Private Investor: Time to switch on to the power generators

With fears of a global recession and continued turbulence in financial markets, 2008 has not been a particularly rewarding year so far for investors. In such difficult times, it can pay to explore investments that are well positioned for a longer-term favourable theme rather than those dependent on a highly unpredictable economic cycle. One theme such theme with this positive outlook is global power.

The world's electricity supply is undergoing a major transformation and it is important to understand that there are a number of drivers behind it.

In the developing countries, rapid rates of industrialisation and urbanisation have led to a massive surge in electricity demand, and power generation needs to be upgraded to keep up. Recent estimates predict a shortfall of 1,000 Gigawatts (GW) in the developing world by 2015, which is more than 10 times the UK's current electricity capacity. It will take an estimated $22,000bn (£11,000bn) to be spent on new supplies to meet the demand over the next 25 years.

Western governments, however, face a different problem. Ageing power stations need to be replaced and there is a desire to reduce the instability that comes from reliance on oil and gas. There is also increased environmental legislation to be met, such as the EU's commitment to supply 20 per cent of all generation from renewable sources by 2020.

Nuclear power is being widely coveted as the solution and was high up the agenda in meetings this week between Gordon Brown and French President, Nicolas Sarkozy.

The problem, though, is the long lead times on nuclear development. In addition, the spiralling demand for nuclear infrastructure globally has heightened the development costs for the UK market, a factor also playing out in the non-nuclear power sector where the rising world cost of materials such as steel has ensured a dramatic rise in the cost of new build for power stations.

This rising cost of new supply will necessitate a rise in the electricity price to justify further investment. In addition, with the depletion of cheap gas reserves from the North Sea and a significant rise in the oil price caused by emerging market demand, it seems likely that UK consumers are facing higher energy prices for some time, a factor that will continue to irk government. Nevertheless, concern that supply is struggling to match demand has led to increased growth opportunities for UK listed power companies.

One such company is FTSE 100-listed Scottish & Southern Electricity (SSE). It has been active in developing increased capacity from renewable sources in line with more demanding environmental legislation and recently bought Airtricity, a group with substantial interests in wind power.

Furthermore, given that SSE is a vertically integrated power group with interests in both electricity supply and generation it retains a superior business model if electricity prices remain stronger for longer. Power groups without generation assets are more exposed to a rise in wholesale prices given they struggle to pass on fully the cost in a competitive supply market and control no upstream generation assets which can provide a very useful hedge in a rising price environment. This outlook perhaps goes some way to explaining the recently rumoured interest of Centrica in buying the Yorkshire based power generator, Drax.

Another stock to consider is International Power. It keeps the lights on in 20 countries worldwide and should be a key beneficiary of the trend towards an increase in the electricity price emanating from the supply and demand in-balance. Of additional interest, it operates desalination plants in the Middle East, which utilise its electricity assets to convert salt water into drinkable water. With a growing threat over longer-term water supplies, particularly in emerging nations, this part of the business may have significant investment potential for some considerable time.

Aggreko is another stock with good opportunities for growth. It provides temporary power solutions to the international market via mobile power generation units, up to the size of a small power station. The group is a key beneficiary of any trend towards power shortages given the flexibility of its operating plant.

BG Group is a company associated with the outlook for power. Essentially, BG supply liquefied natural gas (LNG) to international markets, a product that can be distributed internationally due to its high portability. Given the level of global demand for clean fossil fuels such as LNG that are not tied to pipelines, the price has been rising on international markets, a factor which benefits BG Group significantly and which has been another feature in inflating domestic and global electricity prices.

Issues such as power generation are longer term in nature and should be likely to benefit companies that respond well for some time. With uncertainties emanating from the global credit crunch, power generation is certainly a visible and viable theme to invest in.



Andrew Moffat is the manager of the Co-operative Insurance Society's (CIS) Income With Growth Trust. Sean O'Grady is away

PROMOTED VIDEO
News
video
Life and Style
tech
Arts and Entertainment
Southern charm: Nicolas Cage and Tye Sheridan in ‘Joe’
filmReview: Actor delivers astonishing performance in low budget drama
Arts and Entertainment
While many films were released, few managed to match the success of James Bond blockbuster 'Skyfall'
film
Arts and Entertainment
Up my street: The residents of the elegant Moray Place in Edinburgh's Georgian New Town
tvBBC's The Secret History of Our Streets reveals a fascinating window into Britain's past
Extras
indybest
News
Albus Dumbledore, the headmaster of Hogwarts School of Witchcraft and Wizardry has been the teaching profession's favourite teacher
education
Sport
Luis Suarez looks towards the crowd during the 2-1 victory over England
sport
Life and Style
Cheesecake frozen yoghurt by Constance and Mathilde Lorenzi
food + drinkThink outside the cool box for this summer’s frozen treats
News
John Barrowman kisses his male “bride” at a mock Gretna Green during the Commonwealth Games opening ceremony
peopleBarrowman's opening ceremony message to Commonwealth countries where he would be sent to prison for being gay
Sport
Sir Bradley Wiggins removes his silver medal after the podium ceremony for the men’s 4,000m team pursuit in Glasgow yesterday
Commonwealth games Disappointment for Sir Bradley in team pursuit final as England are forced to settle for silver
Sport
Alistair Brownlee (right) celebrates with his gold medal after winning the men’s triathlon alongside brother Jonny (left), who got silver
England's Jodie Stimpson won the women’s triathlon in the morning
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Junior Research Analyst - Recruitment Resourcer

    £18000 - £20000 per annum + OTE £25K: SThree: SThree Group has been well estab...

    Senior Analyst - Financial Modelling

    competitive: Progressive Recruitment: This really is a fantastic chance to joi...

    Associate CXL Consultant

    £40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...

    Business Anaylst

    £60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...

    Day In a Page

    Backhanders, bribery and abuses of power have soared in China as economy surges

    Bribery and abuses of power soar in China

    The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
    Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

    Highland terriers steal the show at opening ceremony

    Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
    German art world rocked as artists use renowned fat sculpture to distil schnapps

    Brewing the fat from artwork angers widow of sculptor

    Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
    BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

    BBC takes viewers back down memory lane

    The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
    Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

    Nicolas Cage shines in low-budget drama Joe

    Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
    How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

    Make your own ice lollies and frozen yoghurt

    Think outside the cool box for this summer's tempting frozen treats
    Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

    Fiesta is UK's most popular car of all-time

    Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
    10 best reed diffusers

    Heaven scent: 10 best reed diffusers

    Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
    Commonwealth Games 2014: Female boxers set to compete for first time

    Female boxers set to compete at Commonwealth Games for first time

    There’s no favourites and with no headguards anything could happen
    Five things we’ve learned so far about Manchester United under Louis van Gaal

    Five things we’ve learned so far about United under Van Gaal

    It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little
    Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

    Screwing your way to the top?

    Good for Lana Del Rey for helping kill that myth, says Grace Dent
    Will the young Britons fighting in Syria be allowed to return home and resume their lives?

    Will Britons fighting in Syria be able to resume their lives?

    Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
    Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

    Beyoncé poses as Rosie the Riveter

    The wartime poster girl became the ultimate American symbol of female empowerment
    The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

    The quest to find the perfect pair of earphones

    Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
    US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

    Meet the US Army's shooting star

    Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform