Developed States' R/R Ratings: Macro Conditions Cause Fall From Power


BMI View: Downside risks that have previously been identified by BMI have fully materialised, and our Developed States' Power Risk/Rewards Ratings (R/R) profile has registered a broad-based decline in scores. Whilst the sheer size of installed generating capacity, generation and consumption in several of these countries boosts the average regional score, challenging macroeconomic conditions are a key dampener to the potential returns in mature power markets. This trend is strengthened by the addition of troubled markets such as Greece and Portugal to our mature power markets' portfolio this quarter.

The ongoing eurozone debt crisis, a slowdown in global economic activity and rising risk aversion among investors continue to weigh on a sustained recovery in power demand and on capital expenditure (capex) plans in the majority of the mature power markets. Moreover, an overhaul of our methodology behind the power RRRs, coupled with the addition of several new markets to the regional portfolio (Australia, Austria, Greece, Iceland, Netherlands and Portugal), have provided BMI with further evidence of the effects of existing sector-specific and macroeconomic dynamics on the potential returns in mature power markets.

Most notably, a revision of the individual weighting of various industry-specific metrics - introduced to provide a more accurate picture of the power markets - has led to a decline in industry rewards across the table. The average score for this indicator fell from 48.57 in Q312 to 39.78 in Q412 - highlighting the difficulties experienced by mature power markets globally, and especially in the EU. This weakness is compounded by the less than rosy economic outlook for several of these economies, which has resulted in a downgrade of country rewards scores in our ratings matrix (down to 37.53 in Q412, from 44.36 in Q312).

The integration of aspects of our new Renewables R/R Ratings and Infrastructure Project Finance Ratings has also enhanced our ability to gauge risks. Thus, it does not come as a surprise that sophisticated and well-established renewables policies, as well as an improved quantification of the relatively low risks connected to project finance, have played a key role in boosting scores in the industry risks section of the matrix (up to 74.07 in Q412, compared to 71.89 in Q312).

New Countries And Macro Dynamics Push Scores Down
Developed States Power Risk/Reward Ratings, Scores Out Of 100

On balance, the average regional score has declined, reflecting a weakening in sector-specific and macroeconomic conditions. This unfavourable turn has also resulted in developed states' power markets losing their primacy in BMI's global regional power sector ratings.

Although the excellent risk profile offered by mature power markets is still unrivalled, rewards in Asia now appear more attractive. Existing market size gives developed markets the edge; yet, our Power forecasts illustrate that investment over the next decade will focus largely on the substitution of aging capacity and on the addition of greener alternatives. In addition, more lacklustre expectations for consumption growth - a product not only of slower economic growth and more service-oriented economies, but also of efficiency measures - put mature power markets at a disadvantage when compared to power-starved Asian economies.

Dethroned Despite Excellent Risk Profile
Power Regional Risk/Reward Ratings, Scores Out Of 100 (LHS)

Taking these factors into consideration, and in light of the macroeconomic and-sector specific dynamics at play, we believe that the main themes for BMI's Developed States' Power R/R Ratings are:

  • With fairly homogeneous risk performances, market size and growth expectations are the strongest factors influencing industry rewards and overall scores.

  • As such, the substantial size of the power industry in the US and Canada, as well as in Australia and Germany, coupled with their slightly more sanguine macro fundamentals contribute to their top places in the regional ratings.

  • Most notably, the US and Canada are at the top of our table, providing confirmation of our long-held view that North American power markets will continue to outperform their peers on the other side of the Atlantic in the country rewards section for the time being.

  • On the opposite end of the spectrum, Portugal and Greece are the regional underperformers, owing primarily to their dire macroeconomic predicaments and the bleak expectations for both power demand and project pipelines.

Views In Play: Economic Performance Key
Developed States Power Risk/Reward Ratings, Scores Out Of 100 (LHS); And Real GDP growth, % change y-o-y (RHS)
  • Aside from economic considerations, we note that market size is the second most important factor influencing the overall scores for these rather homogeneous mature power markets. In light of this, we note that the mid-table positions are dominated by mid-size Nord-European states, which have up to a 51-point differential between their overall rewards and risks.

Penalised By Market Size
Developed States Power Risk/Reward Ratings, Scores Out Of 100
DEVELOPED STATES POWER RISK/REWARD RATINGS (Scores Out Of 100)
Industry Rewards Country Rewards Rewards Industry Risks* Country Risks* Risks* Power R/R Ratings Rank
*Higher score = Lower risks. Source: BMI.
United States 68.00 45.00 59.15 78.09 80.17 78.98 66.09 1
Canada 55.50 50.00 53.38 78.89 85.83 81.86 63.35 2
Australia 50.00 53.20 51.23 80.13 83.40 81.53 61.84 3
Germany 55.50 32.80 46.77 82.02 84.75 83.19 59.52 4
United Kingdom 46.50 41.00 44.38 83.37 80.41 82.10 57.58 5
Japan 55.25 30.60 45.77 74.59 83.71 78.49 57.22 6
France 50.25 34.20 44.08 80.27 77.95 79.28 56.40 7
Spain 46.50 42.80 45.08 72.37 68.69 70.79 54.08 8
Italy 51.75 27.20 42.31 69.14 68.08 68.69 51.54 9
Sweden 32.00 37.40 34.08 78.10 89.13 82.83 51.14 10
Denmark 25.50 42.40 32.00 81.35 89.01 84.63 50.42 12
Finland 30.50 30.80 30.62 76.07 88.42 81.36 48.38 13
Netherlands 26.00 39.00 31.00 72.76 85.63 78.28 47.55 14
Austria 30.50 30.80 30.62 65.70 85.80 74.32 45.91 15
Iceland 12.50 52.40 27.85 62.35 70.68 65.92 41.17 16
Portugal 20.00 24.00 21.54 65.38 71.99 68.21 37.87 17
Greece 20.00 24.40 21.69 58.70 51.34 55.54 33.54 18
Regional Average 39.78 37.53 38.91 74.07 79.12 76.24 51.98
This article is tagged to:
Sector: Power, Renewables
Geography: Global