Tackling a tall order
In 2021, the power and utilities industry tackled tough challenges, made measurable progress, and received clean energy encouragement from different directions – new administrations in the US, Germany, and COP26, amongst others. As the world economy began to emerge from its pandemic-induced recession, electricity sales rose 3.6% through August 2021 over the prior year. At the same time, unprecedented and unpredictable extreme weather events challenged the grid’s reliability and resiliency, and cyberattacks on critical infrastructure increasingly made headlines.
In 2022, the tough challenges remain – boosting clean energy, ensuring reliability and resiliency, and maintaining security, all while keeping costs down. To tackle this tall order, the electric power industry will likely continue to advance in its “3D” transformation: decarbonization, digitalization, and decentralization. We will be watching for technology deployments to advance and markets to evolve. Industry spending will likely remain high, and renewable penetration could accelerate further.
For our investment universe, we explore four trends that will likely impact the industry in 2022 and beyond. These include 1) enhancing decarbonization and resiliency strategies, 2) the deployment of 5G and cloud technologies, 3) flexible load management of the grid, and 4) supporting building electrification. In the policy arena, while renewable tax credits have supported the clean energy transition to date and will likely evolve further in the future, we will also be looking out for potential regulatory changes supportive of the energy transition into the future.
Positives for the sector:
- Revenues are generally stable.
- Investors often turn to utilities for dividend income when prevailing interest rates are low.
- Low yields provide low funding costs for this capital-intensive sector.
Negatives for the sector:
- During recent periods of market weakness, the sector has not acted as defensively as it has in the past.
- Valuations are high relative to the sector’s historical average.
- Economic recovery makes the sector less attractive relative to other sectors.
Risks for the sector:
- Uncertainty remains regarding potential clean-energy legislative funding.
- Interest rates could rise due to an unexpected rise in inflation.
| Investment opportunities: |
| The sector is likely to continue to lag as investors focus on more cyclical areas of the market that have much greater leverage to strong economic trends. Higher interest rates would likely be a headwind.
For those who still wish to seek exposure to the sector, it may be opportune to consider the following names: in Europe, Centrica, Fortum, E.On, and RWE; in the US, American Water Works, DTE Energy, Excelon, and Nextera Energy. |