A clean energy transition has been in the works for the utilities sector for 20 years, but new clean electricity targets set by the Biden Administration could fast-track that transition and may ultimately mean significant investment and growth for utilities companies.
While proposals are still in flux, our own John Bartlett sat down to reflect on what some of these targets could mean for the sector.
What are the key details of the clean electricity target?
John Bartlett: It’s important to note that these proposals are far from final. The targets announced are just a part of a Democratic-led, $3.5 trillion package addressing health care, education and climate initiatives. That package would need to be approved through the budget reconciliation process, and with Democrats holding a majority vote by the slimmest of margins, nothing is certain.
But if you’re a utilities investor, here are some of the key details to know … Democrats have created a plan to achieve 80% clean electricity by 2030. That plan aligns with a clean energy standard plan the Biden Administration has backed. This is an ambitious target, as of last year, only 13% of electricity was generated from renewable sources. Non-emitting sources are 20% if you include hydroelectric power, 40% if you include nuclear generation.1
The initial plan for getting to that target calls for electric utilities to increase the amount of non-emitting energy they distribute to customers by 4% each year. When companies reach that goal, they receive grants that can be used for customer programs such as direct bill assistance, worker retention or clean energy investment. But if they fall short of 1% improvement, they pay penalties.
Why is this potentially positive for utilities?
John Bartlett: The bottom line: this gives utilities greater incentive to close old plants with depreciated balances and build new ones. They will also have to build connections that attach new plants to the grid. As we’ve discussed in a previous blog, these investments may be positive for utility companies because large scale investments allow them to go to regulators and ask to increase their rate base. When they are asking to increase the rate base because they are using more clean energy, regulators tend to view this favorably. Again, the plan isn’t final, but for some companies, it creates a backlog of growth opportunities that could enable them to continue growing earnings and dividends for years to come.
Which utilities benefit most?
John Bartlett: If you had to generalize, Sunbelt states and those in the desert Southwest benefit. Solar power is more expensive than other kinds of generation. This changes the dynamic to encourage them to create more solar-powered electricity. Utilities in the Midwest that are in the early days of transitioning to renewable sources could also benefit. Utilities on the coasts are generally enthusiastic about energy transition, which could lay the foundation for acceleration of existing programs.
But the devil is in the details. The degree to which a company will benefit is a function of geographic location, current generation mix, geography, the regulatory climate in the region and the customer mix. We look at these details all the time and can already see there would be a lot of disparity in how much companies benefit.
Are there downsides to the proposals?
John Bartlett: The principal risk is escalating costs. Remember: utilities will be building assets without a market signal. If one prioritizes free-market economics and principles, this would be viewed as negative. If one prioritizes addressing climate issues, it’s a positive. As investors, we simply don’t weigh in on the politics. Our job is to look at the trends, see what’s happening and skate to where the puck is going. And these initiatives would be an undeniable growth tailwind for the sector.