You cannot pick up a newspaper or turn on the television these days without being bombarded with doom and gloom about the world’s economic situation, and its prospect of recovery. I am not for one second saying that the situation is not serious – it is! According to the US Department of Labor’s Bureau of Labor Statistics, since the recession began in December 2007, US companies have made over 5 million people redundant, with 3.3 million of them – nearly two-thirds of the total – coming in the past five months. Further, those waiting for a definitive sign that China’s economy has ‘bottomed out’ will have to wait a little longer, as recent economic data continues to send conflicting signals; the export slump has deepened more than expected, while fixed asset investment growth was stronger than anticipated.

I cannot shake a growing sense of unease that all this talk of a worldwide recession that will be ‘unlike anything ever experienced before’, coupled with the use of the word ‘depression’ in relation to some countries, could actually be making the situation worse with regard to encouraging investor confidence and liquidity in the financial markets.

Thankfully, the power industry, unlike other industry sectors such as construction and automotive which are in crisis, is holding up well.

Having said that, it is not immune. In this month’s issue Chris Webb, who is a regular contributor to Power Engineering International, explores what impact the current financial crisis is having on our sector.

According to Jonathan Robinson, a consultant at Frost & Sullivan’s Energy & Environment Practice, the effects of the economic crisis will vary from country to country, and the expectation is that investment, specifically in Europe, will be down this year and next, before rebounding. He also believes that the credit crunch is, and will have, the greatest impact on smaller utilities and independent power producers. Clearly, the current financial situation means power companies are rethinking their near-term investment plans. However, this is not across the board. According to Robinson, although some power generators have cut their capex budgets – Enel by 27 per cent and Iberdrola by 44 per cent – others, such as GDF Suez, RWE and EnBW, have maintained their 2008 forecast budgets.

Thus, new power plants will be built. According to Robinson, investment to replace ageing plants is simply unavoidable, and the forward-thinking utilities have already secured finance for most of their plans through the traditional route of bond issues. In the past six months European utilities have raised more than €28 billion ($37.5 billion) in bond issues, with Vattenfall’s recent bond issue being over-subscribed.

Similarly, the financial gloom seems to have done little to dampen mergers and acquisition activity so far, with PricewaterhouseCooper (PwC) reporting a record number of electricity and gas deals in 2008, compared to 2007. The value of the deals however, has been affected. According to Mark Hughes, Utilities Market and Value Advisory Consultant at PwC, until the lack of availability of credit eases there is unlikely to be a revival in deal values. This presents an opportunity for utilities with strong balance sheets and cash flows to snap up or form strategic partnerships with businesses that are running short of cash for their expansion plans or facing refinancing challenges.

Despite the continuing impact of the global financial crisis, the rating agency, Fitch, believes the European utility sector remains attractive to investor through a combination of strong cash-flow generation, relatively low average leverage and some defensive recession-proof qualities, such as a lower exposure to cyclical revenues.

The economic slowdown without doubt will result in a fall in the demand for power in the short-term. In the medium- to long-term however, the world’s energy demand is still forecast to grow – a healthy 45 per cent by 2030 says the International Energy Agency.

Within the power industry, as in all other industries, the current economic crisis is topping boardroom agendas. At POWER-GEN Europe, which takes place 26-28 May in Cologne, Germany, a plenary session entitled ‘Meeting the Energy Challenge in the Face of the Economic Downturn’ is being held and moderated by Vijay Vaitheeswaran from The Economist, on 27 May. I highly recommend you mark this in your diary.

Kind regards,
Heather Johnstone
Senior Editor