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

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

News
Young Winstone: His ‘tough-guy’ image is a misconception
people
Arts and Entertainment
Man of action: Christian Bale stars in Exodus: Gods and Kings
film
Sport
Adnan Januzaj and Gareth Bale
footballManchester United set to loan out Januzaj to make room for Bale - if a move for the Welshman firms up
Arts and Entertainment
British actor Idris Elba is also a DJ and rapper who played Ibiza last summer
filmIdris Elba responds to James Bond rumours on Twitter
PROMOTED VIDEO
News
Hackers revealed Oscar-winning actress Lawrence was paid less than her male co-stars in American Hustle
people
Arts and Entertainment
Ellie Levenson’s The Election book demystifies politics for children
bookNew children's book primes the next generation for politics
Sport
Wayne Rooney warms up ahead of the English Premier League football match between Tottenham Hotspur and Manchester United at White Hart Lane
football
News
Outspoken: Alexander Fury, John Rentoul, Ellen E Jones and Katy Guest
newsFrom the Scottish referendum to the Ice Bucket Challenge, our writers voice their opinions
Arts and Entertainment
Lena Headey as Cersei Lannister in Game of Thrones
film
News
i100
Sport
Yaya Sanogo, Mats Hummels, Troy Deeney and Adnan Januzaj
footballMost Premier League sides are after a striker, but here's a full run down of the ins and outs that could happen over the next month
News
Nigel Farage celebrates with a pint after early local election results in the Hoy and Helmet pub in South Benfleet in Essex
peopleHe has shaped British politics 'for good or ill'
Voices
Strictly Come Dancing was watched by 6.9m viewers
voicesIt has been hard to form generally accepted cultural standards since the middle of the 19th century – and the disintegration is only going to accelerate, says DJ Taylor
News
Danielle George is both science professor and presenter
people
News
i100
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

    Selby Jennings: VP/SVP Credit Quant- NY- Investment Bank

    Not specified: Selby Jennings: VP/SVP Credit Quant Top tier investment bank i...

    Selby Jennings: Quantitative Research | Equity | New York

    Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...

    Selby Jennings: SVP Model Validation

    Not specified: Selby Jennings: SVP Model Validation This top tiered investment...

    Selby Jennings: Oil Operations

    Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

    Day In a Page

    War with Isis: The West needs more than a White Knight

    The West needs more than a White Knight

    Despite billions spent on weapons, the US has not been able to counter Isis's gruesome tactics, says Patrick Cockburn
    Return to Helmand: Private Davey Graham recalls the day he was shot by the Taliban

    'The day I was shot by the Taliban'

    Private Davey Graham was shot five times during an ambush in 2007 - it was the first, controversial photograph to show the dangers our soldiers faced in Helmand province
    Revealed: the best and worst airlines for delays

    Revealed: the best and worst airlines for delays

    Many flyers are failing to claim compensation to which they are entitled, a new survey has found
    The stories that defined 2014: From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions

    The stories that defined 2014

    From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions
    Stoke-on-Trent becomes first British city to be classified as 'disaster resilient' by the United Nations

    Disaster looming? Now you know where to head...

    Which British city has become the first to be awarded special 'resilience' status by the UN?
    Finally, a diet that works: Californian pastor's wildly popular Daniel Plan has seen his congregation greatly reduced

    Finally, a diet that works

    Californian pastor's wildly popular Daniel Plan has seen his congregation greatly reduced
    Say it with... lyrics: The power of song was never greater, according to our internet searches

    Say it with... lyrics

    The power of song was never greater, according to our internet searches
    Professor Danielle George: On a mission to bring back the art of 'thinkering'

    The joys of 'thinkering'

    Professor Danielle George on why we have to nurture tomorrow's scientists today
    Monique Roffey: The author on father figures, the nation's narcissism and New Year reflections

    Monique Roffey interview

    The author on father figures, the nation's narcissism and New Year reflections
    Introducing my anti-heroes of 2014

    Introducing my anti-heroes of 2014

    Their outrageousness and originality makes the world a bit more interesting, says Ellen E Jones
    DJ Taylor: Good taste? It's all a matter of timing...

    Good taste? It's all a matter of timing...

    It has been hard to form generally accepted cultural standards since the middle of the 19th century – and the disintegration is only going to accelerate, says DJ Taylor
    Olivia Jacobs & Ben Caplan: 'Ben thought the play was called 'Christian Love'. It was 'Christie in Love' - about a necrophiliac serial killer'

    How we met

    Olivia Jacobs and Ben Caplan
    Bill Granger recipes: Our chef's breakfasts will revitalise you in time for the New Year

    Bill Granger's healthy breakfasts

    Our chef's healthy recipes are perfect if you've overindulged during the festive season
    Transfer guide: From Arsenal to West Ham - what does your club need in the January transfer window?

    Who does your club need in the transfer window?

    Most Premier League sides are after a striker, but here's a full run down of the ins and outs that could happen over the next month
    The Last Word: From aliens at FA to yak’s milk in the Tour, here’s to 2015

    Michael Calvin's Last Word

    From aliens at FA to yak’s milk in the Tour, here’s to 2015