UK big 6 utility investment trends: a report for Greenpeace UK on the generation investments of the big 6 utilities

Executive Summary

Energy prices in the UK are a political hot potato, with front pages
pointing the finger at geopolitics and rising Asian demand, green energy
policies and company profits. As a result, the Big 6 energy suppliers have
come under heightened scrutiny, in particular over their profitability and
spending on new capacity. This report analyses the Big 6's investment
choices in the light of their financial situation and the implications for
the UK government's aim to source 30% of electricity from renewables by
2020.

•Scottish Power, owned by Iberdrola, and SSE have made the largest
commitment to renewable investment with over 80% of their new capacity
investment going to the renewables sector since 2006. These investments sum
to over GBP 2.25bn each over the period.

•EDF Energy and Centrica have made the smallest investments in fossil and
renewable new capacity, each spending around GBP 1.25bn since 2006. It is
unclear whether they are keeping their powder dry for nuclear new build or
have simply not seen sufficiently attractive investment opportunities to
persuade them to invest in more generation.

•Since 2006, RWE npower has spent almost GBP 4.5bn on thermal and
renewable generation, with 60% of that investment going to renewables. This
is almost twice the investment, and more than twice the capacity, of any
other Big 6 company.

•E.ON UK, in common with RWE npower, has over 30% of its capacity due to
retire by 2015 to comply with the LCPD. It has invested GBP 2.1bn on UK
capacity since 2006, with two-thirds of that going to renewable capacity.

•Investment in new capacity is slowing as a recession-induced fall in
power demand and new renewable and gas capacity have led to low prospective
returns for fossil-fuel build. The financial crisis has made obtaining
project finance a challenge, and for both renewable and fossil plants this
has been exacerbated by the uncertainty around Electricity Market Reform.

•Centrica has the lowest net debt/ebitda (earnings before interest,
taxes, depreciation and amortisation), indicating a strong balance sheet.
It has the highest dividend payout ratio and the lowest capex/operating
income ratio, suggesting that it may see better value in returning capital
to investors over capital investment compared with the other Big 6
utilities. Investments in recent years have been concentrated in upstream
gas as a hedge for the downstream electricity and natural gas business.

•E.ON has the lowest operating margin at both UK and group level, the
second highest net debt/ebitda and a significantly higher capex/operating
income ratio at the group level than in the UK. Its lower-than-average
renewable build, average thermal build and upcoming retirements imply it
may see better opportunities for its limited capex budget outside the UK.

•EDF Energy has a high capex/operating income in the UK, together with a
mid-ranking dividend payout ratio and net debt/ebitda. But it has built
less than one-third of the capacity delivered by RWE npower. This
illustrates the substantial capital expenditure required for the existing
nuclear fleet and prospective nuclear new build. Expenditure on new nuclear
capacity is not counted in our investment numbers as it has not yet reached
final investment decision.

•RWE npower has a high capex/operating income in the UK, plus a
mid-ranking dividend payout ratio and net debt/ebitda. It has built over
2.5 times the new capacity of any of its Big 6 peers, indicating a
strategic push into the UK market.

•Iberdrola, the parent of Scottish Power, has been looking to invest its
cash, as it has the highest capex/operating income at group level, highest
operating margin, highest net debt/ebitda and lowest dividend payout ratio.

•SSE has the second highest gross renewable build with the second lowest
capex/operating income ratio. It has the second highest dividend payout
ratio, after Centrica, indicating the importance major UK investors,
particularly pension funds, place on dividends.

Please download the full report for more detailed analysis.