Historically, investors have regarded investments in power and gas utilities as relatively safe, characterized by stable returns and low risk. In recent years, however, shareholders in these businesses have seen precisely the opposite, a reflection of the increasingly challenging business environment that confronts the industry. The magnitude and urgency of the challenges facing these companies vary by segment: conventional generation activities have already been hit hard, for example, while network activities have, so far, been relatively unscathed. Still, the industry confronts general risk and uncertainty that will likely intensify for virtually all of these businesses, with significant implications for their shareholders.

Over the past several years, notwithstanding these harsh conditions, a select few companies have managed to produce solid returns for their investors. We examine what these companies have done to achieve this—and what companies in the industry will need to do to maximize their TSR performance.

A Challenging Backdrop, but Winners Emerge

A combination of three significant forces has been battering power and gas companies in recent years. The first is deteriorating fundamentals in the generation market. Demand for power across the developed world is plateauing and even falling in some regions, the result of generally weak economic growth, increasing adoption of energy efficiency measures, and, in some years and locations, relatively tame winters. Power producers have also been hurt by the growth of distributed generation and utility-scale renewable generation, as well as related technological advances, such as energy storage solutions. Together, these developments pose fundamental challenges to merchant players with stakes in conventional production. These include lower wholesale power prices, fewer running hours for conventional plants, and a growing need to provide flexible dispatch of power. (In a number of U.S. states, these developments also threaten traditional regulated hybrids that are forced to determine how they can negotiate these changes while safeguarding returns on their traditional investments.) Gas companies, meanwhile, have been negatively affected by having much of their supply tied up in long-term commitments that limit their ability to react to changes in demand.