Citi said “demand destruction” was now the key sector risk for European utilities and the outlook on that front had “deteriorated materially over the past three months”. That risk was concentrated on the German utilities, it said. Referring to the UK, it anticipated demand growth of “a solid 4 per cent” over the period to 2015.
Two other major sources of risk had eased. One was financial risk, where Citi pointed to the €50 billion (£41 billion) of cash on utilities’ balance sheets, successful refinancing of €20 billion (£17 billion) and securitisation of some government debt.
The other was regulatory risk, which Citi said remained but was lower. It said electricity prices would have to increase above inflation to maintain incentive payments, which was politically sensitive, but it considered that government emphasis on investment would remain steady, and that there would be a counterbalance in the form of lower gas prices, so the overall risk of government intervention was low.
Water companies, Citi said, were among the least risky investments in Europe because they had low regulatory risk and “solid financial structures”.
This article first appeared in Utility Week’s print edition of 20 January 2012.
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