Utilities Are Spending Big on Renewables – And Investors May Benefit

May 14, 2020

Utilities are undergoing a massive spending cycle to make the energy grid greener – and the projects should be applauded by more than environmentalists. We believe investors are also poised to benefit. While it may sound counterintuitive, higher capital expenditures tend to increase earnings power for utilities companies. To understand why, it helps to have a quick primer on how utilities earn money.

The Utility Revenue Model Explained

Higher capital expenditures are typically positive for utilities companies. That’s not always the case for many other industries, particularly in the industrial sector, where a big jump in capital expenditures can depress cash flow for considerable time. For utilities companies, however, increasing invested capital provides a direct opportunity to drive earnings power.

Utilities are allowed to earn a set rate on the amount of invested capital they employ. That rate is determined by working with state regulators. When a utility company embarks on a large capital project, they can ask regulators to increase rates, which ultimately generates more money for the company. But politics and operational efficiency play a role here: The regulators are much more likely to approve those increases if the utility is keeping services reliable, customer costs low, and scoring political victories for the agency. As we like to say, utilities have to earn their right to grow.

This is what makes clean energy investments so powerful. The declining cost of wind and solar energy means using these sources could ultimately lower customer bills. Politicians and their constituents also value making the energy grid greener. Hence, regulators are likely to view requests for rate increases favorably. The key for investors, however, will be to select well-managed utilities that have constructive relationships with their regulators.

Customers, Regulators and Utilities All Benefit from Renewable Investments

We believe the development of renewable energy is a growth opportunity for investors that could drive earnings and dividend growth for at least the next decade.

Q&A with the CEO & Co-Portfolio Manager of Reaves Asset Management, Jay Rhame

Reaves Asset Management is an investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. Registration does not imply any skill or training. Reaves is a privately held, independently-owned “S” corporation organized under the laws of the State of Delaware.

The information provided in this blog does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities and sectors listed. Investors should consider the investment objective, risks, charges and expenses of all investments carefully before investing. Any projections, outlooks or estimates contained herein are forward looking statements based upon specific assumptions and should not be construed as indicative of any actual events that have occurred or may occur.

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