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Demand for energy falling as recession deepens

reposter | 03.03.2009 12:24 | Analysis | Energy Crisis | Globalisation | World

Falling demand for energy and tighter margins has started to bite into the record gains made by energy companies over the last couple of years. The papers are today reporting that the Drax group shares are trading near a record low on the announcement of a small drop in profits between 2007 and 2008 while demand for electricity in the UK apparently fell 4.3% in the last quarter of 2008 and looks set to continue to fall as the recession deepens.

Drax profits slips on narrower profit margins
By Bloomberg - 03 Mar 2009

Drax, the owner of western Europe’s biggest coal-fuelled power station, said profits slipped last year as it made less money selling energy.

The group's pre-tax profits dropped to £443m last year from £449m in 2007, the company told shareholders today.

Drax’s profits are reliant on the so-called UK clean dark spread, a measure of profit for coal-fired plants that allows for fuel and carbon-dioxide emission costs, and wholesale power prices.
Shares in Drax are trading near a record low on speculation profit margins will narrow further as the economic slowdown reduces energy consumption.

Chief executive Dorothy Thompson said: "During 2008, we delivered a good performance against a backdrop of extreme movements in commodity prices."

Drax still intends to build three biomass-fueled power stations in the UK with Siemens, generating as much as 15pc of the country’s renewable power in 2014. The plan has required a change to Drax’s dividend policy, allowing it to keep 50 percent of earnings starting 2010.

British power output fell 4.3pc in the fourth quarter and the worst recession since World War II is curbing demand as businesses cut production and jobs. Rival RWE said last month that below-average temperatures in the first months of this year countered a decline in power use by industry.

reposter

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Good to have a drop in demand but

03.03.2009 13:55

Talking about electricity and engineering isn't sexy enough for the average guy on the street, but they will be talking about it soon...

Since the privatisation of power generation in this country private companies have been happy to make money from running power stations, especially turning on just at peak hours to gain the highest price per unit electricity (even on coal plants that suffer from being turned on and off and are less efficient doing this). However these private companies have been unwilling to invest in new power stations as the size and duration of the investment can be bigger than they're prepared to accept. A company may not want to invest in something ,like a hydropower dam, that may take 50 years to break even but last for 150 years, whereas something like a gas plant which may break even in less than 5 years but only last 20 is seen as a good investment. The state is better placed in this situation to build/finance longer term projects such as large hydropower or even Nuclear plants.

This means that for nearly 20 years virtually no new power stations have been built in the UK, and many of the ones we have will soon shut down due to old age or not meeting the conditions of the Large Combustion Plant Directive. In short, the UK will soon be having blackouts like South African, and then everyone will be talking about electricity. This 4% drop in demand is probably caused by economics and not us all being more energy efficient. This drop also won't stop us needing new power stations.

We need to be much more efficient, both domestically and comercially, with electricity, and we need new stations. Personally I'd like to see more commitment to funding renewable technologies that are in the expensive development stage after prototype and before being totally refined technologies. This takes investing in increasingly more efficient and closer-to-profitable iterations of a design, something companies will avoid if they can just by a coal plant: coal already has the advantage of over a century of design refinement shown in its current low cost and many renewable technologies will never be given a chance if their designs are not built, iterated and refined.

McQn


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