Spanish government approved a decree that puts an end to speculation about the future of feed in tariffs: Revenues for wind and solar thermal projects will remain unchanged. The number of eligible hours will be cut for photovoltaic plants and its useful life be extended by three years.
The Swiss utilities Alpiq, Axpo and BKW decided to create one common development company targeting to build two new nuclear power plants in Switzerland. Within the partnership model, BKW (7.3% of NAV) will offtake 15.5% of the power production from the two new plants.
Power prices rallied strongly in Europe with baseload for 2012 delivery up by 10% in Scandinavia and 5% in Germany. This was driven by strength in coal (+5%) and natural gas prices (+14%), record low hydro reservoirs in Scandinavia (40 TWh less hydro power energy available than normal) and strong spot prices due to cold temperatures across northern Europe.
South Korean Ministry of Economy announced the intention to curtail oil imports by increasing the country’s renewable energy portfolio. For this purpose, KRW 9.3 trillion (~USD 8.2 billion) in public and private funding will be invested to install 500 offshore wind turbines, 5 MW each, for a total capacity of 2.5 GW.
In October, as part of its spending review, UK government guaranteed GBP 2.2 billion for clean energy projects. The proceeds are expected to be distributed towards carbon capture and storage projects, a green investment bank and offshore wind facilities.
In Europe, we increased the fund’s position in Spanish network company Red Electrica to 4.2% of NAV. The company reported 14.4% net income growth for the first 9 months in 2010 and we expect the dividend to grow at the same pace. The integration of renewable energies and interconnectors with the load centers provide the company with an opportunity to grow income at 15% p.a. over the coming two years.
In Japan, Tepco announced a capital increase. Value creation from the transaction is highly uncertain and hence we closed the position as the dividend recovery story turns into a more risky overseas investment story.
UK’s energy minister Chris Huhne attended the opening ceremony of Vattenfall’s new 300 MW offshore wind farm in Kent. The showcase project will be the largest wind farm in operation in the world and marks the start of a race of many more large wind farms in the U.K. and in the North Sea.
The Q2 reporting season of the US utilities was positive: 10 out of 11 of the fund’s holdings beat expectations. We closed the position in NextEra Energy (formerly FPL) on valuation grounds and concerns over growth in the wind business due to weak gas prices. On the other hand, we increased exposure in regulated infrastructure with a new position Spectra Energy. The company derives 80% of its EBITDA from regulated pipeline operations and is well positioned to benefit from the growth in shale gas production.
European offshore wind continues to grow strongly. According to EWEA, 118 new offshore wind turbines were fully connected to the grid in the first half of 2010 representing a capacity of 333 MW. In addition, 151 turbines (440 MW) were installed but not yet connected to the grid.
German power consumption rose to 274 TWh in H1 2010 up from 262 TWh last year (+4.5%). This almost matches the pre-crisis level of 277 TWh in H1 2008. Gas consumption was up by an impressive 14%. Given rapidly improving demand and strong fundamentals for coal prices we expect power prices to rise in the second half of the year. The fund’s core positions in low-cost generators CEZ, Verbund, Fortum and Swiss BKW are well positioned to benefit.
Massive subsidies for renewable energy are distorting the electricity market. Negative electricity prices could soon be the order oft he day. In this situation, traditional utilities face major challenges. The main winners will be operators of pumped-storage power plants. [EN]
The annual Solar power exhibition, Intersolar, took place in Munich. Suppliers & customers were very bullish. Data points at the show were more positive than expected particularly with respect to 2H10 pricing and volumes. Pricing is up slightly and there seems to be little risk of a 2H10 volume slowdown, particularly for low cost suppliers. Many brokers upgraded the sector to buy on fundamentals and on valuation subsequently.
On June 8, the German Government announced the introduction of a EUR 2.3 billion p.a. tax on nuclear fuel. The tax is likely not linked to an extension of the nuclear generation fleet and will have a material negative impact on E.On. Due to the significant and unexpected deterioration of the regulatory environment the fund has closed its position in the company. The nuclear tax will lead to cuts in capex by the German utilities, which will lead to underinvestment in new baseload generation. Indirect beneficiaries will be hydro- and nuclear generators, which have exposure to German power prices and operate in stable regulatory environments. The fund’s holdings in CEZ, Fortum, BKW and Verbund fit that description.
