The US electricity market remains in a state of flux as debate on the Bush energy policy continues. Within this uncertain market scenario a growing number of European energy and utility companies are looking to the US market for growth opportunities.The latest UK utility group to look west to the US is Scottish & Southern Energy. While the success of UK investment in the US electricity market to date has been varied this should not deter other UK and European companies from US diversification strategies. Of all the UK companies entering the US market only National Grid Company has seen any real success to date. Its success is based on it meeting the fundamental requirement of the US electricity market, which is improved transmission reliability. Other UK entrants include PowerGen and Scottish Power, and although they have yet to realise the potential of their investment their acquisitions are relatively sound and should provide medium to long-term gains.
The current state of the US energy market provides three main investment opportunities. The first is providing the management experience of running a competitive market through investment in US utility operations. The risk here is that local state and federal regulations may force UK and European utilities to pay over the odds and take on board more debt than they would like. However, with the US electricity market in a deregulation flux it is inconceivable that US utilities would not welcome the proven experience of European utilities in a competitive market.
The second opportunity is in building new generation plant, both thermal and nuclear, to meet the capacity shortfall in the US which is leading to the risk of more rolling blackouts. Bush has already identified the importance of new plant build and companies such as the UK’s International Power are well positioned to reap benefits in this sector.
The third opportunity is through technological enhancement of existing plant infrastructure. With the strong US focus on the environment the country’s existing thermal plant needs upgrading to meet environmental regulations. This is particularly acute in California, which restricts the operating of any plant once it realises its emission threshold. If these plants were allowed to generate to their full capacity they would go some way to meeting the capacity shortfall in the market. In this category companies such as Siemens are well positioned to reap increasing benefits from the US market through developing clean generation technology to improve the reliability and environmental emissions of existing plant.
It is understandable that US pride would want US companies to fulfil the needs of its domestic market.
But it is becoming increasingly evident that the resolution of current energy problems cannot be fully achieved internally. For this reason the competitive market experience and technological capability of European utilities are increasingly well suited to the short-term requirements of the US market.
Energy’s political future
On June 7 the UK elected the Labour government for a second term. As is evident in the US, energy policy will be a major consideration of the new Labour government, but during the election campaign it has offered very little insight into its plans for the sector over the coming four years.
The only comments that Labour has made on energy relate to its often-stated view that the UK should take an active lead in the European utility market. In a way this proved to be the case in the week of the election as the Chancellor vetoed the European energy tax harmonisation proposal, stating that it would only consider such a move once the market was fully liberalised. The UK found an ally in Spain but most of the other 13 member states favour harmonisation of taxes. The new Labour government cabinet has a strong Euro-sceptic feel and it will be interesting to see how the UK positions itself within the European energy market.
The only other energy-related energy policy outlined by the new government ahead of the election concerned nuclear power and renewable energy. The government will be unlikely to endorse an increased nuclear generation portfolio, and it has said it will invest heavily in renewable energy. But the government’s environment conscience may be tested by its position on coal. In the previous Parliament it gave a subsidy to the coal industry, and given the uncertain future of the UK coal industry it may again come under pressure to provide further subsidies.
The new UK Parliament will span important developments in UK and European energy. The European Union wants to fully liberalise gas and electricity markets by 2005, which will likely occur before the next UK election in 2005/04. During this period the EU will also finalise its own energy policy, but the UK government view on such a policy is unclear. There are also specific issues to be addressed on coal, the environment, and regulation and taxation of the various energy markets.
To safeguard the UK’s energy interests both domestically and in Europe the government has to appoint an energy minister with an understanding of the market. It also has to reduce the layers of regulation being piled onto the gas and electricity markets, and to reduce the political cronyism that is rife in the energy market.
Here are three challenges for the new government. It should be more objective on energy issues and less politically subjective. It should accept that the energy market works better with less political interference, and that the government should direct and not micro-manage energy policy. And finally, the government should give the energy market back some of its independence.
