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Renewable energy in an uncertain U.S. political landscape

Posted by on 20 September 2017
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The electricity sector currently accounts for approximately 60% of all North American infrastructure investment. Over the next twenty years, Bloomberg estimates that more than half of this investment will be directed to wind and solar.

Meanwhile, a survey by Preqin in 2017 indicated that 73% of investors expected to increase their allocation to infrastructure investments in 2017.  As investors look to the U.S. energy industry, and particularly to the renewable energy sector, as an opportunity for investment, the current U.S. political landscape must be considered.

During the past eight months, the Trump administration has modified or rescinded multiple regulations that affect the energy industry. In March, President Trump signed an executive order which suspended the Clean Power Plan, disbanded the Working Group on the Social Cost of Carbon, lifted a moratorium on leasing federal lands for coal mining, directed the Department of Interior to review regulations restricting oil and gas exploration on federal lands, and directed all agencies to review regulations that might burden the production of oil, natural gas, coal and nuclear energy. Separately, the head of the EPA, Scott Pruitt, suspended a rule requiring the oil and gas industry to reduce methane leaks, and Rick Perry, Secretary of Energy, ordered a study of the electrical grid to examine whether reliability concerns should justify support for baseload power, including coal, gas, and nuclear.

"The actions taken by the Trump Administration have so far had a limited impact on prospects for renewable energy investment."

Clearly, policy changes throughout the U.S. energy industry are well underway. However, the actions taken by the Trump Administration have so far had a limited impact on prospects for renewable energy investment. In fact, within the past three months, both Bloomberg and Goldman Sachs have increased their expected penetration of renewable energy in the U.S. relative to their forecasts prior to the U.S. elections.

So, why does the investment landscape for renewable energy remain bullish?  Below are three reasons:

  1. Fundamental economics—not energy policy—are driving current growth in the market. The primary policy-driven incentives for renewable energy in the United States at the federal level are the Production Tax Credits for wind and the Investment Tax Credits for solar, both of which have historically provided credits equal to 30% of capital costs. These credit values are scheduled to gradually decline between now and 2021, ending for wind in 2019, and dropping to 10% for solar in 2022. However, capital costs for wind and solar are falling or have fallen faster over the past five years than the scheduled reductions in credit values. As a result, all industry forecasts expect solar and wind installations to continue their penetration after these tax credits expire.
  1. Electricity industry policy made at the state and local levels is more important than federal policy. At New Energy Capital, we like to say that we invest in 50 different markets. Each of the 50 U.S. states sets its own electric utility regulations, its own wholesale ratemaking process, and its own incentive structure for generation.  Over the past twenty years, regional transmission organizations have consolidated some practices, but states retain substantial authority.

"Since last year, thirty-one states have passed new financial incentives or regulatory policies to support renewable energy..."

At the state and local level, voters are overwhelmingly supportive of renewable energy. Since last year, thirty-one states have passed new financial incentives or regulatory policies to support renewable energy, accounting for more than 74% of U.S. electricity demand. In fact, in two states (Nevada and Arizona) where utilities were successful at lobbying state utility commissions to limit the growth of solar installations in 2016, public outcry and voter pushback was so strong that the state legislatures or governors were forced to rescind the restrictions and reinstate pro-growth policies.

  1. U.S. corporations are driving an increasing share of renewable generation. 215 companies within the Fortune 500 have announced programs to invest in greenhouse gas reductions, sustainability, or renewable energy initiatives, and more than 100 businesses with total revenue of over $2.5 trillion, including 30 of the Global Fortune 500, are transitioning to 100% renewable energy consumption for their global operations. This trend is being driven both by consumer and brand pressure, as well as by economic factors. In particular, renewable energy wholesale pricing is competitive with fossil pricing, and the absence of fuel price exposure offers a better hedge against long-term energy cost increases. If utilities are unwilling to offer renewable energy tariffs at competitive prices, companies are increasingly becoming willing to procure energy directly from renewable project owners, or to own the projects themselves. For example, earlier this summer, Microsoft won approval from the Washington state regulatory commission to bypass the monopoly utility and purchase renewable electricity directly on the wholesale market from independent generators. Other corporations eligible under the same settlement include Wal Mart, Kroger, and a consortium of other industrial users.

Ultimately, while we can’t predict what additional energy federal energy policies may be modified or rescinded, it is clear that the political landscape has not shifted in a manner that is slowing industry growth in the renewable sector. From where we sit the U.S. renewable energy market will remain a highly attractive and rapidly growing opportunity for infrastructure investing for decades to come.

Hear more from Scott Brown, Chief Executive Officer, New Energy Capital Partners at SuperReturn Infrastructure.

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