GLOBAL - UK investment trust Ecofin Water & Power Opportunities has reduced its exposure to non-regulated utilities in Continental Europe in favour of US and China, citing political interference and regulatory risk.
Ecofin chairman John Murray told IP Real Estate: "You had the German U-turn on nuclear power, but there's political risk across Europe, not just in Germany. Things are changing very quickly."
He said political interference had accelerated the company's move up the energy value chain to gain exposure to upstream fuels, infrastructure companies and private equity-type investments.
"Gas is everyone's favourite fuel for generating electricity, especially in emerging markets," he said.
In a note posted with results this week, the company acknowledged significant utilities underperformance and attributed disappointing results to uncertainty created by Invesco's sale in May of its shareholding.
Invesco had been its largest shareholder. Other shareholders include Ecofin's holding company's pension scheme, with 3.8%.
In addition to regulation, the note identified the "lingering effects of the recession" on the European power sector and a history of underinvestment in generating capacity.
The result had been shrinking reserve margins, higher power prices and increased capital spending by power companies.
However, Murray did not rule out a return to European utilities, forecasting European stabilisation and rising power prices over the next 12 months.
In the meantime, Ecofin will continue to invest in infrastructure suppliers, focusing on local and regional monopolies. He cited the company's investment in Eurotunnel and English water companies, which enjoy local and regional monopolies.
With a mandate that allows it to invest as much as 20% in emerging markets, Ecofin also plans to gain exposure to Chinese manufacturing via renewable energy suppliers. Ecofin's China fund has returned more than 20% since July 2009.
"It's a buyer's market," Murray said. "A few years ago, you couldn't get delivery of wind turbines, and manufacturers were charging premium prices. Now there's overcapacity, too many suppliers and no pricing power. It's changed dramatically, and you have cutthroat price competition.
"There will be consolidation in the industry over the next couple of years, which will leave fewer suppliers of wind and solar. It has attracted a lot of money. In short, the sector has too much money in it."
One of the company's largest Chinese investments is Cheung Kong Infrastructure (CKI), which this week announced that it would acquire Northumbrian Water Group with the approval of CAD107.5bn (€77.9bn) Canadian pension scheme OTPP, its largest shareholder.