Author: Ben Debski

Investor appetite for risk is expected to continue grinding down the low-yielding dollar after the US Federal Reserve’s commitment this week to open-ended purchases of Treasuries renewed the focus on the dollar as a funding currency.

“The issue that we have to look at is the financial side and the injection of money,” said Tetsu Emori, a fund manager at Tokyo-based Astmax Co Ltd.

The dollar was mired near 11-month lows against a basket of currencies. A declining dollar boosts the appeal of commodities as a way to preserve value.

The Reuters-Jefferies CRB index, a global commodities benchmark, rose above 312 points on Thursday to its highest since October 2008.

Gold, a traditional haven for investors shunning dollars and hedging against inflation, was above $1,380 an ounce, just below a record high of above $1,390 an ounce.

Later, the market focus will shift to a monthly US jobs report. Employment probably increased in October for the first time since May, a Reuters survey showed.

European shares dipped as investors took profit from six-month highs hit earlier on Friday ahead of the jobs data.

The price of oil has recovered almost half the ground lost between a mid-2008 record high and the low at the deepest point of the recession.

It was approaching the top of a $70-$90 price range, which Saudi Arabia’s oil minister Ali al-Naimi earlier this week said was acceptable to both producers and consumers.

But some analysts pointed out oil’s fundamentals have not recovered to the levels seen before the financial crisis in 2008.

However, some analysts cautioned whether the rally in oil prices would be sustainable.

“Although we are up again as of this writing in a number of commodity markets, including energy, we have trouble seeing how much longer the current run can extend to, given that at some point, higher commodity prices will lead to even higher inflation and interest rates in emerging countries,” MF Global said in its research note.

“Over the last few weeks, we have seen many Asian economies raise rates already, and there is talk that China may be poised to move again.”

Britain has announced an £850m support scheme for renewable heating projects, initially from June 2011 to 2014/2015.

The renewable heat incentive (RHI) will be the world’s first to pay directly for low carbon heat from projects to install biomass burners, solar water heaters and geothermal pumps.

Heating for buildings, water, cooking and industrial processes accounts for the vast bulk of Britain’s energy consumption excluding transport, mostly from burning fossil fuels and especially gas.

But electricity has so far dominated green energy incentive schemes both in Britain and globally: programmes to curb carbon emissions from heating have focused on support for building efficiency, for example to improve insulation.

One of the big potential applications is for centralised biomass burners, including combined heat and power plants, where these warm homes through community heating networks.

But that will be limited in Britain by a lack of a widespread, Scandinavian-style heating grid, experts said.

“It’s a fragmented, distributed business with small individual installations,” said Tom Murley, who runs a €500m renewable energy infrastructure fund at private equity firm HgCapital.

“What you’re talking about are businesses putting different kinds of boilers in people’s homes. It’s very hard to get any kind of scale, and so for our large investment funds it’s not attractive.”

Limit
Impax, a UK-based environment investment manager, agreed on the infrastructure hurdles facing widespread district heating.

Impax would likely use the RHI incentives to invest in anaerobic digestion projects, which trap the combustible greenhouse gas methane from food, farm and human waste, to inject this into the national gas grid, which is widely networked in Britain unlike community heating.

“That appears to be one of the larger opportunities in this space and probably of most interest to us,” said Ian Simm, chief executive of the firm which manages £1.9bn in assets.

HgCapital’s Murley doubted the returns to anaerobic digestion, pointing at high capital costs and vulnerability to commodity prices if crops such as maize are used as feedstock.

Specialist companies may be the biggest beneficiaries from the RHI scheme, deploying low carbon technologies including solar thermal, geothermal heat pumps and wood burners.

“It’s innovative and well-designed,” said Philip Wolfe, chairman of low-carbon services company Ownergy, and former director-general of the UK-based Renewable Energy Association.

“Pretty much all of the eligible technologies can be deployed at quite a large scale,” he said, adding he was advising on an industrial-scale solar thermal installation.

Britain’s planned, £1bn green investment bank would aid scaling out of heating grids, he added.

UK-based energy services company, Myriad, similarly welcomed the initiative. The company’s revenues have nearly doubled in the past 12 months following incentives for micro-generation of low carbon electricity, said chairman Jonny Wates.

“I think the same will happen for heat,” he said.

The government aims to get 12 percent of UK heating from renewable sources by 2020, compared with about 2 percent now, nearly half of which comes from burning wood, and will detail later this year exact RHI support levels.

