The utilities sector includes providers of electric, natural gas and water utilities. The financial results of utilities firms do not vary significantly with the business cycle, mostly because they provide basic services and often operate in monopolistic conditions. The sector is also heavily influenced by regulation, with monopolies and large energy consumers requiring increased government oversight. Europe is the largest contributor to revenue, with its large economies and inflated energy costs. China is one of the fastest growing geographies due to construction, increasing environmental protections and general economic growth.
Revenue by Geography
Global utilities sector revenues were most heavily exposed to the United States in 2015, with 21.2% of all sales coming from that country. The United States was followed by Japan with 11.9%, the United Kingdom at 8.9% and China with 7.7%. France, South Korea, Germany and Italy rounded out the top eight exposures in order, with contributions ranging from 4.6 to 5.1% of global revenues. These figures indicate that nominal gross domestic product (GDP) and GDP per capita are both important determinants of sector revenue exposure.
All of the top contributors are among the 11 largest economies in the world by GDP, and their rankings in both categories are very similar. However, China is the only emerging market economy in the group, and its contribution is disproportionately small relative to the other major contributors. Additionally, India and Brazil are noteworthy large emerging markets that do not crack the top list of countries by utilities sector sales exposure. Regulation leads to higher energy costs in advanced economies, while developing economies often prioritize growth over environmental concerns. Reduced regulation leads to lower energy prices for consumers, dampening utilities revenues in emerging markets.
These conclusions are also supported by regional data. Europe was the largest regional contributor, with 38.1% of global utility revenue exposure in 2015. This was followed by Asia Pacific at 30.9% and the Americas at 29.9%. Africa and the Middle East combined were a distant fourth at 0.9%. Emerging economies only contributed 23.4% of total utility sector revenues, while frontier economies offered a minuscule 1.2%. Developed economies made up nearly 75% of global sales. Utilities is the only sector in which Europe is the heaviest regional exposure. Energy regulations in many European countries play a significant role in this relationship, because energy is generally much less expensive in the United States and large emerging economies that are not as strict on carbon emissions.
Trends Over Time
Italy's contribution to global utilities revenue fell 11.1% in 2015, making it the most significant change among the high-exposure countries. This marked a reversal of trend from the prior year. Germany's exposure fell 7.5% year-over-year, sustaining a multi-year downward trend. France and the United States both experienced more modest declines. Currency played a role in the decline, with the euro depreciating relative to the dollar. Falling commodity prices also contributed heavily to utility revenue drops around the globe. Regulatory changes and renewable energy initiatives were important in Italy and Germany, where demand for fossil fuel energy fell.
China experienced the largest growth in utilities in 2015, rising 7.9% year-over-year and sustaining a multi-year trend. The trend is being spurred by general economic growth, strong construction statistics and rising per capita income. Japan, South Korea and the United Kingdom all experienced low-to-mid single-digit growth in 2015.
Utilities revenue exposure to the Americas region is expected to stay roughly flat in 2016, while that of the Asia Pacific is expected to expand 130 basis points to 32.2% at the expense of Europe, which is forecast to cede 130 basis points. Exposure to developed economies is expected to decrease less than half a percentage point, which should get picked up by emerging economies. This relative lack of volatility is attributable to the nature of the sector and to anticipated stability in energy prices through the last three quarters of 2016.
