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posted on 07 July 2016

The New Generation: Creating Utility Haves And Have Nots

by Richard Stavros

Investing Daily Article of the Week

Virtually every business in the country has been strategizing on how to make loyal customers out of the biggest populations coming of age in terms of spending power: Millennials (ages 21 to 34) and Gen Xers (ages 35 to 48). And it turns out that electric utilities should covet them, too.

That's because these younger demographics are actually willing to spend more money on electricity, as long as it comes from green-energy sources, a new Deloitte study finds.

But not every utility stands to benefit. Millennials and Gen Xers tend to cluster in certain parts of the country, so utilities lucky enough to have them in higher numbers in their service territories will likely outperform their peers.

At Deloitte's annual energy conference, which I attended last week in Washington, D.C., Marlene Motyka, an executive who helps lead Deloitte's alternative energy group, explained the results of the firm's "Resource 2016 Study," which found that Millennials' preferences for clean energy are "increasingly an influential factor in the transformation of electricity providers."

In fact, 86% of Millennial respondents to the Deloitte survey believe the government should be active in setting a clear vision and path for driving U.S. energy strategy. This compares to 80% for Gen X and 76% for Baby Boomers.

Among all age cohorts, a willingness to pay a surcharge on their electric bills for developing sources of renewable energy trended upward in the 2016 study. Of particular note, 54% of Millennials are willing to pay a 4% surcharge for renewables.

That's great news for those utilities with large populations of Millennials, as growth in electricity demand has been anemic since the downturn. And those consumers willing to pay more for these new renewable resources will ultimately drive not only electricity demand growth, but more importantly, earnings, creating "have and have not" utilities.

The reason these populations are not evenly distributed across the country has to do with the fact that Millennials, Gen Xers and even retiring Baby Boomers have different needs and wants, which leads them to favor different parts of the country.

A report on recent census data from the public-policy firm Governing shows how each group breaks down geographically:

Millennials

Washington, D.C. has been the most favored destination by Millennials over the past decade. More than a third of the city's residents are of this age group, which is more than any other state.

As such, one can now understand why perhaps Exelon Corp. (NYSE: EXC) fought so hard to acquire D.C.-based Pepco Holdings, as the city's demographics are well positioned for future earnings growth.

Next up are Utah, Alaska, North Dakota, and Texas. The data suggest that western states tend to have higher concentrations of millennials, and this region of the country also happens to be where some of the largest renewable developments are taking place.

And certainly the high concentration of Millennials in Utah reinforces Dominion Resources' (NYSE: D) decision to acquire gas distribution utility Questar Corp. (NYSE: STR), which operates where their newest top customers could drive earnings growth.

Generation X

Incredibly enough, Washington, D.C. is also the most favored place for Gen Xers, though they also account for a fifth of the population in most states. Next up is Georgia, which bodes well for Southern Company (NYSE: SO) and its efforts to develop more renewables. Gen Xers also make up about 22% of the populations of Nevada and Colorado.

Baby Boomers

Looking at the other side of the age divide, Florida remains a top destination for retirees will favor NextEra Energy's (NYSE: NEE) service territory.

I, myself, am a Gen Xer, and while the rise of the Millennials sometimes makes me feel that I'm already in the midst of my forced obsolescence, clearly both generations remain crucial demographics for our favorite utilities.

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