Vestas and Suzlon, the wind turbine makers from Denmark and India respectively.
Solar power is less advanced than wind and remains more expensive than conventional power. Wind and solar are currently failing to fulfil their potential, because of shortages of key components and raw materials - in solar, the principle constraint has been the availability of silicon, while in wind, according to New Energy Finance, these range from turbine gearboxes to specialist ships to install offshore turbines. Companies such as A2Sea and Gaoh Offshore are well placed to profit from this shortage, being among a handful of operators capable of meeting this demand.
Michael Liebreich, chief executive of New Energy Finance, says a huge amount of new silicon capacity will hit the market over the next few years, bringing the price down from its current level of $60-$90 per kg to its long-term average of $30-$50. This will hit some solar players hard, but should cut the cost of solar power significantly for consumers within a few years.
The International Energy Agency says an extra $45,000bn (£23,079bn, €29,048bn) of investment is needed to halve CO2 levels by 2050, leading to what Mr Liebreich calls “almost unlimited opportunities”. Apart from wind and solar, other areas that will see strong growth are energy efficiency, where companies such as smart metering group Itron and building materials group Kingspan are benefiting from strong demand, as are makers of LED (light emitting diode) lighting companies such as Cree that are benefiting from a wave of regulation outlawing incandescent light bulbs. Companies that provide outsourced demand management, such as Ener-NOC and Comverge of the US, are also emerging.
Combined heat and power is likely to become more common in the next few years - here fuel cell companies Ceres Power and Intelligent Energy are working with British Gas and Scottish and Southern Energy respectively on rolling out fuel cell-based CHP products for domestic use.
Nuclear power is also back on the agenda, says Gordon Springett, head of the power and utility practice for EMEA at Marsh. “Gordon Brown has said that we need not just to replace current nuclear capacity as it comes to the end of its life over the next 20 years but also to build extra capacity to help tackle climate change.” This has sparked a scramble for the UK government’s 35.2 per cent stake in British Energy, the company that owns most of the country’s nuclear plants. Bidders such as EdF and RWE are interested more in the sites next to current reactors than those facilities, as their location means they have all the necessary permits to develop new plants. “The approval process for new sites is extremely lengthy and arduous as it requires dealing with various levels of government as well as local communities,” says Daniel Bida of Innovest Strategic Investors. “The fact that BE’s sites are already approved makes them all the more valuable.”
Many opportunities thrown up by the utilities sector revolve around infrastructure - the IEA says $5,000bn needs to be spent on updating transmission systems by 2030. This will benefit companies such as ABB, which is working on a high-voltage DC cable from the UK to the Netherlands, and American Superconductor, a leader in high-temperature superconducting wires that will allow transmission systems to carry electricity over long distances with minimal efficiency losses, helping to integrate renewable energy into grid systems.