Electricity Prices Are Moving Higher Across the Globe
Something is happening internationally that has gone almost unnoticed in the American market – electricity prices in certain regions are increasing… and fast.
The spikes have been particularly noticeable in Australia and the U.K.
Much of Australia has seen rises in power costs of 20% (or more) in less than two years. Prices there are accelerating more than twice as fast as a rising inflation rate and will continue to soar, due to an under-funded electricity infrastructure.
The U.K., along with the rest of Europe, finds itself in the grips of an unusually early and prolonged snow assault carrying frigid temperatures. British consumers are now facing 22-month-high electricity prices, and thousands of homes in northern England and Scotland are facing the serious challenge of losing heat.
On Friday (December 17), the British government announced that it was considering something rarely seen this side of World War II – fuel rationing.
Elsewhere in Europe, the picture is similar, although public subsidies remain in many countries to temper the full weight of the rising price.
Countries already reeling from credit problems and downgrades – especially Ireland – have begun dismantling some of the support structure, as the cold weather hits hard. And that means the population will need to shoulder a greater portion of the price rises, while experiencing the heavy hand of a genuine financial crisis, to boot.
With broad government support for renewable energies, especially wind and solar, and France obtaining most of its electricity from nuclear power and natural gas (both conventional and unconventional), western Europe has moved significantly away from coal as the sourcing fuel for power generation.
But it has come at a heavy cost.
European residential and commercial customers pay among the highest rates in the world for electricity, even with the public sector kicking in some support.
The prevailing argument had been that difficult choices made decades ago provided for the rise of a better energy balance today.
But that conclusion is now being tested…
Natural gas is a good example. While the rapid increase of liquefied natural gas (LNG) imports into western Europe has resulted in a discount to the prevailing prices of Russian gas coming in by pipeline (of about $20 per 1,000 cubic meters), the price charged to end users is well more than 200% higher.
And with the Eurozone now once again teetering on the brink, power is not going to be getting any cheaper. Ireland is still the primary concern, but disturbing signs are developing in Spain – a much larger and more strategic market for Europe as a whole.
Some interesting developments are nonetheless taking place in the European electricity market.
On December 3, 10 countries bordering the North Sea agreed to coordinate wind power initiatives to develop an innovative offshore energy grid. The 140-gigawatt project could provide as much as 16% of the power needed for Europe as a whole.
There is, however, a catch. Even if it’s successful, the massive wind farm will not be in full operation until 2030. That means they’ll have to rely on more traditional sources in the meantime.
Problems in Developing Markets
Officials in Russia are once again increasing the pricing forecast for electricity on the unsubsidized open power market. Some administrators in Moscow are now saying electricity prices could double over the next five years.
Brazil’s electricity usage will be growing twice as fast as the U.S., while India has embarked on a major project to increase production. As with India, elsewhere in Asia, the rise in electricity prices is a direct result of the increased use of power in economic development. But the effect has put significant pressure on the grid.
China is once again facing the prospect of a shortfall in power production, with rising coal prices (the primary fuel source) and some 50% of generating companies running in the red. China will continue to subsidize its power sector, but it will also witness a continuing decline in the power generation sector’s ability to meet rapidly increasing demand.
The problem may be even more acute in South Korea, where an outright power shortage is looming. As the cold sets in there, as well, electricity use is surging (no pun intended). On Thursday (December 16), the country recorded its highest daily demand ever.
South Korea is already passing in the price rises, and that is certain to lead to political unrest.
Two Possible Ways to Profit
Aside from investing in individual foreign companies – which may result in major difficulties, since most do not trade in markets easily accessible to the outside investor – two moves are possible.
First, you could look into global exchange-traded funds (ETFs) focusing upon utilities and power production. Provided that an ETF is sufficiently liquid and tradable, it should offer an opportunity.
Unfortunately, therein lies the problem.
Of the ETFs providing global power sector exposure, only the iShares S&P Global Utilities Sector Index Fund (NYSEArca:JXI) has a market cap ($250 million) sufficient to justify a move.
However, JXI does not include emerging markets in its portfolio, and its return has been virtually flat (“anemic” might be a better word). That is likely to change as the pricing dynamics heat up, but a tracking problem persists.
The second approach is to keep an eye out for a new breed of investment funds. These funds will tap into emerging market power sectors.
One interesting fund was announced just last Friday. The Russia Power Utilities Investment Fund will be run by Renaissance Assets Managers, a division of Moscow-based Renaissance Capital. The fund will be registered as a Luxembourg UCITS (Undertakings for Collective Investment in Transferable Securities).
It will take some time before funds such as these – targeting the high-return potential of emerging market power needs – will become readily available to outside investors. And just as well, because the Renaissance Russian fund is likely to open trade with a market cap of barely $130 million.
Yet there is one advantage for the investor in all of this: As electricity demand continues to increase and infrastructure upgrades become more essential, the overall attractiveness of the global power sector can only improve.