As potential legislation, the so-called "Green New Deal" certainly could have had a better launch. But despite a not-quite-ready-for-prime-time roll-out, its key goal of de-carbonization is gaining ground on both sides of the aisle in Congress, and more importantly with industry.
Recently, MDU Resources (NYSE: MDU) became the latest US electric utility to retire coal, announcing the shutdown of 3 power plants by the end of 2021. Giant mining firm Glencore Plc (London: GLEN) pledged to cap its coal output. And two bipartisan bills to boost carbon capture and storage technologies began circulating in the US Senate.
Current energy storage technology is not capable of economically resolving the intermittency issues of wind and solar power. During NextEra Energy’s (NYSE: NEE) fourth quarter earnings call, however, CEO Jim Robo forecast a cost for wind plus 4-hour storage of between 7 and 10 cents per kilowatt hour, and a cost of 7.5 to 10.5 cents/kwh for solar plus storage, all by "early in the next decade" and without any subsidies and incentives.
Getting there depends on the premise that "continued technology improvements and cost declines" will follow current multi-year trends. But as Robo points out, those economics if achieved will be "cheaper than the operating cost of coal, nuclear and less fuel efficient oil and gas units."
NextEra forecasts annual growth of 6 to 8 percent in earnings per share for the combination of its regulated Florida utility and the unregulated unit that’s the leading wind and solar power producer in the US. That target could prove quite conservative if solar and wind economics prove as "disruptive" as Robo believes.
Unfortunately, every bit of that potential upside is reflected in the company’s trailing 12 months price/earnings ratio of 25 times plus. And NextEra and other renewable energy leaders face another challenge: PG&E Corp (NYSE: PCG) may attempt to use its bankruptcy as a lever to cut the price of existing contracts.
I continue to believe California will ultimately insist contracts are honored, as these renewables producers’ investment is critical to meeting the state’s decarbonization goals. NextEra continues to find opportunities elsewhere, including the giant wind-solar-storage project announced with Portland General Electric (NYSE: POR) this week. But we’re more bullish on renewable energy yieldcos like NextEra Energy Partners (NYSE: NEP), which own growing portfolios of valuable assets and are considerably cheaper. Pattern Energy Group (NSDQ: PEGI), for example, pays a yield of 8 percent.
And renewable energy is hardly the only Green New Deal winner. Semiconductors, for example, are essential to the emerging fleet of electric and self-driving vehicles. They’re also key to improving efficiency of conventional trucks and automobiles, so they win whichever technology comes out on top.
Natural gas and new nuclear are not favored by the principal Green New Deal sponsors. But the combination of cheap and abundant supplies from shale and new takeaway capacity is speeding electric utilities’ switch from coal to gas in the US, and from fuel oil to gas in Mexico. Kinder Morgan Inc (NYSE: KMI), which transports 40 percent of US gas, forecasts a 32 percent lift in US demand, including exports by 2030.
As for new nuclear, it’s critical for Southern Company (NYSE: SO) to get its two new reactors up and running at the Vogtle site in Georgia without major new cost overruns. That’s far from certain in light of the project’s struggles under previous contractor Westinghouse. But the project is now 74 percent completed, and several new Chinese reactors using the same AP-1000 model are now in service and relatively problem-free. Success at Southern could be all that’s needed to spur a US industry renaissance.
"China Inc" is another likely Green New Deal winner. The country increasingly dominates global production of solar components and batteries. According to Bloomberg New Energy Finance, annual global solar module production capacity is 219 gigawatts, up 61 percent over the past two years. Demand in 2018, however, was only 107 GW. The upshot is capacity continues to consolidate in the strongest hands, with 70 manufacturers leaving the business and the 10 largest producers now controlling 66 percent of global capacity.
Chinese companies have emerged at the top of the heap for two reasons: The voracious appetite of the country’s domestic market and the government’s designation of solar and energy storage as key sectors. Chinese innovation and ramping up of production capacity have been critical to driving down the global price of solar components, and a similar effort is underway with battery storage. That includes new processes for recycling lithium-ion batteries previously used in electric vehicles.
Niche lending to renewable energy and efficiency projects is already big business, demonstrated by robust fourth quarter results at Hannon Armstrong Sustainable Infrastructure Capital (NYSE: HASI). Technically a business development company, Hannon is organized as a real estate investment trust, allowing it to shelter income and pay a generous dividend.
Business Development Companies ((BDCs)) typically run aground at some point during the economic cycle because they focus lending on the less creditworthy. In contrast, Hannon’s niche has proven highly resistant to economic swings, particularly the "behind the meter" efficiency projects that make up 75 percent of its backlog. The company’s focus also allows it to stick to investment grade corporations and municipalities, where default risk is a fraction of that carried by more conventional BDCs.
Last year, Hannon froze its quarterly dividend, as took an earnings hit from refinancing debt to fixed rates from mainly variable interest rates. Recently, it resumed annual dividend growth after reporting 8.7 percent higher 2018 earnings, topping the guidance range of 2 to 6 percent.
Over the past year, investors have had numerous opportunities to buy Hannon below $22, which I view as a good entry point. Resuming dividend growth will eventually earn this stock a higher buy target. But now, up more than 25 percent year-to-date, a pause is overdue. Be patient.
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Disclosure: I am/we are long SO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Roger Conrad and his Utility Investor publication publishes financial news and opinions and is NOT a securities broker/dealer or an investment advisor. Readers and subscribers are responsible for their own investment decisions. All information contained in articles and model portfolios should be independently verified with the companies mentioned, and readers should always conduct their own research and due diligence and consider obtaining professional advice before making any investment decision. Roger Conrad and/or people associated with him may hold positions in the securities that are discussed in the Utility Investor.
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