The recovery in power and gas demand continues across Europe. French (Jan-Apr), Spanish (Jan-May) and German (Q1) power demand are up 3% compared to last year. The gas market is recovering particularly well with demand up 8% in Germany (Q1).
The German Federal Network Agency (Bundesnetzagentur) published that in December 1.5 GW of PV installations were registered with the agency, which brings the total 2009 installations to 3.8 GW. This is 27% above the consensus of 3 GW expected for 2009.
Under its Green Energy Act feed-in tariff, the Ontario government (Canada) has approved 184 new contracts for large renewable energy projects (>500 kW). The facilities will have capacity of 2.5 GW and trigger investments of approximately CAD 9 billion.
The Q1 earnings season in the U.S. started off well. Net income of portfolio companies FPL, DTE Energy, Entergy and ITC came in ahead of expectations. Transmission company ITC grew earnings by 17% powered by continued investment in high-voltage infrastructure. DTE Energy managed to grow by 7% on rate relief and a recovering demand in Michigan.
Chinese Suntech Power, the worlds largest producer of crystalline photovoltaic modules, saw a surge in net income in Q4 to USD 92 million (+182% yoy). For 2010, the company expects to ship 1.25 GW and increase capacity to 1.4 GW (currently 1.1 GW) by mid 2010.
Iberdrola Renovables announced plans to invest EUR 9 billion in wind energy over the next three years. EUR 4.9 billion will be invested in the U.S., EUR 1.9 billion in the UK, EUR 1 billion in Spain and EUR 1.2 billion in the rest of the world. Iberdrola Renovables also plans to open an offshore wind division in Glasgow, Scotland, to promote wind energy projects that will amount to 10 GW.
Our March field trip to Germany confirmed that E.On’s profit and dividend outlooks are solid through 2013. Driven by improving demand and higher European coal prices we expect the front year power contract to rebound toward 50 EUR/MWh (+10%) in Germany in the near future.
The Global Wind Energy Council announced surprisingly high global installations. 37.5 GW were installed in 2009, compared to a 27.1 GW in 2008. Major 2009 contributors were China with 13 GW, the EU with 10.2 GW and the US with 9.9 GW. Cumulative global capacity now stands at 158 GW.
Chinese solar companies continue to outperform the German solar companies. Ja Solar, Canadian Solar and Trina Solar all reported strong Q4 sales growth with mostly stable margins and the companies increased guidance for 2010 shipments. German companies still suffering in the current environment. Q-Cells notably reported revenues 10% below consensus with an EBIT loss of EUR 480 million. US module producer SunPower acquired European solar power plant developer SunRay Renewable Energy with its 1.2 GW pipeline for EUR 200 million.
In the US, First Energy bid USD 4.7 billion for Pennsylvanian coal-fired power generator Allegheney Energy. The bid premium of 32% values Allegheney at 12x 2010 earnings. This highlights the value in the fund’s generation companies such as PSEG (9.5x), PPL (8.5x) and Constellation (10.5x). We added to our holding in FPL Group as we are convinced that the 10.7x valuation does not reflect the premium asset base including the largest wind energy portfolio in the US.
All US utilities in the fund’s portfolio have so far beaten earnings expectations for Q4 2009. Entergy, Exelon, Wisconsin and Alliant Energy beat expectations by 8%, while FPL Energy beat by 4%. More importantly, all five companies provided 2010 earnings guidance in-line or higher than the market’s expectations. On average, these companies expect to grow earnings by 11% in 2010 driven by the expected recovery in power demand as well as grid infrastructure investments.
The Obama administration announced that it would offer USD 2.3 billion in clean-energy manufacturing tax credits to 183 companies. Each project must now raise private funds to construct its plant in order to exploit the tax benefit. Ontario's government signed an agreement with a consortium led by Samsung and Korean Electric Power Corporation (KEPCO) for the investment of CAD 7 billion to create 2,500 MW of wind and solar power manufacturing capacity. The government expects more than 16,000 new green energy jobs to be created from manufacturing, installation and operation of the renewable generation projects. China is still expected to release a renewables stimulus plan in late February. Previous drafts aimed for 20GW of solar and 150GW of wind capacity by 2020.
The German Environment Ministry (BMU) presented its suggested changes to the solar feed-in tariffs: 15% cut for ground mounted systems effective July 1st (25% for farmland), 15% cut for roof top systems effective April 1st and further 2.5% cut to the year-end annual tariff decline rate if domestic installations exceed 3 GW.