Growth in production capacity matters to future investment

Companies borrowing heavily to finance development of new energy resources is not a concept that is limited to the renewable power industry.  Indeed, it has long been a hallmark of oil and gas exploration and production.  Investors have been willing to provide equity and debt capital to an industry that supplies products for which demand is steady, if not growing gradually, and doing so with ever-greater efficiency from harnessing new technology.  It's a great story -- wonderful for consumers -- and one that has been shared across the energy spectrum.  

Except that returns to investors have been uneven at best over the past several years and disastrous recently in the oil and gas sector, brought about by this year's especially sharp decline in commodity prices.  The impact has been especially severe in the upstream segment where capacity growth was most pronounced.  Commodity prices, which many assume to remain steady or gradually rise, often do the opposite.  And, despite various means of managing exposure to them, the financial performance of many energy producers remains highly geared to energy prices.

Investors are no longer tolerant of oil and gas producers' focus on growth while all of their competitors do the same thing.  Investors have curtailed their appetites or otherwise raised the cost to producers seeking to finance new capacity.  The result is a greater focus on discipline -- keeping production as steady as possible with less capital spending -- at the expense of growth.  Commodity prices might rise in the future to allow better returns, but the collective attitude is that no one should count on it.

A similar attitude should apply to the power industry, but one doesn't get such a sense from reading the analyst reports.  This is especially true among those whose interest is in seeing more development of renewable resources but not shouldering the risk.  Power prices have followed a similar trajectory to natural gas - downward - over the past several years largely because the power sector has its own capacity issue.  Excess capacity is only getting more severe as investment in renewables ramps up but there isn't such a focus on capital discipline as in oil and gas -- at least not to the same degree.  There are reasons for the difference but it's important to consider the similarities.