This week has seen fears surrounding electricity blackouts come to the fore, with National Grid (LSE: NG) (NYSE: NGG.US) warning that they pose a real threat over the course of the next winter.
The main reason for the so-called ‘energy crunch’ is generator closures, with breakdowns also a contributing factor. In fact, spare electricity capacity has fallen from 17% of consumption three years ago to just 4% today. This means that, while blackouts may not occur, they are undoubtedly far more likely than in previous years.
So, does this mean that investors in National Grid, SSE (LSE: SSE) and Centrica (LSE: CNA) should worry, or is it unlikely to hit their share prices in the short run?
Blackouts
Of course, the current spare capacity levels remain within those set out by the government and, although they have fallen over the last three years, they remain higher than they were prior to 2007. Therefore, while talk of an ‘energy crunch’ makes for good headlines and fits in well with the political discussion of a cost of living crisis, it seems as though the chances of it occurring are no higher than they were in recent years.
Utility Stocks
That said, if a blackout were to occur, it could hurt sentiment in National Grid, SSE and Centrica. Customers would complain and it would tie in neatly with the political climate of the day, which surrounds a lack of investment in our electricity network, environmental concerns and a cost of living crisis. In other words, it would be easy fodder for politicians and, as such, could put all three companies under considerable political pressure in the short run.
Looking Ahead
Even if blackouts do occur and hit sentiment in the short run, all three companies offer a strong longer-term investment case. For starters, they all have fantastic yields of around 5%+ and, perhaps more importantly, are increasing dividends per share at a faster rate than inflation. In addition, they all trade on valuations that are relatively attractive, with National Grid having a price to earnings (P/E) ratio of just 13.5 and SSE and Centrica having P/E ratios of 12.5 and 11.1 respectively.
So, while sentiment (and their share prices) may come under pressure this winter if there are blackouts, all three companies seem to offer an attractive mix of income and value. This means that a fall in share price could signal a buying opportunity, rather than a cause for concern.