econintersect .com

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.

posted on 11 May 2016

Electric Cars To The Rescue?

by Richard Stavros

Investing Daily Article of the Week

As utility investors, right now times are good. The Dow Jones Utilities Average is up nearly 15% year to date, compared to just 1.7% for the S&P 500.

Of course, utilities are benefitting from the fact that times are not so good for everyone else. As a safe-haven investment, utility stocks tend to gain when uncertainty causes most other stocks to lose ground.

But this recent action masks a longer-term concern for the sector: Growth in electricity demand has been anemic since the downturn.

While utilities are offsetting weak demand through other growth initiatives, including rate-basing infrastructure upgrades and adding new regulated earnings streams through acquisitions, their core business is still ultimately beholden to load growth.

And the sluggish U.S. economy doesn't look like it's about to give electricity demand a boost anytime soon. Meanwhile, rising efficiency and the secular shift to a service economy are slowly eroding existing demand.

One possible answer to this conundrum: electric cars. As plug-in cars become increasingly affordable, they could spur greater electricity demand and help justify premium valuations for utilities.

In fact, according to an influential annual survey conducted by veteran utility banker Lewis Hart, Wall Street executives believe the electric-vehicle market has strong potential for driving utilities' future earnings growth.

That would be a welcome development, indeed, since some analysts are fretting that utilities might otherwise go from enduring weak electricity demand to suffering an absolute decline in kilowatt-hour sales.

At Utility Forecaster, we've been acutely aware of weak electricity demand and have, therefore, focused on investing in utilities that operate in service territories underpinned by strong economies. But with a handful of exceptions, a relatively strong state economy in this environment means gross domestic product (GDP) growth that ranges between 2% and 3% - that's hardly gangbusters.

So for the past few years, we've been closely monitoring the prospect of electric cars boosting electricity sales. Of course, the stodgy utilities industry is typically slow to adapt to changing technology. The sector's huge infrastructure and enormous capital expenditures make it difficult to turn on a dime.

But the industry is starting to take the opportunity more seriously. Nearly two years ago, the Edison Electric Institute, the association that represents investor-owned utilities, published a report encouraging utilities to begin electrifying their service-vehicle fleets. Baby steps.

And the fact that Wall Street financiers now see this technology as a potential source of future demand growth could be the impetus the industry needs to truly make gains in the electric-vehicle markets. After all, these are the guys with all the capital, and this survey suggests they would smile upon the opportunity to deploy more capital to this endeavor.

As the utility-sector specialist Leonard Hyman recently observed:

"Wall Streeters don't produce the electricity. But they do determine the cost and availability of capital for the most capital intensive of industries, and Wall Street can change corporate direction with a disapproving phone call or an encouraging report. They have enormous influence and invest both time and money to stay ahead of the curve."

Of course, I have long believed that electric cars are the best option to increase electric-demand sales, as well as help reduce carbon emissions. When I was a strategy executive at Dominion Resources Inc. (NYSE: D) many years ago, our team did the analysis that showed that electric cars could increase demand while making more efficient use of the electric system.

Even so, there are still significant cultural and regulatory hurdles that many utilities will have to overcome before they can truly benefit from this trend.

And at present, electric utilities have yet to develop the business model necessary to capitalize on the electric-vehicle market.

But we will continue to watch this space closely, as this could be a significant investment opportunity. Because the utility that successfully transforms its business to serve the transportation sector could very well one day outpace its peers in earnings growth, and set a new standard for excellence in the industry.

For my part, I've always been a fan of Porsche's 918 Spyder hybrid-electric sports car. But the salesman on the showroom floor admonished me to look, but don't touch: The price tag is a mere $847,000.

So until a Russian oligarch takes me under his wing (and my local utility makes charging at my house more convenient), I'll have to admire it from afar. Such are the pricing and infrastructure challenges for the automobile and electric utility industries.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Investing Post Listing

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted. You can also comment using Facebook directly using he comment block below.

Econintersect Investing

Print this page or create a PDF file of this page
Print Friendly and PDF

The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.

Keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Middle East / Africa
USA Government

 navigate econintersect .com


Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2018 Econintersect LLC - all rights reserved