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Energy supply ‘in a tight spot’ as heat waves sweep Europe, strategist says

Tortoise Ecofin Portfolio Manager Michel Sznajer joins Yahoo Finance Live to discuss energy supply, the European heat wave, and the outlook for the energy crisis.

Video Transcript

[INSTRUMENTAL MUSIC PLAYING]

- A heat wave sweeping over Europe, with the UK bracing to bake in record-high temperatures, as Europeans look to cool down. This could spell bad news for energy prices. We are, of course, also watching the effect of the heat wave here in the US as well. We've had Texas telling, for example, crypto miners to shut down their operations to help preserve the reliability of the grid during a heat wave there. Joining us now for more insights is Michel Sznajer. He is Tortoise Ecofin Portfolio Manager. Thank you for being here, Michel. So, I guess, big picture, first of all, when you look at the heat that is sweeping, really, across the globe, are the electricity operators up to the task? Are we going to see rolling brownouts? Are we going to see the grid hold up?

MICHEL SZNAJER: Good morning, and thank you for inviting me. You know, I'm calling you from London today, and we are reaching historical highs, as you mentioned, probably 100 degrees today or tomorrow, so, really, record highs. With regard to electricity generators, they are really in a very tight spot, because we are already in a very tight supply environment due to the war in Ukraine, the Russia-Ukraine conflict. That put pressure on supply of natural gas. On top of that, we have a situation of very hot weather, very dry weather, and, therefore, hydropower is also under pressure in several regions, and that, again, is adding to the tightness on the supply of electricity.

The good news is, obviously, the sun is shining, and therefore we have record-high sun generation, but sun, or solar generation is still a small percentage of the total generation, and therefore not enough to compensate the weakness of the low level in gas, or in hydro. So we are in the summer, when, typically, we fill storage, especially natural gas storage, and, unfortunately, with the current climate, we're in a situation where the demand is above expectation, unusually high, and therefore somewhat capping the opportunity to store more and more gas for the winter.

- What has this done in terms of consumer prices in the region?

MICHEL SZNAJER: Oil prices have skyrocketed since the beginning of the year. As I mentioned, part of that, or the main reason was really the issue in terms of gas coming from Russia. And so, if, in many countries in Europe, the price of electricity, on the back of the price of gas, and the price of coal, and other commodities, the price of electricity has doubled, tripled, or more in some countries. In the US, you have also seen the price of electricity double in some regionns, and that has an impact on the consumer, typically with a time lag, but it will have to be passed to the consumer, both at the retail and on the business side.

- Michel, however, even though prices for the consumer, and, certainly, my electricity prices have been going higher, even though prices have been going up, are the utility companies making more money, because their costs are higher, on the one hand, and it's still a regulated business in many markets.

MICHEL SZNAJER: It is. You're right. So a lot of companies are not making more money. They're passing through the increase in costs to the consumer. Some companies that have hedged their supply, or that are generating electricity from other sources that are not seeing such inflation, are taking advantage of those higher prices, because they keep those economics for themselves. So if you have an open position in the market, or if you have a cost base that is fixed in nature, then you're taking advantage of those higher prices.

- What's the economic impact in the UK from the heat wave?

MICHEL SZNAJER: You know, it's a bit early to tell. At the moment, there hasn't been any rationing, there hasn't been any constraint on supply. We have plenty of gas. We know the UK is actually exporting gas to Europe at the moment, because we have less storage than Europe, so it's not unusual for the UK to export gas in the summer and to get gas back in the winter, so it has put a lot of pressure on people, as you mentioned, because the bill, the energy bill, has increased substantially. We are all seeing, or expect to see, our bill more than double this year. So it will have a domino effect on disposable income. The government is stepping in to help the lower-income population, but we would expect, if it stays like this, that, ultimately, something needs to happen. Either the government is going to have to intervene to send the price of electricity, or we'll have to support consumers much more.

- And, Michel, finally, very quickly, what stocks would you recommend that people buy as we see this surge in heat, the power companies that are best poised here?

MICHEL SZNAJER: Yeah, you want, at the end of the day, what the consequence of this is is that you need more renewable, and renewables are cheaper than the alternatives like gas and coal power generation. They were cheaper before, despite that we see in prices, so they're even cheaper now. You're going to see an acceleration in development of renewables. That's to the benefit of the key companies that are exposed to that in the US. It's companies like NextEra, like Clearwave Energy, or, in Europe, companies like Drax, in the UK, or ERG in Italy, or Encavis, for instance, in Germany.

- Thanks so much, Michel. Michel Sznajer, Tortoise Ecofin Portfolio Manager, thanks for your insight on this important story, as we see this heat continuing.