Temporary World Power Demand Is Set To Soar – And Aggreko plc Is Ready!

Emerging markets are prone to experiencing soaring energy demands driven by industrialisation, urbanisation and a growing consumer base. This growth often outpaces supply, leaving entire countries in the dark, and with worldwide power demand set to grow by more than 4% per annum until 2020, these incidents will become more and more common.

Even more disconcerting is the fact that by 2015, 25% of the world’s current power-generating capacity will exceed their average operating life of 40 years, and these aging systems will be prone to failure.

But who are you going to call when a power cut strikes?

Aggreko (LSE: AGK).Aggreko

Let there be light!

Aggreko is the global leader in temporary power supply. Its local business supplies anyone from film studios to farmers experiencing power cuts, while its power projects business often steps in to support the power demands of entire countries. Wherever energy infrastructure fails, Aggreko is ready to save the day.

Aggreko estimates a worldwide shortfall of power generating capacity of 230 gigawatts (GW) by 2020. To put this gigantic figure into perspective, this is 24 times as large as the amount generated by Aggreko’s entire fleet of generators, and it owns the biggest in the world.

Even if these estimates aren’t completely accurate, there is clearly growth to be had in the sector, but the question is, will Aggreko still be the frontrunner in temporary power in the future?

I believe so, and here is why. Unlike competitors, Aggreko constructs and maintains its entire fleet in-house.

In-House Excellence

This grants Aggreko a number of operational advantages over its competitors. They gain a 20-40% cost advantage over rivals simply by cutting out the middle man and by bulk buying their own materials at reduced cost. Machines at the end of their lifecycle can be recycled by swapping outdated parts for new at half the cost of a buying a replacement model.

As a result, the company has maintained an unusually high return on capital of over 20% for years, an impressive rate of return for a business in an industry that is so capital-intensive. If Aggreko continues to outperform their rivals on reinvestment of capital, they should, over time, produce greater shareholder returns.

Designing their own fleet has advantages above cost. An Aggreko generator will be moved hundreds of times in its life, whether by truck, ship or aircraft, and may be expected to work faultlessly in the Saudi Arabian Desert one week and Siberia the next. Bespoke design allows generators to operate in these demanding conditions. The exceptional robustness of an Aggreko machine is well known among customers, and results in them being happy to pay the same rent for a ten-year generator as they would for a brand new one. This, combined with the lengthy lifespan of the products means the business earns a significant amount per machine.

Power Play

The in-house fleet supplies Aggreko with its primary competitive advantage; better machines than competitors and a lower cost base. And good luck to anyone trying to replicate this strategy, unless they have world-class expertise and a spare £2bn kicking around to build a state-of-the-art fleet!

To top it off, they operate in a rapidly expanding market and their key advantage seems unassailable.

The temporary power business is driven by events such as power cuts and so earnings can be lumpy, resulting in volatility in the stock price. We Fools view this short-termism as an opportunity to buy into quality shares, and Aggreko certainly ticks all the boxes.

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Zach Coffell has no position in any shares mentioned. The Motley Fool UK owns shares of Aggreko. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.