Why Electric Utilities Might Be Set For A Huge Global Shakeup – Part 1

Most of us sleep with our air-conditioners or fans on throughout the night. We store food in refrigerators. We depend on our mobile devices and computers for work and leisure.

It’s hard to downplay the importance of electricity in nearly everything we do. In fact, electricity has become such a ubiquitous and natural thing in our lives that I think most of us never give a second thought to the electric utility companies that provide us with power.

But, there may be an interesting global shakeup happening with electric utilities and it deals with the concepts of a Supergrid and distributed power. In this article, I’d describe the Supergrid and its importance. In a separate piece found here, I’d be touching on distributed power. So, let’s get started.

A Supergrid

The State Grid Corporation of China might not be a household name to most people outside of China. But, it is actually at the forefront of the Supergrid concept for the electric power sector.

The company, a state-owned enterprise in China, is the largest electric utility in the world and is responsible for the bulk of electricity distribution in China. It currently has more than 1.9 million employees and recorded revenue of more than RMB2 trillion (S$ 420 billion) in its last financial year.

State Grid has been busy snapping up electric utility companies in other countries and has stakes in power assets in countries such as Brazil, Australia, Philippines, and Italy. These investments and more are part of State Grid’s push for the idea of a global Supergrid.

The company wants to connect the electrical grids of all countries around the world. In theory, if there’s a Supergrid, countries can buy electricity that are produced from all corners of the globe; Singapore could get power from say, Australia or Africa.

It’s not going to be cheap to form a Supergrid; State Grid estimates that it would cost US$50 trillion to develop it. For perspective, the US’s gross domestic product in 2014 was US$17.4 trillion.

Although the plan might sound farfetched, many companies have already started to jump on board with the idea. Earlier this month, companies such as Korea Electric Power, Russian power company Rosseti, and Japanese conglomerate Softbank, had signed a memorandum of understanding with State Grid to pursue the development of an “Asian super grid.”

If those companies happen to be successful in transforming the electric utilities industry, what might it mean for other utility companies in this region? How might the super grid affect national utilities such as Malaysia’s Tenaga Nasional Berhad (KLCI: 5347.KL)? What would the effects be on companies and business trusts in Singapore that produce power, such as Sembcorp Industries Limited (SGX: U96) and Keppel Infrastructure Trust (SGX: A7RU)?

These are all interesting and important questions that may not have easy answers.

A Foolish summary

Even though many investors see electric utilities as a defensive and slow-changing type of industry, it is important to note that changes can still happen. As the saying goes, the only thing in life which is constant is change. As things change and evolve, it is our job as investors to consider how the transformations may impact our investments.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn’t own shares in any companies mentioned.