London, 31 May 2010

The next bonanza for the utility sector may be at least five years away. After the recession ended a boom in commodity prices that fuelled the best period since at least 1990 for utilities' earnings and share prices, investors will have to wait that long for a repeat, according to executives and investors at the Reuters Global Energy summit.

European markets could remain oversupplied with gas until 2015, said Carlo Malacarne, the chief executive of Snam Rete Gas , the operator of Italy's power grid.

RWE Chief Operating Officer Ulrich Jobs said he expected sufficient supply of gas for at least two years, possibly for another five years.

Low gas prices due to an oversupply are dragging down profits because utilities supply gas, but they also have a much wider effect on power prices. Lower gas prices have brought down the price of power, which was driven higher by buoyant coal in the heady days of 2003-2008. Coal prices are higher than gas but much lower than they were during those years.

The prices of gas-based power are now close to nuclear power, usually the cheapest large scale source, according to analysts such as UniCredit's Lueder Schumacher. Demand from emerging markets mostly in China had propelled coal prices to previously unseen heights until July 2008.

While most of that demand is still there – the Organisation of Economic Co-operation and Development estimates China's economy will grow 11.1% this year – European and Asian prices have diverged, according to executives such as E.ON's Tony Crocker, head of the company's trading operation.

Coal delivered on the Pacific Ocean and mostly delivered to Asia – is more expensive than coal delivered on the Atlantic and mostly delivered to Europe – as demand in Europe has shrunk because of the cheap gas. Feedstock substitution is not a major factor in Asia.

In order for global coal demand to drive European power prices, European coal markets have to follow Asian prices again, Crocker said. "We see good supply of gas for the next 18 months ... it's got to happen after that," he said.

Utilities consider other drivers for the power price equally unreliable. Several, including Denmark's Dong and RWE, Europe's largest emitter of carbon dioxide, are suggesting a government-guaranteed minimum price for certificates for carbon dioxide emissions.

That indicates that they do not think they can rely on prices for permits picking up again even when utilities will have to fully pay for them from 2013. High carbon permit prices were one of the factors behind the last power bull run.

As there is little hope from the supply side of energy markets, some are hoping that customers might make up for that. A very bitter pill for the industry has been that demand – usually taken for granted as the services are essential for much of today's life – has slumped so strongly: the key factor, industrial demand, is where it last had been a decade ago.

A quicker pickup in demand than anticipated – companies right now expect demand to be back at 2008 levels in the middle of this decade – would therefore lend a helping hand and might be one of the few chances of a quicker recovery.

"Everything will depend on industrial production," said the chief executive of the Prague power exchange, David Kucera. But even if that was to boost power prices, higher prices feed through to earnings with a time lag as utilities sell most of their power up to three years before they generate At the end of last year Germany's E.ON , the world's largest utility by sales, had already sold at least 80 percent of the power it was going to generate two years later. Large players with business outside the continent are therefore betting on other areas.

"Growth in Europe will be limited," said Gerard Mestrallet, chief executive of GDF Suez , Europe's second-largest utility by sales. The STOXX index of European utility shares is the worst-performing benchmark this year, just as it was last year.

Some companies are taking the lead from investors and are putting their money elsewhere: "We are looking for growth outside Europe," GDF Suez' Mestrallet said.

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