CLOSE

We permit the publication of our auditors’ report, provided the report is published in full only and is accompanied by the full financial statements to which our auditors’ report relates, and is only published on an access-controlled page on your website https://www.hermes-investment.com, to enable users to verify that an auditors’ report by independent accountants has been commissioned by the directors and issued. Such permission to publish is given by us without accepting or assuming any responsibility or liability to any third party users save where we have agreed terms with them in writing.

Our consent is given on condition that before any third party accesses our auditors’ report via the webpage they first document their agreement to the following terms of access to our report via a click-through webpage with an 'I accept' button. The terms to be included on your website are as follows:

I accept and agree for and on behalf of myself and the Trust I represent (each a "recipient") that:

  1. PricewaterhouseCoopers LLP (“PwC”) accepts no liability (including liability for negligence) to each recipient in relation to PwC’s report. The report is provided to each recipient for information purposes only. If a recipient relies on PwC’s report, it does so entirely at its own risk;
  2. No recipient will bring a claim against PwC which relates to the access to the report by a recipient;
  3. Neither PwC’s report, nor information obtained from it, may be made available to anyone else without PwC’s prior written consent, except where required by law or regulation; and
  4. PwC’s report was prepared with Hermes Property Unit Trust's interests in mind. It was not prepared with any recipient's interests in mind or for its use. PwC’s report is not a substitute for any enquiries that a recipient should make. The financial statements are as at 25 March 2016, and thus PwC’s auditors’ report is based on historical information. Any projection of such information or PwC’s opinion thereon to future periods is subject to the risk that changes may occur after the reports are issued and the description of controls may no longer accurately portray the system of internal control. For these reasons, such projection of information to future periods would be inappropriate.
  5. PwC will be entitled to the benefit of and to enforce these terms.
I accept
CLOSE

1. Select your country

  • United Kingdom
  • Austria
  • Australia
  • Belgium
  • Denmark
  • Finland
  • France
  • Germany
  • Iceland
  • Ireland
  • Italy
  • Luxembourg
  • Netherlands
  • Norway
  • Singapore
  • Spain
  • Sweden
  • Switzerland
  • USA
  • Other

2. Select your investor type

  • Financial Advisor
  • Discretionary Investment Manager
  • Wealth Manager
  • Family Office
  • Institutional Investor
  • Investment Consultant
  • Charity, Foundation & Endowment Investor
  • Retail Investor
  • Press
  • None of the above

3. Accept our terms and conditions

Proceed

The Hermes Investment Management website uses cookies to remember your preferences and help us improve the site.
By proceeding, you agree to cookies being placed on your computer.
Read our privacy and cookie policy.

Power plays

Challenges and changes in the utilities sector

Home / Hermes EOS Blog / Power plays – Challenges and changes in the utilities sector

In response to the financial crisis, some called for banks to follow the business models of utilities, pointing at the benefits of low risks and lower but steady returns of this capital-intensive and highly regulated industry and aim to gear it towards the needs of society overall. But how sustainable is the industry really?

Utilities are at the forefront of the fight against climate change. They are responsible for 25% of all carbon emissions globally and thus face the challenge to adapt to tighter carbon regulations. Moreover, although energy demand is still rising in emerging markets, and globally overall, in OECD countries it has been flat or even falling, adding to the pressure on utilities to change their business models. Innovation in investments and business models will determine the success of their transition towards a low-carbon economy.

Challenges
However, as utilities have traditionally been protected from the effect of economic cycles by monopolies and high entry barriers, they have had little incentive to innovate. Investors with a focus on dividends or credit saw a natural alignment with the consistent need for cash by states, which have tended to be the dominant shareholder in the industry.

Of all sectors, utilities are the most affected by climate-driven political choices. On top of political costs resulting from attempts to secure energy supplies, provide low costs for customers and create employment, institutional investors are concerned about falling prices, technological innovations and other disruptive changes to the power sector. Coal has suffered particularly, due to cheap gas in the US and climate policy in Europe. Even more remarkable is that executives of utilities are also becoming more sceptical about the sustainability of the business models. According to PwC, 70% of surveyed executives say that the current market models of power companies will not be sustainable and that they have to change rapidly.

The economics of change
The complexity and high stakes of utilities are now clear to all, but investors have long challenged the economics of the sector, which has seen the market value of a number of its constituents shrink significantly since 2008. For instance, in Europe major utilities such as EDF, Enel, E.ON, RWE have seen their combined market value more than halved over the past seven years.

