by Richard Stavros
Investing Daily Article of the Week
It may seem counterintuitive that utilities could still profit in the Trump era by going green.
But the Edison Electric Institute (EEI), the association of investor-owned utilities, predicts that grid- and renewables-oriented infrastructure will receive the bulk of the sector’s investment in the coming years.
EEI forecasts that its members will spend more than $300 billion over the next three years to enhance the grid and continue the sector’s transition toward cleaner energy. Under the regulatory compact, utilities stand to recoup the costs incurred from this buildout, plus a fair return on investment.
In the absence of a federal clean-energy mandate, the association believes such investments will largely be driven by economics, including declining prices for natural gas, renewable energy, and new technologies.
Of course, there are still significant environmental mandates at the state level that will also spur investment in these areas.
Additionally, the reality is that utilities have an ultra-long-term outlook toward their investments, with a 20-year time horizon not uncommon. As such, the industry has long been planning for the possibility that carbon emissions would be regulated and has already invested accordingly.
Beyond that, many of utilities’ biggest customers, including retail, commercial, and industrial companies, have their own self-imposed mandates to reduce emissions.
The Trump Trade
Despite his campaign-trail bluster, President Trump, himself, may be more open to clean energy than his critics assume – at least when such projects involve the possibility of creating new jobs and boosting the economy.
Indeed, the White House has been circulating a 50-item Infrastructure “Wish List” whose projects include transmission expansion to connect renewables to the grind, wind power, and energy storage.
However, it’s not entirely clear if these are formal proposals, or whether they originated with the Trump administration or were first drafted by an outside consultancy. Still, it’s intriguing nonetheless.
Energy storage, in particular, is one of the utility sector’s top priorities given the rise of renewables and the intermittency of energy sources such as wind and solar.
According to EEI, electric utilities use more than 90% of all energy storage. And investment in this area is growing rapidly, with more than 220 megawatts installed in 2015 alone, up 243% from the prior year.
While pumped hydropower accounts for more than 95% of installed storage capacity in the U.S., batteries are a key driver of today’s energy storage market.
Meanwhile, utilities are also focused on building out transmission and distribution infrastructure, with wires investments accounting for 43% of the sector’s total capital expenditures. One factor is the need to connect all these renewables to the grid – the other is that interstate transmission stands to earn a higher return on equity thanks to federal ratemaking.
Fossil fuels also have a contribution toward cleaner energy. Natural gas has roughly half the carbon emissions of coal, which helps utilities meet state mandates. And the Shale Revolution means gas is in abundant supply, which also makes the cleaner-burning fuel more economic.
Growing demand for natural gas has resulted in what we like to refer to as the Great Gas Grab. Over the past year-and-a-half, the utility giants have been on a mergers-and-acquisitions spree, buying gas distributors to secure a new, growing stream of regulated earnings.
In fact, subscribers to Investing Daily’s Utility Forecaster have already been the beneficiaries of several such takeovers, with extraordinary gains shortly after recommendation in some cases.
The Trump administration has yet to define how its stimulus program will be applied, which means there’s plenty of room for utilities to maneuver (and lobby) to secure the best possible outcome.
For its part, the EEI says it will work with Trump and other key policymakers to develop an agenda that “recognizes the vital role of the energy grid and the importance of maintaining reliable, affordable, secure, and increasingly clean energy for all customers.”
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