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How market forces have driven decarbonization in power and transportation

The U.S. Supreme Court recently ruled against the Environmental Protection Agency’s ability to broadly regulate greenhouse gas emissions—essentially rejecting the Biden Administration’s attempt to resurrect former President Obama’s “Clean Power Plan.”

Predictably, the decision drew swift and fiery condemnation from America’s political left, and generally praise from the right. But ironically, it won’t have much if any impact on the pace of decarbonization in the power and transportation sectors.

In fact, the decision increases private sector and individual state flexibility to meet energy transition goals. That in turn should reduce the cost of changes, alleviating growing concerns about affordability of electricity and transportation.

The current popular media consensus is only government action can drive fast enough change to prevent global climate catastrophe. But in reality, US deployment of wind and solar energy and retirement of coal-fired power plants actually accelerated under former President Trump, despite his Administration’s hostility.

According to US Energy Information Administration data, net electricity generation from coal dropped by -37.6 percent from 2016 to 2020. That compares to a decline of just -18.2 percent from 2012 to 2016 during Obama’s second term. And it contrasts with the 16.2 percent increase in coal-fired generation in 2021, the Biden Administration’s first year in office.

As for renewable energy, total US generation excluding hydropower increased 33.7 percent during the four years of the Trump Administration. That compares to 42.8 percent under the last four years of Obama. But add in 2021—which basically reflects decisions made to build under Trump—and renewables growth from 2016 is 47.8 percent. Net generation of solar nearly tripled over that time, despite steep tariffs put in place on imported solar panels.

Unshakeable support from state regulators for utilities’ energy transition plans was critical to renewables’ growth. So was the rapidly declining cost of components like wind turbines and solar panels. And at the same time, the coal power plant fleet built in the 1950s, 60s and 70s has simply come to the end of its useful economic life.

But the larger point here is national politics have had only a very limited impact on decarbonization efforts, especially compared to basic economics. In fact, it’s the Biden Administration—not the US Supreme Court—that’s squarely responsible for the biggest disruption we’ve seen in renewable energy deployment over the past decade or so.

That was the US Commerce Department’s decision this spring to pursue potential tariffs as high as 250 percent on solar panels imported from four Southeast Asian countries, as highlighted in my April 26 Income Insights “Uncle Sam Up-ends US Solar.” The immediate result of that move was the delay of 51 gigawatts of solar projects, or 46 percent of what was expected to enter service this year.

The Biden Administration subsequently attempted to revive solar deployment by granting in effect a two-year “tariff holiday” on whatever Commerce decides. The president also pledged to take action under the Defense Production Act to triple US solar panel production by 2024. And a group of developers—including AES Corp (NYSE: AES) and Clearway Energy (NYSE: CWEN)—backed that move with a pledge to buy 7 gigawatts of solar module capacity annually from domestic manufacturers starting in 2024.

Even that’s apparently not enough for First Solar Inc (NSDQ: FSLR), currently the largest US solar panel maker. The company has complained bitterly and publicly about Biden’s tariff holiday. Now it’s reportedly decided to build a new facility in either Europe or India rather than the US, citing “uncertainties” about “trade policy and tax incentives.”

But in any case, the US Supreme Court’s recent EPA decision is pretty much a non-factor here, and by extension for the speed of US solar and wind power deployment. And NextEra Energy’s (NYSE: NEE) “Real Zero” plan announced last month would create an entirely new source of wind and solar demand, for manufacturing “green hydrogen” through electrolysis. The company’s output would be used to run its utility facilities currently powered by natural gas, with a goal of full conversion by 2045.

If NextEra’s strategy begins to bear fruit, we can expect to see adoption of similar approaches across the sector. In fact, several major electric and gas utilities are already in process of testing blending hydrogen in their systems. So are midstream companies and major oil and gas producers like Chevron Corp (NYSE: CVX), which in mid-June announced it will spend $2.5 billion to build up its hydrogen business over the next few years.

Again, these are private sector decisions based on economics. And none of them have anything to do with EPA mandates or Supreme Court decisions.

The key driver of energy stock investment returns is the energy up-cycle, which likely has years to run because of a widening sector-wide investment deficit. For utilities, add maintaining support of state regulators for long-term investment plans—which at this point are focused on improving efficiency and reliability while cutting pollution and maintaining affordability.

Not all companies will succeed. That’s why we investors need to be highly selective about the individual energy and utility stocks we own. ETFs based on pre-packaged indexes including the good, bad, and ugly aren’t going to cut it.

The July issue of Conrad’s Utility Investor, featured my top picks for the second half of 2022. Check it out here.

One sector, however, is worthy of comment now as a likely beneficiary of the Supreme Court’s roping in of EPA.

That’s US Communications, specifically wireless and fiber broadband communications leaders like AT&T Inc (NYSE: T), Comcast Corp (NSDQ: CMCSA) and Verizon Communications (NYSE: VZ). Before the ruling, these companies appeared to be headed for much tighter regulation from the Federal Communications Commission regulation, including a far more severe version of so-called “net neutrality” than was in effect prior to the Trump Administration.

New restrictions on EPA will likely apply to the FCC. And that’s another good reason to shop in this beaten down group, where leading stocks currently trade at bear market valuations despite outperforming the S&P 500 this year so far.

To your wealth!

Roger S. Conrad