What’s happening to energy markets and what are the impacts for UK savers and investors?

John Ditchfield, Director Barchester Green Investment shares his expert view on the changes in the energy markets

The last few months have seen a number of significant shocks to global energy markets.

And given that exposure to the global business of energy production typically makes up a reasonable part of most investors pensions and other investments it’s worth taking some time to understand a few of the ramifications of these changes; energy companies make up around 11% of the FTSE All Share.

The first, and most widely publicised change, is the rapid fall in oil prices from well over £100 dollars per barrel to the current level of $55.15 (NYMEX WTI Crude $, Bloomberg).

This is being widely interpreted as a deliberate policy adopted by some the major middle-eastern oil producers to eliminate so called marginal producers from the market. A marginal producer is a country, such as Venezuela, or a business which produces oil from unconventional sources and therefore typically suffers much higher extraction costs; this makes a low oil price a huge problem for their businesses as they need a high oil price level to simply stay profitable.

Goldman Sachs has warned that a potential $1tn of spending on new projects is at risk due to the present oil price (http://www.ft.com/cms/s/0/b3d67518-845f-11e4-bae9-00144feabdc0.html#axzz3LxdBSR62), so this turn of events might actually shape the market for energy production for some time to come.

Solar energy

Looking at the wider implications, although in the longer term the low oil price should be good news for the global economy, as private individuals and business benefit from lower transportation costs. Investors are anxious about the possibly unforeseen knock-on consequences from such a steep downward trend in the price of oil.

Remarkably, the fall in oil has actually had a negative impact on the share prices of some businesses in the renewable market with solar energy businesses seeing a fall in their share price as speculators mistakenly expect solar companies to suffer increased competition (Market Vectors Solar ETF has fallen 22% over the past six months GYO3)

But as Christiana Figures executive secretary of the United Nations Framework Convention on Climate Change said recently “We’re all old enough to know that oil prices go up and down,” and “The fact that oil is so unpredictable is one of the reasons why we must move to renewable energy, which has a completely predictable cost of zero for fuel.”

Energy efficiency

At the end of November E.ON Germany’s largest utility firm announced its plans to split its business into two. E.ON said in its press statement that looking ahead the business intends to focus on the renewable energy generation and energy efficiency businesses which it sees as being the future for firms in the power industry.

In Germany about a quarter of the country’s energy needs are met by renewables and E.ON’s view, as set out by the firm’s Chief Executive, Johannes Thyssen, is that the traditional model of very large distributors controlling the market has now “broken apart” with the arrival of new business model focusing on energy efficiency, technology and energy efficiency.

To put this into a broader perspective the world’s generates around 5% of all its energy needs from renewables at present, which is up from 1% in 1990, the current trajectory of public policy suggests this could reach 12% by 2040 (Source: Bloomberg New Energy Finance)

Another trend which has started to become more significant for investor portfolios is the arrival of renewables as a source of potential income for investors; these are known as “Yield Co’s”, in essence Companies with relatively predictable sources of income which are then in a strong position to distribute dividends to their shareholders.

Wind farms

It used to be the case that investors into these areas were getting involved with relatively speculative, small scale “growth” businesses but now we are seeing businesses with good track-records in delivering income.

Just one example of this sort of product is Greencoat UK Wind Ltd. This company owns already installed and operating wind farms, both onshore and offshore, the business then sells the energy it generates to UK power distribution companies thereby generating a predictable stream of income.

Greencoat’s strategy is to pay a dividend to its shareholders of around six percent per annum and to use the fact that the supply contracts it has are RPI linked to gradually grow the dividend in-line with inflation.

The emergence of these high yielding (income paying) green energy businesses has sparked a great deal of interest from both mainstream investors and those who are in-part motivated to support projects which contribute towards the drive for a more sustainable global economy.

This article is intended to provide general information only and should not be considered as a replacement for regulated financial planning advice. All views expressed are the author’s personal opinions.

The value of investments may fall as well as rise.

John Ditchfield http://www.barchestergreen.co.uk/our-people/john-ditchfield