Making up for lost time
on climate policy?

  • Tweet
  • Share on LinkedIn
  • Share via email
  • Print
  • Download

September 21, 2021

 

In 2019, the electric power sector was the second largest contributor to greenhouse gas emissions in the US.1 Without federal policy that mandates utilities to transition energy grids, hitting near-term emissions targets could be difficult, according to Newton portfolio manager Paul Flood.

In August 2021, the US Senate passed a US$1trillion bipartisan infrastructure package, but critical climate elements were left out. Although the package includes more than US$150bn to promote climate resilience against hurricanes, wildfires and droughts, it omits President Joe Biden’s proposed national Clean Electricity Standard (CES), a requirement to use renewable sources in the national grid.2 If the US plans to catch up with more progressive countries in Europe, this omission of strong federal incentives could be problematic, according to Flood.

“At the federal level, we don’t see many incentives to try and restrict carbon intensity,” he says. “For instance, there’s a carbon tax in the UK and I believe the US could benefit from something having something similar in place.”

While the proposed CES did not include a carbon tax,3 it would have required a segment of retail electricity sales to come from low and zero-carbon sources, including wind, solar and geothermal generators, as well as nuclear power and fossil fuel generators with carbon capture and storage. Despite the exclusion of this key piece of federal legislation, positive work is being done at the state and local government level, according to Flood.

State action

Many US states have enacted Renewable Portfolio Standards (RPS), which incentivise utilities to transition energy grids.4 Under these mandates, utilities earn renewable energy credits (RECs) for each megawatt-hour of electricity generated from a renewable energy source.5 Credits are then used as proof they are compliant with state regulation and can be sold on the open market as an energy commodity. This provides utilities with a second stream of revenue, further incentivising them to invest in renewable technology. Businesses and individuals, who mostly purchase RECs to lower their carbon footprint, also drive demand in the renewable market, potentially encouraging more supply while helping to lower costs.6 In Flood’s view, the risk of investing in pro-climate projects such as renewables is somewhat mitigated through such state policy incentives.

“They’re not risk-free investments, so the goal is to derisk the volatility investors might incur,” Flood says. “As that happens, renewable power sources become more cost competitive with traditional power generation, which is economically supportive of the no-carbon era. However, in many cases, renewables have a lower levelized cost of energy than traditional forms of power production already.”

Some states have gone so far as to require major utilities to close all carbon-emitting power plants by a certain date. In 2020 the state of Virginia passed a law that would require its largest utility to decommission all carbon emitting plants by 2045.7 While this may be a step in the right direction, Flood says federal policy needs to catch up in order for the US to meet its emissions targets. But, he adds, the US is not the only country struggling with policy.

“In the UK, current policies only get us to 26% of the intended 78% reduction target by 2030. But the policy gap in the UK will likely close over the next five years.” Flood says. “If you think about it, policies in place today would’ve seemed extreme just three years ago. That said, all around the world, it’s accelerating at a promising pace and there’s already supportive rhetoric from the Biden administration.”

Transition risk?

Some investors worry about the notion of stranded assets – assets that once had greater value but no longer do – in the fossil fuels and energy sector. With an accelerated phasing out of coal, oil and even gas, where does that leave utilities dependent on traditional power generation? If they have a transition plan in place, they should survive, according to Flood.

“Several companies with low environmental, social and governance (ESG) scores are making big strides to transition away from their fossil fuel dependency,” Flood says. “Eventually investors will move way from focusing on short-term factors and will utilize positive screening, which involves looking for companies that are doing the most to change their business models.”

On this point, a carbon intensity score may not tell the whole story. Fundamental analysis of what a company is doing, as well as how likely it is to stick to its plans, should be considered. Some companies trade at lower multiples than competitors which rate better with respect to independent ESG factors. But many assets in the power sector can offer stable revenue streams at a time when income generation is becoming harder to find, Flood notes.

“Assets with revenue streams less sensitive to the economic backdrop can give a level of diversification to investors. As more people retire and need income, there should be greater support for these types of assets. And as renewables reach economies of scale, we believe that will help drive opportunity in the space as well,” he concludes.

1 US Environmental Protection Agency: Total US Greenhouse Gas Emissions by Economic Sector in 2019. 2021.

2 MarketWatch: Senate infrastructure bill leaves out clean electricity standard and jobs-focused climate corps sought by Biden. August 3, 2021.

3 Forbes: Can President Biden get the clean energy standard across the goal line? August 1, 2021.

4 Bipartisan Policy Center: Pathways to decarbonization: The National Clean Energy Standard. Accessed August 2021.

5 National Conference Board of Legislatures: State Renewable Portfolio Standard and Goals. April 7, 2021.

6 Energysage: Renewable Energy Credits. December 23, 2020.

7 Greentechmedia: Virginia Mandates 100% clean power by 2045. March 6, 2020.

 

All investments involve some level of risk, including loss of principal. Certain investments have specific or unique risks.

Recent market risks include pandemic risks related to COVID-19. The effects of COVID-19 have contributed to increased volatility in global markets and will likely affect certain countries, companies, industries and market sectors more dramatically than others.

This material has been provided for informational purposes only and should not be construed as tax advice, investment advice or a recommendation of any particular investment product, strategy, investment manager or account arrangement, and should not serve as a primary basis for investment decisions. Prospective investors should consult a legal, tax or financial professional in order to determine whether any investment product, strategy or service is appropriate for their particular circumstances. Views expressed are those of the author stated and do not reflect views of other managers or the firm overall. Views are current as of the date of this publication and subject to change.

This information contains projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or expectations will be achieved, and actual results may be significantly different from that shown here. The information is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be and should not be interpreted as recommendations. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

BNY Mellon Investment Management is one of the world’s leading investment management organizations, encompassing BNY Mellon’s affiliated investment management firms and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the corporation as a whole or its various subsidiaries generally.

“Newton” and/or the “Newton Investment Management” brand refers to the following group of affiliated companies: Newton Investment Management Limited (NIM) and Newton Investment Management North America LLC (NIMNA). NIM is incorporated in the United Kingdom (Registered in England no. 1371973) and is authorized and regulated by the Financial Conduct Authority in the conduct of investment business. Both Newton firms are registered with the Securities and Exchange Commission (SEC) in the United States of America as an investment adviser under the Investment Advisers Act of 1940. Newton is a subsidiary of The Bank of New York Mellon Corporation. Newton’s investment advisory businesses are described in their Form ADVs, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request.

No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.

© 2021 BNY Mellon Securities Corporation, distributor, 240 Greenwich Street, 9th Floor, New York NY, 10286

Not FDIC-Insured | No Bank Guarantee | May Lose Value

MARK-214817-2021-09-21