Private Investor: Utility horror story hides opportunities in the energy sector

The energy market is becoming too much like a horror movie: you simply cannot hide your eyes. Prices soar to new records with yet another terrorist strike or a geologist's doomy warning. This hits us all, as savage destruction is wreaked on the family budget through higher petrol, gas and electricity bills.

The energy market is becoming too much like a horror movie: you simply cannot hide your eyes. Prices soar to new records with yet another terrorist strike or a geologist's doomy warning. This hits us all, as savage destruction is wreaked on the family budget through higher petrol, gas and electricity bills.

Then you make the mistake of letting your grip on your calculator relax as prices slip back. You think you have worked out the plot and the worst is over. But yet another frightener appears - corporate-profits forecasts beginning to shrivel. British manufacturers have asked for an emergency meeting on energy prices. The consequence could be at least 15 per cent wiped off stock market prospects.

Higher energy prices should, it is surely not unreasonable to think, ensure a booming energy industry. But that is not always the case. Energy price volatility makes the major producers reluctant to commit funds to exploration until the last moment. This energy industry lore is not generally discussed. The timing lag has emerged only to thwart the hopes of us naïve optimists who planned some budget balancing, boosting investments to fund rising domestic bills.

For decades it has been known that North Sea oil and gas had limited life. Yet British Gas is blaming the depletion of reserves there for forcing it into the expensive import market. It is saying this is the reason for the latest swingeing price rises of 12.4 per cent for gas, 9.4 per cent for electricity. It needs urgently to put billions into finding new supplies.

Centrica, which owns British Gas, is at least doing something to hold onto its investors. While it doesn't care if it loses a million or so of the 18.4 million of us who use its services (inertia is likely to hold most), there is a 23p-a-share special dividend in the pipeline. That did not stop brokers giving it a pasting, saying the shares justify only current levels.

The clutch of utility shares in my portfolio, bought in the original 1986 privatisation campaign to Tell Sid, need some attention. There is my small clutch of Centrica shares and some National Grid Transco - poised to hand back £1bn-plus to shareholders after the sale of four of its regional gas distributors. Both have had a very good run, with Centrica gaining 40 per cent in the past six months.

It's probably prudent to take a little profit. Since I intend to switch to a cheaper gas supplier I should have spare funds to put elsewhere, probably again in energy. But what to choose?

British oil-service companies are not having a good time on the whole. Historically important fields for them, like the North Sea, are seeing production declines and it takes time to build business in the new areas of Russia and offshore West Africa. But I might consider a little inspection company called Sondex, which is forecast to see a huge hike in profits.

"Green power" would seem a sensible choice, though government enthusiasm has not helped much. Cock-ups rather than conspiracy have left many schemes floundering. The Ministry of Defence has objected to half the wind-farm proposals on grounds of radar interference. Others have been scuttled because they straddle shipping lanes. Local councils have gone slow on granting permissions because of the green lobby. But Scottish & Southern has been a strong investor in green energy. Johnson Matthey is working on fuel cells, and AEA Technology's consultancy business offers a spread of exposures.

The little exploration companies who are forerunners for the major companies in some of the nastier, but minerally rewarding, parts of the world are worth a look. Their business plan is for a mega-find that attracts a BP to be a joint partner or bidder. Perhaps they are for those bolder than me, but Cairn Energy in Rajasthan, Burren in Turkmenistan and the Congo, or Premier Oil in Guinea Bissau and Pakistan, are all favoured.

I will go for safety first, since it is my defensive portfolio. A fund will give me a spread of investments, and I like Framlington UK Select Opportunities, with its 18 per cent in resources companies, JPMF Natural Resources IT and M&G Global Basics.