Utilities

Data source: Bloomberg, own representation

 

Political interests still heavily weigh on decision-making, as recently evidenced by the plans of French state-controlled EDF to build a new £18 billion nuclear power station in the UK. EDF’s board, which was split on the decision, gave the go ahead only for the decision to be reviewed again by the UK’s new prime minister. Meanwhile in Germany, the four large utilities are challenging the government’s demands to pay £23.3 billion into a fund for the financing of nuclear decommissioning.

New models
Utility companies have responded differently and at different pace to the pressures from regulators and investors. For instance, the two largest German utilities companies, E.ON and RWE are undergoing major restructuring.

RWE will keep its conventional power generation and create a subsidiary focused on its grid, while spinning off its infrastructure, retail and renewables businesses, which will be listed on the stock exchange later this year in a bid to raise fresh capital. E.ON, on the other hand, has decided to keep its German nuclear exposure and renewables business within the company, while spinning off its upstream, global commodities and power generation businesses into a new company, Uniper.

Enel meanwhile has taken a different direction. By re-integrating its green power subsidiary and placing it at the heart of its strategy, the company has demonstrated its commitment to energy transition and sustainability. It has laid out a strategic shift towards profitable sustainable energy, backed by clear capital allocation and M&A activity. Going beyond the vision of renewables as a clear opportunity for growth, Enel has embedded corporate social responsibility into its process. Its new business model embraces innovation to help address the new energy paradigm.

Focus of our engagement
In our longstanding engagements with most major utility companies, we have encouraged them to ensure that their business models are fit for a low-carbon future. At times, we have insisted on enhanced reporting and climate risk analysis, appropriate expertise on the board and awareness training on climate change for directors. Therefore, we also engage with utilities to ensure they are customer-facing and consider innovating to develop consumer energy efficiency technologies.

In addition, to achieve more systematic change, we have focused on wider advocacy by contributing to the Investor Expectations of Electric Utility Companies developed by the Institutional Investors Group on Climate Change. The 2015 Paris agreement has lent unprecedented weight to our engagements and, indeed, to be successful in engaging with companies, public policy engagement remains crucial. The significant infrastructure investments needed by the industry require clear commitments from nation states to provide a consistent framework and reduce uncertainty and, to paraphrase the International Energy Agency, “repower the markets”.

By using the links above, you will be leaving the Hermes website. Hermes has no control over the content on third party websites.
Share this post:
Natacha Dimitrijevic Natacha Dimitrijevic is sector lead for pharmaceuticals and responsible for Hermes EOS’ investment stewardship programme in Europe. She engages with corporate boards and regulators on relevant governance, social and environmental issues to foster long-term value creation. Natacha is a regular speaker on governance matters. She is a member of the Eurosif policy group, the remuneration committee of the International Corporate Governance Network and of the French corporate governance association. She has also sat on the Access to Medicine Index expert review committee. Before joining Hermes EOS in 2007, Natacha worked at L’Oreal’s international audit department and in consulting, advising senior executives. She has degrees from the Institut d’Etudes Politiques de Paris and HEC School of Management and she holds the CFA Institute’s Investment Management Certificate. She has published a number of articles and a book on corporate finance.
Read all articles by Natacha Dimitrijevic

Find posts by author

  • Bill Mackenzie
  • Bruce Duguid
  • Christine Chow
  • Colin Melvin – Global Head of Stewardship
  • Darren Brady
  • Dominic Burke
  • Emma Hunt
  • Freddie Woolfe
  • Hans-Christoph Hirt
  • Jaime Gornsztejn
  • Jennifer Walmsley
  • Jon Brager
  • Justine Lutterodt
  • Karin Ri
  • Leon Kamhi – Head of Responsibility at Hermes investment Management
  • Louise Dudley
  • Mais Hayek
  • Manuel Isaza
  • Mark Sherlock, CFA
  • Matthew Doyle
  • Maxine Wille
  • Michael Russell, CFA
  • Naheeda Rashid
  • Natacha Dimitrijevic
  • Nina Rehrbein
  • Nina Röhrbein
  • Rochelle Giugni
  • Roland Bosch
  • Sachi Suzuki
  • Saker Nusseibeh
  • Tim Goodman
  • Victoria Barron

Find posts by category

  • Select category
  • environment
  • eos
  • governance
  • strategy