New Legislative Priorities May Have Big Implications for the Utility Sector

April 22, 2021

Early legislative proposals from a new presidential administration show a clear priority: transferring the U.S. away from fossil fuels and toward renewable energy sources. We expect the utilities sector to play a leading role in the transition.

For many utilities, the renewable energy transition is well underway, with companies shuttering existing coal plants and replacing them with cleaner wind and solar energy sources. But a greater focus on renewables at the national level could hasten the transition, and provide utility companies even more incentive to initiate projects to meet more aggressive renewable targets. We believe such projects could benefit the environment and utility shareholders alike.

It’s important to note that current legislative proposals are only that … proposals. Potential laws could look significantly different, but glimpses of both the Biden administration’s infrastructure plan and CLEAN Future Act illustrates the priorities.

The infrastructure proposal, for example, provides grants to create 500,000 EV charging stations across the country by 2030.1 Presumably, utilities will play a leading role connecting these stations to the grid to meet expected electrical demand growth.

Meanwhile, the proposed CLEAN Future Act calls for electricity suppliers to increase clean energy generation to 80% of total output by 2030 and 100% by 2035.2 It also includes provisions “to promote energy efficiency, guarantee consumers’ ability to purchase clean energy, and modernize energy transmission infrastructure siting to benefit clean sources,” according to a summary of the proposal from the Committee on Energy and Commerce.2

To carry out these changes, utilities will undergo a massive capital expenditure cycle to make the grid greener and more reliable. Again, many utilities are already making these changes, but we believe the administration’s focus on the issue is likely positive for the sector.

As we’ve discussed in prior blogs, changes to harden the electricity grid and make it greener require massive spending for utility companies. That may be positive because increasing invested capital provides a direct opportunity for a utility to increase earnings power.

We explain in more detail here, but when a utility company embarks on a large capital project, they can ask regulators to increase rates to fund the expenditure, which in turn can generate more revenue for the company. Such increases are approved by state regulators, but the priorities on clean energy and a more reliable electric grid in Washington reflect many of the priorities we see developing at the state level.

We believe, if legislators continue to view these issues with growing importance, regulators are likely to view future requests for rate increases favorably. Given the sentiment around clean energy, we believe it could be a tailwind for the sector in the years to come.

 

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1Link to Source: https://www.whitehouse.gov/briefing-room/statements-releases/2021/03/31/fact-sheet-the-american-jobs-plan/

2The Climate Leadership and Environmental Action for our Nation’s (CLEAN) Future Act by the Committee on Energy & Commerce, (March 2021), link to source: https://energycommerce.house.gov/sites/democrats.energycommerce.house.gov/files/documents/CLEAN%20Future%20Act%20One-Pager%20FINAL.pdf 

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