United States Power Report Q2 2012

BMI View: With the US economy remaining on course for a slow recovery and our Country Risk analysts maintaining their growth forecasts for 2012 and 2013 of 2.0% and 2.4% respectively, both our short- and long-term view for the US power sector remain in place. Factoring in both industry-specific and macroeconomic factors, we believe that the US' mature electricity market will see a moderate rise in generation and consumption in the coming years. While we see consumption growth accelerating compared to 2011 (from 0.18% to 1.27%), the effect of widespread uncertainties over the renewal of federal renewables subsidies is likely to become fully manifest only after 2013.

The divergence in transatlantic economic activity remains fairly stark. Manufacturing data suggest the eurozone economy is languishing in recession while the US economy remains on course for a slow recovery. US manufacturing PMI has remained firmly above 50.0 (signalling expansion) while in the eurozone this reading has been below 50.0 since last July – a picture matched by industrial production, with expansion continuing at a solid pace in the US whilst activity in the eurozone contracts. In light of this, we see the power markets in the US doing combatively better, with consumption and generation accelerating in respect to 2011 levels.

Yet, accounting for previous capacity expansion booms as well as for the uncertainty introduced by fiscal austerity, we maintain our view that the power sector will see only moderate growth in the coming years. Electricity demand growth in the US has slowed each decade since the 1950s and BMI anticipates that the trend will continue, especially as efficiency gains are likely to offset any potential boost in demand for electricity.

This considered, we anticipate that investments in new electricity generating capacity will drop from current record levels in the coming years. Renewables projects are likely to take the most significant hit, while the clean energy sector attempts to drive down costs and become more competitive.

In light of these elements, key themes for the US power sector this quarter include:

The EPA announced plans to introduce greenhouse gas emission limits on new power plants in March 2011. In spite of this, BMI retains its view that the risk this poses to the US coal industry is overblown and the move will ultimately be insignificant to the US' overall energy mix. That said, the proposal does highlight coal's diminishing position as the fuel of choice for the US and further emphasises the shift towards natural gas.

A surge of acquisitions in the US solar sector have seen a wider variety of investors (including institutional investors and insurance companies) turning to the secondary solar infrastructure market to benefit from the long term, stable returns granted by solar Power Purchase Agreements (PPAs). However, this investment trend is not illustrative of the fundamentals, and consequently BMI maintains a bearish outlook for the US solar industry.

After a decade of continued growth in wind power installations in the US, BMI's forecasts for the coming decade are much less sanguine. As a result of the expiration of the subsidies and consequently the shrinking project pipeline, BMI believes that the boom in wind generation witnessed between 2000 and 2011 is unlikely to continue into the next decade.

In the case of offshore wind, we note that the US Energy Department announced a US$180mn initiative to build four offshore wind farms over the next six years in March 2012, with funding to be focused on developing innovative technologies aimed at achieving large cost reductions. In the meanwhile, Spanish wind giant Gamesa Energy won state approval to construct a wind turbine prototype off Virginia's Eastern Shore. Yet, we remain sceptical that the new offshore wind energy initiatives will prove a catalyst for change on their own. More policy certainty will be crucial in aiding development.