Though the biggest energy headline coming out of last week’s U.S. presidential debate was whether a President Biden would end fracking, President Trump’s critical portrayal of renewable energy warrants more attention than it has gotten – and a closer look at the reality of growth in the sector.
During the debate, Trump argued that renewable energy is too expensive, wouldn’t power up America’s “beautiful factories”, and is bad for birds. In addition to being seriously outdated, this view flies in the face of capital flows in the energy sector. Renewables-rich electric utilities are on the ascendency at the same time that oil and gas company valuations are in serious decline. This is happening in the United States and across the world as technological, market, and policy forces, amplified by a global pandemic, collide to shift the balance of power in energy.
Utilities Awake From Their Slumber
Electric utilities, once derided for their risk aversion and lack of innovation, are now seizing prominence in the global energy sector that had once been reserved for the oil and gas multinationals. This shift is partly due to the fact that the utility industry itself has become more multinational, but it also reflects the technological advances in renewable energy that have come into play just when global factors – economic and political – are demanding it.
Case in point: NextEra, America’s largest electric utility by market capitalization, has just become the nation’s largest energy company, surpassing ExxonMobil. NextEra’s generating assets run the spectrum from fossil to renewables, but its growth trajectory has been driven heavily by renewables. It is now the world’s largest producer of wind and solar power.
NextEra’s timing is strategic. Although U.S. federal policy action on climate and renewable energy has been limited, many states and the utilities that serve them have established ambitious targets for carbon-free energy by mid-century. This creates market opportunity for firms like NextEra who have a deep well of expertise in scaling up renewables to meet electricity demand from factories, homes, and electric vehicles.
We are not talking charity here. The costs per megawatt hour of utility-scale wind and solar generation have declined 70 and 90 percent respectively in the last decade. These sources now operate at or below cost parity with conventional sources like natural gas, coal, and nuclear, according to the investment firm, Lazard, who just this week released its annual report tracking these cost trends. The calculus gets more favorable for renewables when interest rates are low, which they appear set to be for the foreseeable future, because the primary cost of production is capital.
Expertise In Renewables Calling the Shots
One business transaction this week provides a vivid example of converging forces. On the day before the Trump-Biden debate, Avangrid announced its acquisition of PNM Resources, owner of electric utilities operating in New Mexico and Texas. Avangrid is the U.S. arm of Spain’s Iberdrola, the world’s third largest power company and a major player in the buildout of Europe’s wind capacity over the last two decades. Iberdrola Avangrid already had wind generating assets in New Mexico and Texas and sees tremendous growth potential there for both wind and solar. Texas is currently the country’s largest generator of wind power, which provides about 18 percent of its electricity. In 2019 New Mexico’s legislature passed the Energy Transition Act, calling for the state’s utilities to generate half of their electricity from carbon-free sources by 2030 and all of it carbon-free by 2045. That’s a lot of change in a fairly short period of time.
In past efforts to expand renewables across a service territory, it might have made sense for an incumbent utility to steadily build or acquire wind and solar assets on their own or to enter into power purchase agreements with independent renewable producers. But that is more of a niche mindset. Today, as many jurisdictions across the globe are requiring a massive ramp up of zero carbon sources in the next few decades, the tail and the dog are switching places.
It is now more important that the parent company has core expertise in renewables. This creates a value proposition for large companies like Iberdrola and NextEra, who have the operating scale, capital, and renewables expertise, to acquire large utilities with a more conventional portfolio facing large renewable requirements. Indeed, last month NextEra made an offer to acquire Charlotte, NC-based Duke Energy, the country’s 3’rd largest electric utility, who itself has declared a net zero carbon target by 2050. The offer was declined, but the inherent appeal remains.
Bigger Picture: All Zero Carbon Options On the Table
Though President Trump’s comments at the debate were specifically targeted at wind and solar, other options in a low-carbon portfolio are also drawing attention and capital these days. In August, the Nuclear Regulatory Commission issued a safety approval for NuScale’s first small modular nuclear reactor, paving the way for the first plant of its type to be built in Idaho by mid-decade. And a number of firms, including large multinational oil and gas concerns like BP and Royal Dutch Shell, are deploying their expertise and capital with bets on hydrogen as a cleaner and more flexible fuel alternative.
Time For Perceptions To Match Reality
In today’s energy marketplace, renewables present valuable opportunities that are attracting large investments from profit-seeking capitalists. While their prominence in a future zero-carbon electric power sector has a number of significant hurdles to overcome – notably project and transmission siting, energy storage, and environmental effects throughout the product lifecycle, the technological advances of the last decade show the industry has a good track record with high hurdles. The president’s arguments about renewables are nearly as outdated as the Dutch windmills in Rembrandt’s paintings – and, most importantly, ignore the reality of current economic activity and market opportunity in the energy sector.
Read More: As Trump Dismisses Renewables, Energy Sector Doubles Down