Utility Companies: Past and Future Strategies

Utility companies have seen unpredictable and rough execution in the previous years. An investigation of 50 noteworthy publicly traded utility companies from Asia, Europe, and North America indicated normal aggregate total return to investors of around 1 percent from July 2007 to July 2017, contrasting 55 percent for the MSCI World Index. A portion of the execution is owing to the fall of merchant conventional generation dissolving profits in Europe and the United States, and the development in different parts, for example, renewable energy sources (T&D), has not been sufficient to adjust lost profits in that area. Merchant generation is anguished from regulatory risk, and the development of sustainable power sources, which have zero marginal cost. As indicated by IEA's World Energy Outlook, worldwide investments in T&D will approach $3.0 trillion, $1.9 trillion more than in fossil fuels ($1.1 trillion), and be $7.2 trillion in investment in the power division, which is nearly $1.0 trillion more than in the earlier decade.

Understanding the struggles of merchant conventional generation and adding problems such as overcapacity and low wholesale prices in mature power markets, led to extensive pressure, and in some cases, market collapse for many companies positioned solely in the merchant power generation in the past five years. Looking forward, a pure merchant revenue model might witness financial difficulties, after all prices are set by the variable cost of the marginal technology. Power companies are considering major investments in distributed generation and new services as a long-term proposition. Adoption of distributed technologies and new services has been slower than expected in many markets; only a handful of American states, for example, have reached 2,000 megawatts or more of installed solar capacity or 150 megawatts of storage.

Investors should see electricity demand to grow faster than any other kind of energy, due to economic growth in Africa, Asia, and Latin America, and the electrification of final energy demand, specifically in transportation and heating.

Keith Knutsson of Integrale Advisors commented, “Many companies in the utility space have to rethink their strategy – sleeping on industry trends has generated clear losers in the past years.”