Electricity and Water: Scarcity Will Drive Prices Upwards

Today we're going to talk about utilities, if for no other reason than because I got my son the board game Monopoly for Christmas. I remembered playing the game when younger, and thought it was about time that he learned the value of money. Thinking back, I recall those two utilities in the game, the "Electric Company" and "Water Works", neither which truly excited me as investments. There were only two of them, set far apart on the board from each other so that it was unlikely someone would land on either of them. Besides which, the rates were never set, as they were dependent on the dice roll. That said, right now may be a good time to invest in utilities, as fate may have just turned up a pair of sixes.

There are two types of utilities, the ones that deal with energy and the ones that deal with water. Both energy and water are becoming increasingly scarce commodities internationally. As scarcity drives up prices for both, those companies that either deliver or provide these vital commodities will be sitting in a lucrative position. Just like oil companies back in 2007-2008.

Utilities drive other businesses. Energy is necessary for every modern industry. Water is essential to life, and to agriculture. Even during recessions, utilities do well.

Energy Providers

A year ago, Adam Feinberg wrote on this blog about the probability that increased investment in energy utilities will see IT companies flourish as they provide electrical utilities with infrastructure to make them more efficient. We are seeing this happening, and we are also seeing an ever increasing investment in green technology as it relates to all utilities.

I note, however, a recent post by Jim Cramer of CNBC, in which he mentions Emerson Electric (NYSE: EMR). It should be noted as well, that Emerson's CEO is remarkably cynical about the US government's stimulus activity during the downturn, and that Emerson is looking internationally for growth rather than in the US. That means that with half its business international, Emerson will do all right even if the US economy remains sluggish.

Another company to look for is FPL Group (NYSE: FPL), which gets over half its energy from renewable sources. Two others to watch are Exelon Corp (NYSE: EXC) and Entergy Corp (NYSE: ETR), the top two producers of nuclear energy. Odds are nuclear will factor into any carbon lowering agenda.

Look too at smart grids, which will save consumers from 10-30% on their monthly bills and other such technology that controls electrical consumption. Prices of energy will have to increase significantly, however, according to studies of consumers and their likelihood of using the system.

Water Suppliers

Living at the tip of Africa, I recognize the importance of water. Just to the east of us, a drought has made water so scarce that reservoirs are drying up. Salt desalinization plants are being built along South Africa's Garden Route in response to the lack of water that is bringing communities there to their knees. Here in Cape Town, in some of the poorer areas, households are limited as to how much water they can have. Whether this is due to climate change does not really matter, though this may be a precursor of it. Water utilities will have to start using ever more drastic measures to ensure that people conserve.

Water utilities are in a good position. According to William S Brennan:

In a low growth environment... water utilities bought at the proper valuation metrics, provide just that opportunity. A basket of high yield water utilities such as American Water (NASDAQ: AWK), American States (NYSE: AWR), Cascal (NYSE: HOO), United Utilities (OTC: UUGRY) and certain Hydro electric companies such as CEMIG (NYSE: CIG) should be considered by investors that are in search of sustainable yield and stable growth.

All in all it will be those energy and water utilities that seek to cut carbon emissions, conserve finite energy and water resources, and aggressively pursue renewable energy that will be in the best position, as governments seek green energy alternatives and deal with issues of scarcity. Consumers too will hop on the wagon if energy or water prices rise significantly.