New Laws for Utilities - Is it safe to invest?
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- Jan 23, 2020 12:25 am GMTJan 23, 2020 12:16 am GMT
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How are new laws, recent studies and weather conditions impacting utility investments? Investing in utilities was once the safe option for a portfolio. As regulated entities with fewer competitors, utilities offered predictable cash flow, consistent dividends, low risk and high demand for investors. By and large, this meant a steady, profitable return. Mike Loewengart, chief investment officer at E-Trade Financial says’ “Since utilities stocks represent resources that are needed regardless of how the economy is performing, they are known as defensive plays for an investor's portfolio.” Adding utility stock was thought to complement a balanced portfolio and since utilities can provide diversification it lessens the impact of occasional dividend reductions and eliminations. Are new regulations, extreme weather and recent studies lowering confidence in utility stocks? How are policy changes impacting utility investment? Utilities are now under pressure to decarbonize, modernize, adapt new technologies and create new alternative energy sources. All this while navigating the constant ebb and flow of policy changes.
As a result of a recent FERC decision, electric customers across the Chicago region and most of northern Illinois are facing an imminent increase to their "capacity price.” FERC’s ruling conflicts with the state’s Future Energy Jobs Act, that promotes clean energy goals and consumer savings through increased investments in energy efficiency and zero-carbon emissions sources, such as wind, solar, and nuclear power. "The Federal Energy Regulatory Commission (FERC) policy doesn't make sense for our economy or our environment," U.S. Senator Dick Durbin (D-IL) said. "States like Illinois have been leading the way in taking advantage of clean energy sources such as wind and solar power and the FERC should not be stunting such growth for the benefit of energy company executives.” The FERC decision comes amid an ongoing campaign by the Trump administration to sustain coal-fired power plants. With such unrest are investors losing confidence? Can investors see past troubled waters to further efficiency and renewables in the area?
In New Mexico, a new law will alter how PNM does business and hopefully improve economic growth. The Energy Transition Act intends to boost renewable energy production, create thousands of new careers, reduce carbon pollution, and diversify New Mexico’s economy. The new law will also invest tens of millions of dollars in new clean energy projects that will help replace some of the lost economic impact of the closing coal plant, San Juan Generating Station. Sen. Martin Heinrich commented, “We can no longer resist change in the electricity sector just for the sake of trying to hold on to the past… If we make the right decisions now, including moving forward with full implementation of the Energy Transition Act, we can bring thousands of new jobs and millions of dollars of investment to communities across our state and build a better and healthier future for our children. PNM contends the least costly option, moving forward, involves a mix of solar, wind, natural gas and battery storage. Critics say natural gas plants would also have to close eventually if PNM wants to meet its goal and state mandates of being emissions-free in a couple decades. Ben Shelton, the political and legislative director of Conservation Voters New Mexico, said the energy act provides the blueprint by requiring emissions-free electricity by 2045. PNM has vowed to meet that goal by 2040. “This is our moment to ensure that New Mexico’s grid shifts from fossil fuels to clean, renewable energy like wind and solar,” he said. Are capitalist eager to invest in an energy transition? Are renewables offering better returns? According to the numbers, the answer is yes? Renewable energy prices hit record lows in 2019. In fact, renewables fell below the cost of coal in 2018. New U.S. Energy Information Administration (EIA) data predict solar and wind energy will dominate America’s new generation in 2020, making up 76% of new generation and adding 42 gigawatts (GW) of zero emission capacity, while coal and natural gas will dominate 2020 retirements with 85% of plant closures. According to a recent Forbes article, it is now cheaper to save the climate than to destroy it. Utilities can capitalize on this trend, but policymakers can accelerate transition. How can we encourage policy that further supports utilities?
The growing demand for cheaper renewables are enticing investors but the goal to achieve clean energy is motivating policymakers to implement new standards. Despite the lack of federal adoption, 29 states and the District of Columbia have enacted renewable portfolio standards (RPSs) requiring that a certain fraction of their electricity mix come from renewable power technologies, such as wind or solar. Since money talks, a team at MIT wanted to connect a monetary value to stronger standards. The MIT team examined electricity-consuming activities in all sectors and tracked changes in emissions, costs and benefits for specific regions. The study used modeling framework to determine the economic cost of a renewable energy or climate policy and the benefits it will provide in terms of air quality, human health, and climate change. Depending on the assumptions used, the analyses produced a range of results. Eager to apply their model, results were presented last summer when the Ohio state legislature began considering a bill that would both repeal the state’s RPS and subsidize existing coal and nuclear power plants. Emil Dimanchev, a senior research associate at the MIT Center for Energy and Environmental Policy Research presented analysis of the benefits to Ohio on its current RPS. After pointing out that Ohio topped the nation in the number of premature deaths attributed to power plant pollution in 2005, he shared his results. He found that by protecting human health, the RPS would generate an annual economic benefit to Ohio of $470 million in 2030. He further calculated that, starting in 2030, the RPS would avoid the premature deaths of 50 Ohio residents each year. Given the estimated cost of the bill at $300 million, he concluded that the RPS would have a net benefit to the state of $170 million in 2030. “Hopefully, Emil’s testimony raised some awareness of the tradeoffs that a state like Ohio faces as they reconsider their RPSs,” says Selin. Money should motivate legislators in other states to consider how strengthening their RPSs could benefit their economies and communities.
Weather the Storm
Hearing the health benefits may move people to change and conforming to new laws is challenging but not impossible. How can utilities help investors avoid pitfalls? To ease the impact on investors, PG&E Corp. eliminated its dividend in 2017 when the company's liabilities rose due to wildfires caused by its equipment and California's regulatory rule. Of course, some events are unforeseeable but following market trends and growth can reduce risk. On a positive note, California is on track to get 50% of its electricity from clean sources by year’s end and has already ratified SB 100, the senate bill that requires 100% of the state’s power requirements to be supplied by clean energy sources by 2045. Laura Wisland of the Union of Concerned Scientists has told KQED Science that California’s cost of solar and wind power is already competitive with natural gas. Other areas experiencing growth are energy storage and battery manufacturing. Investment banking company, UBS, estimates that the United States energy storage market could grow as much as $426 billion over the next decade. Investment in renewable energy capacity worldwide was $282.2 billion last year, up 1% from 2018’s $280.2 billion. China was the biggest investor in renewables, at $83.4 billion in 2019. The U.S. was the second-largest investing country in renewable energy capacity, at $55.5 billion, up 28% in 2018. Looking at the overall renewable energy capacity investment figures for 2019, wind (onshore and offshore) led the way with $138.2 billion globally, up 6%. Solar was close behind, at $131.1 billion, down 3%. Falling capital costs in wind and solar meant that the two combined are likely to have seen around 180 gigawatts added last year, up some 20GW in 2018.
Utilities are embracing change and if they can crack the code, investors can capture a massive economic opportunity and enjoy growth for decades.