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Mid-Year Outlook 2018 | Gearing Up The Grid and Keep The Home Fires Burning

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Summary

In the final part of our series of Mid-Year Outlook articles, we look at the changes in demand on the electricity grid and why the UK stock market still presents an attractive opportunity.

In Gearing Up The Grid we look at how the electricity grid has seen falling demand due to more efficient appliances, however demand patterns could change with the growth of electric vehicles.

In Keep The Home Fires Burning we remind ourselves of the attractions of the U.K. stock market in the face of political difficulties. 

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    Gearing up the grid

    The demand for electricity in the UK runs to a very predictable cycle, building in the morning as people wake up, switch on lights and make breakfast and remaining pretty constant until the evening when they start to go to bed. Occasionally enormous spike occur, mostly relating to the end of a huge event of national importance – a sporting contest, a royal wedding or the revelation of a plot twist in Eastenders. The biggest ever spike occurred during the 1990 World Cup a couple of minutes after Chris Waddle’s wild slice as fans turned to drink – specifically tea – as an estimated 1.1m kettles were boiled.

    The grid is built to cope with this. Nuclear energy and renewables, which are difficult to switch on and off, provide the base supply and National Grid – which balances supply and demand on the electricity grid – switches various gas, coal, and hydro power plants on and off as demand rises and falls. Overall demand for electricity has been declining as consumers switch to more efficient televisions and lightbulbs.

    In recent months, however concerns have been raised about the effects on the grid from a new source of demand – electric vehicles – which may substantially increase the peak demand if everyone comes home and plugs them in at the same time. What changes to our infrastructure could we see in the years to come?

    We could see more gas plants as these are easy to switch on and off, however companies are reluctant to build more as they are expensive and tend to sit idle for long periods. We could see more Hydro – only 2% of supply at the moment – and more ‘electric mountains’ like Dinorwig Power Station in the Snowdonia National Park, which can release colossal amounts of water to generate power almost instantly. Again, these can be expensive.

    Interconnectors to draw power from other countries are playing an increasing role and, as their price falls, massive battery plants can help by storing energy generated by renewables and releasing it instantly as needed at peak times.

    However, as well as more generation, the grid will also need to become smarter to smooth demand. Software will be needed so that when you plug your car in at home, the battery in your car powers your home for several hours, before switching to being charged as demand on the grid eases overnight.

    The final piece of the jigsaw in the plan to cope with future demand is the physical grid itself; indeed National Grid’s earnings statement in May mentioned the word ‘investment’ 144 times. As well as upgrading the pylons and cables, they will need to link in many more small power generation sources, from offshore and onshore wind, to battery plants and biomass generators.

    At the city level it is also becoming clear that more infrastructure will be needed such as much larger copper cables. These are fine for carrying current to street lamps and houses but can’t cope with the much higher current and voltage needed for fast-charging vehicles.

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    Keep the Home fires burning

    The UK stock market has been lagging its global peers in recent years – Global investors are underweight the UK relative to other countries and a recent survey by Merrill Lynch suggested that the UK stock market was the least liked asset class of any globally Why has this happened and how do we feel about it?

    One reason is that the index is dominated by Oil, Gas and Mining names which are subject to moves in commodity prices. Another is that has a large number of Banks which are under severe regulation. And it lacks the technology names which now dominate the US and Asian markets.

    Global investors also cite the uncertainties over the UK’s future trading relationship with Europe and the instability of the current government.

    One of the reasons the UK stock market enjoyed a strong bounce in the past few months has been the high level of corporate activity. Those investors with longer time horizons – companies themselves – see great value in the UK and in the first five months of 2018, 13 of the top 350 listed UK companies had received or agreed a takeover offer. These bidders are looking beyond the short term political uncertainties and taking advantage of depressed valuations and even more depressed investment managers!

    After all, when you look at where British companies make their money (as shown in the chart) it is clear that the majority have low sensitivity to the ups and downs of the UK economy and may be a cheap way of buying international earnings.

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Key Takeaways

The electricity grid will need to grow and adapt to power not just the national rush to put the kettle on, but also our cars.

About Adam investments

We offer discretionary investment management to individuals and their families, and to charities. We take a long term approach to investing and we believe this gives us an advantage in a world where markets and media are increasingly focused on short term news.

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