“The government needs to confirm the tariff rates,” said Patrick Sherriff, director at Geothermal International which designs and installs geothermal heat pumps and other systems. “I think they will be larger (than previously announced) for larger installations,” he added.

Modernised water wheels and turbines are now included in the government’s feed-in-tariff (FIT) scheme, which financially rewards small-scale renewable energy projects.

Hydropower is already one of the most popular sources for new green energy projects as the Environment Agency says it has noticed a tenfold demand for hydropower permits in the past two years.

“This announcement will breathe useful life back into thousands of schemes all over the UK, and will attract visitors keen to learn about renewables,” said Renewable Energy Association (REA) Chief Executive Gaynor Hartnell.

The association, together with environmental group Friends of the Earth, had been campaigning for the inclusion of refurbished hydro facilities into the FIT scheme.

REA said it hoped that biomass and deep geothermal green power sources will also benefit from FITs in future.

The extension of FITs to refurbished hydro projects comes one week after the government announced in its spending review that green energy rewards would be maintained as they are.

“Feed-in Tariffs are here to stay and we confirmed last week that we don’t want to change the tariffs until 2013 to ensure ongoing investment in new projects,” Energy and Climate Change Minister Greg Barker said.

Ambassadors to the World Trade Organization from Brazil, China, the European Union, India and the United States agreed that much valuable work had already been done on Doha.

But they disagreed whether a lot or a little was needed to finish the talks, launched nine years ago this month to open global commerce and help developing countries prosper through more trade.

All restated long-standing positions, indicating how hard it will be to break out of the current impasse, but also suggesting they were readying for a final round of bargaining.

“They’re just positioning themselves. They’re marking out territory,” said one senior trade official.

The ambassadors, speaking at a WTO workshop on the impact of the Doha round, all agreed that give and take on all sides was needed to finish the job.

Discussions by key WTO ambassadors in recent months to brainstorm on Doha have brought a sense of movement to the talks, stuck since a meeting of ministers in July 2008 broke apart over differences over the core areas of farming and manufacturing.

The main features of a Doha deal would be a cut in distorting farm subsidies by rich countries to end trade distortions that hurt developing nations, while emerging economies would open up their markets for industrial goods. All would liberalise services such as telecoms and banking, which now account for the bulk of economic activity in most states.

Varying estimates
Estimates of the value of a deal like that vary widely, and the WTO workshop brought together leading trade economists to discuss the analyses.

Relatively modest forecasts of a boost to the global economy of $50bn a year from opening up farming and manufacturing could be improved significantly with more ambitious negotiations and liberalisation of services.

But the main benefit from a Doha deal could be locking in cuts in tariffs that countries have undertaken unilaterally, preventing protectionist backsliding and providing businesses with certainty for their investments, they found.

In any case, EU ambassador John Clarke said EU member states and the European Parliament would make a hard-headed political assessment of whether a deal created opportunities in different sectors, and created fairer conditions for developing countries, rather than looking at macro-economic studies.

Chinese ambassador Sun Zhenyu said China, which joined the WTO when Doha was launched, was not pushing for any particular concessions in the talks, but would benefit from a strengthening of the global trading system, and warned that the round was not primarily about opening markets for rich countries.

The fact that businessmen were now coming to Geneva to discuss the talks with negotiators was a sign of hope, he said.

“People are talking about a possible window in 2011,” he said.

US ambassador Michael Punke said what had been achieved was not insignificant – but nor was it sufficient, reiterating Washington’s call for big emerging economies to do more to open their markets.

“For us, what is very clear is the pain and what is not so clear is the gain,” he said, encapsulating a view voiced by most of the others, but which WTO Director-General Pascal Lamy said was a classical negotiating stance.

Ultimately the fate of the Doha round will depend on what the United States agrees with China and the other big emerging countries, although China and the United States have not so far got down to serious bilateral talks, diplomats said.

Brazil had nothing to gain from the industrial goods talks, and the proposals in farming were still disappointing for the world’s agriculture superpower, ambassador Roberto Azevedo said.

“In agriculture we’re not convinced we’re getting a lot but we’re moving in the right direction,” he said.

The telecoms provider said on Thursday the reduction in valuation liabilities to £40bn as of September 30 reflected this year’s government decision to link pension increases to the consumer prices index (CPI) measure of inflation rather than the retail prices index (RPI).

The liabilities assessment followed a detailed legal and actuarial review by BT and the trustee of the BT Pension Scheme.

