Global Financial Crisis Impact of the Current Financial Crisis on the Energy and Utilities Industr
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Global Financial Crisis
Impact of the Current Financial Crisis on the Energy and Utilities Industry Update
Without question, we live in a vastly different world than that of a year ago and the environment remains dynamic and challenging. Global energy markets drive local utility prices.
The energy sector
be capital intensive.
Debt and capital commitments play a prominent role in funding the operations and growth of energy companies.
Crisis on Oil and Gas ProducersThe key focus for any producer is its annual capital budget for exploration and development.A number of independent producers finance exploration activity through a combination of equity and debt.
Equity is generally more expensive, and many independent producers and private equity funds use debt to leverage invested capital
Crisis on Oil and Gas ProducersThe impact on the large national oil and gas companies wasn’t considered meaningful until an accident like the Deep Water Horizon.The impact on many of the independent oil and gas producers is obvious.
Crisis on Oil and Gas ProducersEarlier this year, inflation data out of the United Kingdom, the United States, China and the Eurozone, indicate inflation was increasing worldwide and there would be pressure central banks to raise interest rates, making money harder to borrow and consequently those nation’s currencies more in demand.
Crisis on Oilfield Service CompaniesPlatforms, rigs, drill ships, drill pipe and services are financed through both debt and equity.
Oil and natural gas producers locate the hydrocarbons, but the contract with oilfield service companies to actually drill and to build the facilities to support field development and production activities.
Crisis on Mining CompaniesAs is the case with oil and gas producers, analysts want to see that a mining company is not only growing its level of production and reserve base, but finding costs lower than their peers and at a reasonable level in comparison to projected market prices.
As a result, the key focus for most mining companies is their annual capital budget for exploration and development.
Crisis on Utilities and Merchant GeneratorsThe most significant issue for utilities is that the demand for electricity has been growing during a time when power plant and transmission line construction has been lower than normal.
Crisis on Utilities and Merchant GeneratorsThe Edison Electric Institute is projecting that about $800 billion in new construction over the next 10 years will be required to meet generation and transmission needs just within North America.
Crisis on Utilities and Merchant GeneratorsThe International Energy Agency anticipates that the capital investment in energy infrastructure necessary to support global demand will cost approximately $20 trillion through 2030.
Investments will focus on
facilities (last year’s observation), alternative energy sources, transmission lines and retrofits to reduce carbon emissions from existing facilities.
The Japanese government agreed earlier this year to set up a fund with taxpayers’ money to help Tokyo Electric Power Co (TEPCO) compensate victims of the crisis at its tsunami-crippled nuclear power plant and avoid financial collapse.
The government issued special-purpose bonds to help finance the scheme, which will allow Asia’s largest utility to make compensation payouts expected to run into the tens of billions of dollars. There will be no ceiling set on Tokyo Electric’s liabilities.
In return for public backing, the government will exert control “for a certain period of time” over management of TEPCO and other power utilities, which will also be asked to pay annual premiums into the fund.
Following the Fukushima nuclear meltdown, the inherent risks of nuclear power and the overall safety of the U.S. nuclear power plant fleet have been raised. Because the nuclear power industry is virtually incapable of building new plants without taxpayer-backed loans, the potential for cancelled projects and defaults on loans, the American taxpayer is at risk of losing $22.5 billion they are set to have tied up in these projects.
Subsidies have a cost that needs to be financed from
In the past,
subsidies from the government budget seemed to be the best option in most utility sectors and countries. However, government budgets have been slashed and many subsidies have been phased out. The result has been the
financing of maintenance and rehabilitation costs
assuming only a minimum of the
responsibility for the accumulated debt in order to prevent the utility collapsing.
Earlier this year Greece passed an austerity bill that imposed fiscal austerity measures. The state power utility Public Power Corporation (PPC) owns 93% of the installed power capacity in Greece. PPC is the largest business in Greece in terms of asset value and like all inefficient state-owned industries is subject privatization.New Reality for Government Owned Utilities
Crisis on Alternative Energy ProvidersHowever, most people agree that continued investment and research in this area is a priority, so over the long run, further investments and subsidies for this sector are anticipated.