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Wednesday, September 29, 2010

Trouble ahead for the Cleantech markets Europe wide




I was reading an analysis from Citi group on the prospects for the European Utilities to meet there extraordinary capex demands
being faced by the Utility Sector in the decade to 2020 as it tries to meet the
enormous costs of government imposed environmental regulations and embark
upon large scale asset replacement cycle, this directly impacts the Cleantech sector, the summary below makes an interesting read, it points to still more reductions in the cost of energy required, and the capex, if companies are going to survive through the next decade




The €1trn Euro DecadeEuropean Utilities
European Utilities sector is facing a decade of unprecedented investment
requirements. Across the five major markets (UK, Germany, France, Spain,
Italy) we estimated that the investment requirements totaled €800m in the
decade 2010 to 2020, and across the EU as a whole the figure could easily top
€1trn.
One year on we revisit this issue and ask what has changed? Unfortunately for
the governments of Europe who are driving the capex surge and are relying
upon the Utility sector to deliver their very expensive environmental policies,
the main developments in the past 12 months are all negative for capex. The
main developments are:
1. Costs up: Estimates of the total capex spend required by 2020 to
meet environmental targets and replace/re-new aging assets has risen
from €800bn to €938bn for the five major EU markets. Rising
equipment costs and additional requirements on Utility companies in
areas like energy efficiency have outweighed the delay in some
replacement expenditure;
2. Risks up: Events in Spain and Germany over the summer have
substantially increased investor perception of political risk in the Utility
sector in our view. This is particularly damaging where Utilities are
making very large investments in order to meet government
environmental targets. Much of this investment is fundamentally
uncommercial and relies upon government directed subsidy. If
companies do not have complete confidence that the subsidy regime
will be maintained beyond their investment pay-back period then
investment will not flow in our view.
3. Woeful sector performance: Since March 2009 the European Utility
sector has underperformed the wider market by 26%. Of particular
worry to policy markers should be that the underperformance has
been concentrated in the large cap generation based Utilities – the
very same companies who are expected to do most of the heavy lifting
on the capex front. The European Utility sector has been significant
de-rated both relatively and in absolute terms. This suggests that
equity investors are much less confident over the sectors future cash
flows and reflects a substantial increase in the cost of equity.



Can the Sector Finance €938bn?

From the Citigroup Global Markets report they have built a sector wide model to try and ascertain how much balance sheet headroom exists to fund the required capex. We assume that companies seek to maintain at least an A- credit rating and that power prices average
€55/MWh. With these assumption we calculate that the sector would have a
funding shortfall of €277bn that would need to be met largely through issuing
equity if it were to meet the total capex spend requirement of €938bn. Given
the cost of equity faced by the sector, such a level of equity issuance is, in our
view, highly unlikely

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