Morningstar Magazine - June/July 2017 - 74
Strategies
President Can't Thwart Green Progress
With or without Trump, renewable
energy, coal-to-gas switching, and carbon
reductions should continue.
INVESTMENT RESEARCH: EQUITIES
Andrew Bischof and Travis Miller
Anti-environment rhetoric might be trending now,
but even our most conservative forecasts
for the next eight years show U.S. renewable
energy capacity doubling, gas continuing to
steal power generation market share from coal,
and carbon emissions falling near Obama
administration-era targets.
The three key trends we forecast during the next
four to eight years are:
1 State renewable portfolio standards will keep U.S.
renewable energy growth in line with that
achieved during the Obama presidency. Supportive
tax policy, pro-manufacturing initiatives, and
corporations' interest in reducing their carbon
footprint represent upside to our base forecast.
2 Efficiency improvements in gas generation
technology have made it difficult for aging coal
generators to compete, especially in the eastern
United States, where cheap gas is plentiful.
3 Carbon emissions reductions will remain on track
to meet or exceed targets in the U.S. Clean Power
Plan and the Paris Agreement despite President
Donald Trump's efforts to abandon both.
Best positioned to take advantage of our forecasts
are large-cap utilities with good regulatory
relationships and investment opportunities.
On average, we expect the six utilities we feature
to increase earnings and dividends 6% annually
at least through the next election cycle.
74
Morningstar June/July 2017
Best Idea Dominion Energy D, Duke Energy
DUK, American Electric Power AEP, and Southern
SO have billions of dollars to invest in gas and
electric infrastructure. NextEra Energy NEE
and Xcel Energy XEL should widen their lead as
the top U.S. renewable energy companies.
Forecast 1: Renewable Energy Goes Boom
During the past decade, U.S. tax incentives have
helped drive exponential growth in renewable
energy. In the coming years, our analysis
shows state renewable portfolio standards,
or RPS, mandates will supercharge U.S. renewable
energy growth.
Our forecast shows U.S. renewable energy, including
hydroelectric, will grow at least 40% during the
next eight years based on RPS alone ( EXHIB IT 1 ).
This would boost renewable energy to 20%
of the U.S. generation mix from 15% now and could
replace 20% of U.S. coal generation.
RPS targets primarily in Colorado, Connecticut,
Washington, D.C., Massachusetts, Maine,
New Jersey, New Mexico, and Pennsylvania would
add 155 terawatt-hours of renewable
energy generation, a 28% increase from 2016
through 2020.
RPS targets primarily from Arizona, Delaware,
Illinois, Indiana, Minnesota, New Hampshire,
Nevada, Utah, and Virginia would add 75 TWh
through 2024.
We think federal intervention in state RPS is
unlikely. The Trump administration is likely
to favor state-level decision-making. Furthermore,
Trump's appointment to the Supreme Court, Neil
Gorsuch, has favored a limited role for the
courts and has preferred to relegate power to the
states. We think Gorsuch's swing vote will
protect state RPS from federal interference.
At the state level, legislators' efforts to block RPS
generally have been unsuccessful.
To date, only West Virginia has repealed its
renewable target.
The number of states with RPS keeps growing, and
states are becoming more aggressive with existing
RPS. In 2016, Oregon (50% renewable by 2040),
Rhode Island (38.5% by 2035), Washington,
D.C. (50% by 2032), New York (50% by 2030), and
Hawaii (100% by 2045) increased their current
RPS. Ohio Gov. John Kasich recently vetoed efforts
to make the state's 12.5% RPS by 2025
voluntary. Ohio lawmakers recently introduced
legislation to roll back the state's RPS, but
we expect Kasich would veto it again if it passed
the state Legislature. No other state has pending
legislation to repeal current RPS.
In February, California legislators proposed
implementing a 100% RPS by 2045 and shortening
the 50% mandate to 2025 from 2030. We think
there is a high probability this will pass, given that
Democrats control the state House and
Senate, and Gov. Jerry Brown has been a strong
supporter of renewable energy. The state's utilities
already are on track to meet the 33% mandate
by 2020. Nevada legislation recently introduced
would boost RPS to 80% by 2040 and include
4% step-ups every year starting at 26% in 2018-19.
As in California, Democrats control the Nevada
House and Senate and the governor has been
a renewable energy supporter.
If both states' proposals pass, we estimate it
would add another 22 TWh, or 3%, to our
2024 renewable energy forecast. This would push
renewable energy growth well above that
achieved during Obama's presidency.
In addition to RPS-driven renewable energy growth,
we think there is upside for wind and solar
growth based on several factors: consistent tax
policy, Trump's pro-manufacturing jobs focus, and
corporations' interest in reducing their carbon
footprint. In addition, the economics for wind and
solar are becoming more attractive relative to
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Contents
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