Renewable generators and regulated networks are currently safer bets for investors than incumbents in the retail sector, according to new analysis from Macquarie Research.
Despite regulators’ “squeeze” on profits, the company still expects network operators – National Grid and the three listed water companies – to generate “attractive” long-run returns.
It said investors have overestimated the risks of renationalisation under a Labour government, with the market applying an excessive premium: “We believe the stocks offer superior returns for those willing to take the political risk.”
Meanwhile, the renewables sector is set to enter a “golden decade” as progress towards decarbonisation gathers pace. The potential to increase the flexibility of the electricity systems means fears of a collapse in power prices due to cannibalisation are overblown.
RWE, which is set to become a “renewables supermajor” following its asset swap with Eon, will therefore offer “outstanding returns”, in spite of the risks surrounding its remaining coal portfolio.
Incumbent retailers, by contrast, will “struggle to adapt” to the technological disruption brought by scalable, cloud-based back-end systems and price comparison websites.
The introduction of a market-wide cap on default tariffs will also dent their margins. There still remains “a very large price gap” between the standard variable tariffs of new entrants and the big six, and their hopes that the price cap would reduce switching rates have “so far proved unfounded”.
Macquarie warned investors to dump stocks in Centrica, which it believes will be forced to slash its dividend in half to maintain its cash flow, and also urged caution over SSE, Eon and Drax.