Analysts at JP Morgan Cazenove said the reduction was equivalent to 27 pence per share after tax, reflecting CPI being generally lower than RPI.

BT said the move to CPI helped cut its pensions shortfall to £5.2bn at end-September from £7.9bn on June 30.

It said the shift to CPI will not be fully reflected in the deficit until the next triennial funding valuation in December 2011 and will have no immediate impact on an existing recovery plan, agreed with trustees, that will see BT pay deficit contributions of £525m in 2010 and 2011.

“However, clearly the change will materially improve the funding deficit given the implied reduction in future pension payments,” the JP Morgan Cazenove analysts said in a note.

Analysts reckon the government’s changes could particularly help companies with big pension deficits, including British Airways, BAE Systems, Lloyds Banking Group, Royal Bank of Scotland and National Grid.

Since liberalisation in 1999, the German market is as open to new entrants as the British market. Giants such as E.ON or RWE have added retail market share in Britain in recent years, while they have lost ground at home to municipal utilities and new market entrants.

The population with the second-highest savings rate in Europe after Switzerland, which coined the phrase “stinginess rocks”, has largely stuck with its roughly 800 municipal utilities rather than hunt for bargains on the power market.

Public opposition also has prevented the sale of at least 19 local utilities, mostly owned by the municipalities in which they operate, over the past 10 years, according to “More Democracy”, a movement that promotes direct democracy through referenda.

“It hasn’t been difficult to gather majorities against the privatisation of local utilities,” said Lars Holtkamp, a professor at Hagen University who specialises in municipal budgets and politics.

Germans’ preference for these so-called Stadtwerke is based on more than price competition. They give communities leeway to offer jobs to young people and finance loss-making services such as swimming pools and public transport, Holtkamp said.

“A local utility is closer to the citizen and can act differently when it’s under municipal control than when it’s owned by a corporation,” said Uwe Wiemann, spokesman of an intiative that prevented privatisation of the utility in the small town of Bad Salzuflen.

Germany’s wholesale energy market is dominated by E.ON, RWE, Energie Baden-Wuerttemberg and the German unit of Sweden’s Vattenfall, which control 80 percent of its power plants and more than half of its gas market, according to the cartel office, the country’s antitrust agency.

Keeping market share
But in the retail market, households and small businesses have been able to choose from dozens of big and small suppliers for more than 10 years, and more than half of them chose to stay with their local utility, their default provider, as of 2008.

In the retail gas market, three percent of customers changed their supplier in 2008, according to the Federal Network Agency, which oversees customer switches of suppliers.

In Britain, by contrast, the retail market is dominated by six large providers, four of them owned by companies based outside Britain, and incumbent suppliers had already lost more than half of their power and gas business by 2007, according to regulator Ofgem.

Germans even are in favour of higher power prices when they are needed to finance wind or solar generation, a survey from polling agency forsa showed.

“Being able to influence the local energy supply towards sustainable solutions is important to us,” said Reinhard Richter, managing director of the Energieverbund Dresden, a city business that holds the municipal utility.

The city of Dresden decided in March to buy back its local utility.

“Owning our municipal utility in the medium term contributes significantly to the city’s budget. Part of the reason is that we can rely on loyal customers,” Richter said.

The move by Dresden is part of a trend to reverse the privatisation of local utilities.

Last year a group of municipal utilities bought Thuega, a holding company with stakes in some 100 local energy suppliers. Now municipal suppliers are in the running to buy RWE’s gas grid and the power plants of Evonik, which holds Germany’s fifth-largest generation portfolio.

Publicly owned ventures are usually well run businesses, according to a study by Datamonitor. It compared large state and investor-owned utilities, and found that public utilities “post above-average profit margins and energy volume returns”.

It found that operating income per employee was lower, indicating the role the utilities play in local labour markets.

Successful acquirers of local ventures on Europe’s largest power market and second-largest gas market have either been owned by local governments or have adjusted strategies to consumer preferences.

“More than in other takeovers, buyers have to make sure they understand the ecological, social and regional interests of the municipal utility and its communal owners,” said investment banker Michael Hegel, managing director of Hegel Karbenn.

Hegel in 2008 advised the municipal owners of EWE, Germany’s fifth-largest utility, when they sold a quarter of the utility to Energie-Baden Wuerttemberg, the country’s fourth-largest power company, for €2bn.

In another example of strategy, MVV, the energy provider majority-owned by the southern German city of Mannheim, bought into eight local utilities, confining itself to minority stakes in all but three of them.