Executive Summary
Energy prices in the UK are a political hot potato, with front pages pointing the finger at geopolitics and rising Asian demand, green energy policies and company profits. As a result, the Big 6 energy suppliers have come under heightened scrutiny, in particular over their profitability and spending on new capacity. This report analyses the Big 6’s investment choices in the light of their financial situation and the implications for the UK government’s aim to source 30% of electricity from renewables by 2020.
•Scottish Power, owned by Iberdrola, and SSE have made the largest commitment to renewable investment with over 80% of their new capacity investment going to the renewables sector since 2006. These investments sum to over GBP 2.25bn each over the period.
•EDF Energy and Centrica have made the smallest investments in fossil and renewable new capacity, each spending around GBP 1.25bn since 2006. It is unclear whether they are keeping their powder dry for nuclear new build or have simply not seen sufficiently attractive investment opportunities to persuade them to invest in more generation.
•Since 2006, RWE npower has spent almost GBP 4.5bn on thermal and renewable generation, with 60% of that investment going to renewables. This is almost twice the investment, and more than twice the capacity, of any other Big 6 company.
•E.ON UK, in common with RWE npower, has over 30% of its capacity due to retire by 2015 to comply with the LCPD. It has invested GBP 2.1bn on UK capacity since 2006, with two-thirds of that going to renewable capacity.
•Investment in new capacity is slowing as a recession-induced fall in power demand and new renewable and gas capacity have led to low prospective returns for fossil-fuel build. The financial crisis has made obtaining project finance a challenge, and for both renewable and fossil plants this has been exacerbated by the uncertainty around Electricity Market Reform.
•Centrica has the lowest net debt/ebitda (earnings before interest, taxes, depreciation and amortisation), indicating a strong balance sheet. It has the highest dividend payout ratio and the lowest capex/operating income ratio, suggesting that it may see better value in returning capital to investors over capital investment compared with the other Big 6 utilities. Investments in recent years have been concentrated in upstream gas as a hedge for the downstream electricity and natural gas business.
•E.ON has the lowest operating margin at both UK and group level, the second highest net debt/ebitda and a significantly higher capex/operating income ratio at the group level than in the UK. Its lower-than-average renewable build, average thermal build and upcoming retirements imply it may see better opportunities for its limited capex budget outside the UK.
•EDF Energy has a high capex/operating income in the UK, together with a mid-ranking dividend payout ratio and net debt/ebitda. But it has built less than one-third of the capacity delivered by RWE npower. This illustrates the substantial capital expenditure required for the existing nuclear fleet and prospective nuclear new build. Expenditure on new nuclear capacity is not counted in our investment numbers as it has not yet reached final investment decision.
•RWE npower has a high capex/operating income in the UK, plus a mid-ranking dividend payout ratio and net debt/ebitda. It has built over 2.5 times the new capacity of any of its Big 6 peers, indicating a strategic push into the UK market.
•Iberdrola, the parent of Scottish Power, has been looking to invest its cash, as it has the highest capex/operating income at group level, highest operating margin, highest net debt/ebitda and lowest dividend payout ratio.
•SSE has the second highest gross renewable build with the second lowest capex/operating income ratio. It has the second highest dividend payout ratio, after Centrica, indicating the importance major UK investors, particularly pension funds, place on dividends.
Please download the full report for more detailed analysis.