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UK: Investors look to gain first movers advantage in energy sector

AS expected the Government has backed the construction of ‘new nuclear’ in the UK Energy White Paper.

New nuclear is likely to form a large part of the UK Government’s energy policy as crucially, it ticks two important boxes – reducing carbon emissions and increasing the security of supply. Between four and six new plants are expected to be operational by 2020 and the industry is to bear the full costs of building, operating and decommissioning the plants as well as all of the waste management costs. The move is ambitious and politically sensitive but pales in comparison when compared to the Chinese, who already have plans to build 40 new nuclear power stations. In the UK, new plants will be treated as a “critical infrastructure project” and as such, will be subject to much faster planning procedures. These developments have refocused attention on the energy sector as investors look to gain first movers advantage. However, identifying which companies are likely to benefit may be trickier than initially thought. Any company or consortium looking to develop new plants will need a number of specialties including the expertise, financial flexibility, the sites, customers and a relationship with a turbine manufacturer.

With the Chinese already heading the queue, the UK will not be top priority for the already over stretched turbine manufacturers. Any engineering group may well view the opportunity to sell a raft of turbines to China as lower risk than entering into a consortium which involves the operational risk in the UK. It is critical for British Energy that it is involved in new nuclear power in the UK to prevent personnel losses once new power plants open, in order to extend the life of the company beyond the next fifteen years. However, its involvement may be limited to that of minority partner as possible sites are the only asset that British Energy has to bring to the table. It is likely that the company is hoping to announce a partnership which would include an electricity retailer, such as Scottish & Southern Energy or perhaps a European operator such as Iberdrola or RWE.

Indeed both European stocks appear more credible ways in which to play the new nuclear theme. For many, cleaner fuel remains the obvious alternative as high power prices and rising carbon prices lend themselves to the green generators. Scottish & Southern Energy is already regarded as the largest renewable generator in the UK, while Iberdrola Renovables – recently spun out of Iberdrola – is the only quoted global renewable wind generation business. The market appears to be underestimating the growth potential from renewable sources. Data suggests that between now and 2020, Europe could add 6-gigawatt per annum of wind capacity. This implies an annual growth rate of 8% over the coming 15 years. There has already been a rush to invest and this looks set to continue as many expect renewable sources to account for at least 25% of total generation in Europe by 2030. (