Green utilities under the radar

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There are firms in this sector which will have a huge part to play in the shift to greener power over the next few decades.

More power!

The future is electric – and the world is expected to need more of it than ever before. Even in the UK (where energy consumption has declined in the last decade), the shift away from fossil fuels to electrification for both transport networks and heat production means there is a growing long-term structural demand for clean energy.

National energy profiles are already changing as a result. For example, in the UK, the share of renewables, such as wind, hydro and solar power, in the overall electricity generation rose to a record high in 2017 – as all other fuel sources recorded a decline.

Opportunities for utilities

Much of the focus on creating a zero-carbon future is on the more obviously ‘exciting’ aspects, such as technology firms helping develop cleaner ‘smart’ cities. However, as an income investor looking for sustainable dividend growth, I’m also interested in its impact on the less flashy parts of the investment world.

Utilities companies, for example, have relatively dependable revenue streams coming from energy contracts sometimes stretching out for several years. And there are firms in this sector which will have a huge part to play in the shift to greener power over the next few decades.

It’s written on the wind…

Greencoat UK Wind is a good example. Around 50% of UK wind farm revenues comes from green subsidies such as renewable obligation certificates (ROCs), with the other half coming from the wholesale price of electricity. Greencoat’s business model involves taking over the management of turbines from other developers (including the recent acquisition of a 35.5% stake in a 66-turbine farm near Fort Augustus in Scotland’s Highlands).

Subsidies for renewable generation have been subject to strict scrutiny from the UK government and ROCs will expire in 2037. However, with growing energy demand, we believe further subsidy models will still be required, providing further opportunities for operators like Greencoat to expand.

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It is not just the newer operators which are making changes. WEC Energy Group, which has been selling electricity since 1896 (as the Milwaukee Electric Railway and Light Company) is also pumping money into zero-carbon generation – with proposals for two 100+ megawatt solar-technology projects in Wisconsin, which it hopes will be operational by 2020.

Predictable – not boring

Growth stocks took a hammering at the end of last year as it became clear we are near the end of this economic cycle. With earnings growth turning negative year on year for the last quarter, investors have been looking out for stocks which are less volatile and more reliable. In short, a bit boring

When the dust settled on Q4 2018, the utilities sector was top of the tree, as the market rewarded its defensive qualities. These companies typically offer sustainable growth, which may be lower, but is less variable. In this kind of environment, dependable is what a lot of investors require.

Put next to a Silicon Valley tech giant, these might be a less interesting subject for brokers to research. However, these modern utilities are tapping in to long-term structural trends and helping to shape the world we will be living in. As investors, that’s something to get very excited about.


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