Developed States Industry Overview
BMI View: Our outlook for the power sector of developed states is relatively bearish, as we expect economic growth in most of these countries to remain weak , thus weighing on power consumption . The North American and Australian power markets are expected to outperform other developed states in both the short and long term. We also predict that, going forward, the share of natural gas and renewable energy will grow as developed nations look to reduce emissions.
Here are some of the key trends we have identified in the power sectors of developed countries:
Weak macroeconomic conditions continue to impair growth in electricity consumption.
Government debt as a % of GDP has been on the uptrend in several developed states, and is expected to have an effect on capacity expansion programmes, and thus on power utilities and subsidies.
Austerity measures and growing risk aversion will favour divestments over capital expenditures, especially in Europe, where cash-strapped European utilities need to reduce outstanding debt.
Feed-in tariffs are being reduced across many European countries as a result of austerity measures.
Nonetheless the share of natural gas and renewable energy is set to grow in the energy mixes of developed states.
We have revised down our 2013 electricity consumption growth forecast for the developed states from 1.5% to 1.2%. This downward revision is motivated by the continuing eurozone debt crisis and a slowdown in global economic activity. Our country risks team has made downward revisions in their 2013 real GDP forecasts for several eurozone countries such as Austria, France and Italy. The most recent eurozone manufacturing Purchasing Managers Index came in at its weakest since June 2009, and has now been in contractionary territory for 10 consecutive months. The US, on the other hand, looks to have avoided a recession, but growth will remain subdued.
|e/f=BMI estimate/forecast. Source: BMI|
We expect the performance of the different developed states to vary greatly, with North America and Australia expected to continue to outperform other markets. The US and Canada account for nearly 55% of the developed power market, and the economic data and monthly electricity consumption data for both countries have been relatively encouraging. Conversely, we expect peripheral eurozone countries such as Portugal and Greece to underperform, due to their macroeconomic predicaments and poor economic performance.
|North America And Asia To Lead|
|Developed States - Generation By Region, TWh|
We are also seeing tighter credit conditions, especially in Europe. Greater capital controls for European banks has led to a tightening of credit, leaving financiers increasingly reluctant to lock away capital in lengthy and capital-intensive power projects. Investors are also growing increasingly risk averse, and we expect lesser funds to be available for renewable, thermal and nuclear energy projects. We believe that most investments will arise from the renewable energy sector, as developed states look to substitute ag e ing capacity and reduce greenhouse emissions.
Long-Term Outlook: Eurozone Problems Most Pertinent
We expect electricity consumption in developed states to pick up slightly over the long term, and are forecasting annual average growth of 1.4% from 2013 to 2017. The North American and Australian power markets will account for the bulk of this growth, primarily because we expect their economic performance to remain resilient over our 10-year forecast period to 2021.
Our outlook for the eurozone is far more bearish, as the sovereign debt crisis continues to act as a drag on economic growth and the power sector. The Italian government has revised its GDP growth forecast downward to 0.2% in 2013 (we are forecasting 0.0%). The government also expects debt to peak at 127.1% of GDP in 2013, which will constrain new power investments or subsidies. Portugal was also hit with a new raft of austerity measures, with a substantial incidence of the social contribution tax being shifted from employers to employees.
BMI's Country Risk team believes that the odds of the eurozone surviving have worsened to 50:50. At this stage, resolution depends entirely on the political will to accept a marked dilution of sovereignty of individual Member States to the institutions of the European Union. More specifically, the outcome depends on the decisions taken by a handful of policymakers, particularly German Chancellor Angela Merkel and European Central Bank President Mario Draghi. Second guessing these decision-makers - who are operating under considerable pressures (the market, the electorate and other global leaders) - is futile. Therefore, having a strong conviction on the dichotomous outcome of whether or not the eurozone survives would be similarly naïve.
At the moment, we believe that the consequences of a eurozone breakup on the electricity sector would be mixed. Countries that exit the euro would likely experience a drastic decrease in economic activity, electricity consumption and investment in the short-term, due to elevated cost structures and unproductiveness. That said, these countries could benefit from a competitive devaluation of their currency over the long term. Industrial production could improve, while a weaker currency would lead consumers to purchase a greater number of domestic goods. We note that these benefits are merely possibilities, as the exact impacts of a euro exit would depend largely on the policies and directions adopted by the government.
Going Towards Natural Gas And Renewables
In spite of the difficult macroeconomic predicaments, we believe that the majority of developed states are still looking to expand their gas-fired and renewable energy capacities in order to reduce emissions, and have incorporated this view into our forecasts. Many developed countries have begun reducing the share of emissions-intensive coal- and oil-fired capacity. For instance, the share of coal energy in the US has progressively lessened over the past few years, and we anticipate that its share will dwindle further as electricity demand is increasingly met by natural gas and renewable technologies. We estimate that the US retired approximately 9,000MW of coal-fired capacity in 2012 and will retire additional capacity in the coming years.
|Significant Growth In Gas And Non-Hydropower|
|Global - Generation By Type, TWh|