Fluctuating commodity prices may have boosted profits for the electricity giants in 2008, but increasing government scrutiny has prompted fears of a short sharp shock in the form of a windfall tax.
As Britain shivers in sub-zero temperatures, the politicisation of the sector has never been more apparent. Shortly before Christmas, electricity regulator Ofgem to power companies, threatening a referral to the Competition Commission unless further price cuts are passed on to customers.
Analysts have played down the attack as sabre rattling, but there is a real fear that regulatory intervention could cut margins at a time when commodity prices are forecast to rise. The other big worry preying on investors' minds in 2009 is financing issues as the credit crunch continues to bite.
International Power has seen its shares slump due to fears surrounding a £550m refinancing due next year, and Scottish & Southern Energy kicked off 2009 by announcing a placing of 40m new shares, in a move which is expected to raise £450m to £500m. Management say this is to help finance its £6.7bn capital programme to 2013, and potentially fund some smaller acquisitions. Yet its shares slid on the day of the announcement, showing that the market is cautious about equity raising.
Other electricity stocks could also experience weakness from the expectation of more rights issues in the utilities sector. National Grid issued a £350m bond in the new year at a coupon of 7.4 per cent, but analysts are not fretting, believing that the group's outstanding index-linked debt means it is better placed to deal with deflation.
Cash conservation is the name of the game at Drax, still reeling from a change in its dividend policy, which will see the operator of the UK's largest coal-fired plant pay out 50 per cent of net earnings from 2010, rather than distribute all excess cash from operations back to shareholders. This caused analysts to slash dividend forecasts by more than 50 per cent.
With the green credentials of renewable energy out of favour due to low oil prices, the focus is now on nuclear energy - and the Russian gas dispute only adds to its popularity.
EDF's takeover of British Energy has now gone unconditional, so UK investors seeking exposure to nuclear energy should look to Centrica, which hopes to secure a 25 per cent stake in the new company in the coming months. However, EDF has stated that it is open to other companies taking stakes in its new nuclear power stations proposed for the UK. This throws down the gauntlet for a sector that is increasingly .
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