Spark Your Interest In Electricity Investments

As we look ahead to a future of electrification powered by clean energy, electric utility companies are pivotal players in this transformative journey. With their long-standing history as the backbone of our power systems, these companies have powered homes, businesses, and industries for decades. Now, as we shift towards a world fueled by affordable, reliable, and prevalent clean energy, the role of electric utilities becomes even more vital. In this newsletter, we’ve assessed this strategic investment opportunity focusing on the United States.

Why invest in electricity utility companies?

Electricity companies offer an attractive investment proposition for several reasons.

Firstly, they provide an essential service, ensuring consistent demand and addressing long-term customer needs. This essentiality translates into steady revenues and cash flows, appealing to investors seeking more predictable returns. Moreover, operating in regulated environments provides a certain level of stability and predictability to their earnings. With regulated revenues and the ability to adjust electricity rates over time, these companies offer lower risk compared to many other sectors.

Additionally, electricity companies must continually invest significant capital to upgrade, expand, operate, and maintain their infrastructure. While this represents a substantial financial commitment, it underscores the long-term nature of these investments and their critical role in ensuring uninterrupted power service.

Furthermore, their monopolistic positions in established customer markets enhance their competitive advantage, positioning them well for longer-term sustained growth. In summary, electricity companies offer investors the potential for both stable returns and long-term gains.

Trends Shaping Electricity Demand

Like most established regions, electricity demand in the United States is influenced by a myriad of factors, including population growth, economic development, electrification, and technological advancements such as cloud computing and artificial intelligence.

The United States Census Bureau reported a population of roughly 331 million in 2020. Projections suggest a steady but slower growth rate, with an estimated population of about 379 million by 2060.

The United States is actively embracing electrification across various sectors, including transportation, buildings, and industrial processes, to transition towards a cleaner and more sustainable energy system. This means replacing technologies or processes dependent on fossil fuels, like internal combustion engines and gas boilers, with electrically powered alternatives.

Particularly noteworthy is the adoption of electric transportation, spanning cars, trucks, rail, and transit, fueled by federal incentives, funding, and growing consumer interest. Concurrently, efforts to phase out fossil fuel-based heating systems in buildings and electrify industrial processes are underway. All these replacements typically offer greater efficiency, resulting in reduced energy demand and significantly contributing to emissions reduction as electricity generation shifts towards decarbonization.

Furthermore, a growing number of companies across the United States are making commitments to source 100% of their electricity from renewable sources. Driven by corporate sustainability goals and increasing consumer demand for eco-friendly products, this trend has catalyzed the rapid deployment of renewable energy capacity nationwide.

In essence, these trends underscore a fundamental shift toward a more electrified, sustainable, and environmentally conscious future in the United States while supporting the increased demands.

Grid Modernization Opportunities

The path to a green energy future demands significant investment in existing and new infrastructure, as highlighted by a recent IEA study on global electricity grids. Urgent improvements and expansions are essential to meet climate targets and ensure energy security, presenting a substantial opportunity for investors to engage in the expansion and modernization of electricity grids worldwide.

By 2040, according to IEA, approximately 80 million kilometers (or 50 million miles) of electrical grids will require addition or replacement, offering considerable growth prospects. Doubling annual investment in grid infrastructure to over $600 billion by 2030 is predicted to address the escalating demands while supporting a more sustainable future.

In the United States, significant progress has been made in decarbonizing the electric grid, evidenced by key indicators of this progress are as follows.

Renewable Energy Growth: The rapid expansion of renewable energy sources such as wind and solar power has been remarkable. According to the U.S. Energy Information Administration (EIA), renewable energy (i.e. wind, solar, and other renewables as shown in the chart) accounted for 20% of U.S. electricity generation in 2020, up from just 9% in 2008. To accelerate the transition, ramping up the production of renewable energy sources like wind, solar, geothermal, and hydropower is essential. Additionally, expanding nuclear energy capacity in some regions can play a crucial role in meeting energy demands without emitting greenhouse gases.

Coal Power Reduction: According to the EIA, coal-fired power plants, a significant source of carbon emissions, have been steadily declining in the U.S. over the past decade, hundreds of coal plants have been retired or converted to cleaner energy sources. In 2020, coal's share of total electricity generation dropped to 19%, down from over 50% in the early 2000s.

Natural Gas Transition: Natural gas has served as a bridge fuel during the transition away from coal, which has steadily increased to nearly 40% as efforts are focused on reducing its carbon footprint. Measures to minimize methane leakage and improve the efficiency of natural gas power plants are underway to further decarbonize the grid.

Grid Modernization: Investments in grid modernization and infrastructure upgrades have enhanced the flexibility and reliability of the electric grid, facilitating the integration of renewable energy sources. Smart grid management technologies, energy storage systems, and grid interconnections have played a crucial role in this transition.

Overall, seizing grid modernization opportunities is critical for advancing toward a sustainable future, driving economic growth, and mitigating climate change.

Government Driving Change

The United States government has provided $28 billion for funding and additional tax credit incentives aimed at bolstering grid modernization and expansion projects. Initiatives such as expanding the Investment Tax Credit and allocating significant sums to programs like the Grid Modernization Initiative underscore a dedicated effort to expedite the shift towards a sustainable energy landscape.

Additionally, regulatory reforms streamlining permitting processes are facilitating the development of a resilient, reliable, and modernized electric grid, while increased funding for research and development initiatives focused on grid innovation provides further momentum in this direction.

Energize Your Portfolio

Electric utility companies present compelling investment opportunities in the transition to a green energy future.

Their essential role ensures stable revenues, while regulatory environments offer predictability and lower risk. Significant capital investments are ongoing, underscoring their long-term growth potential. Trends like electric transportation and corporate commitments to renewable energy further drive their prospects. Government funding and legislation support this transition, creating an attractive investment landscape.

In essence, electric utilities offer investors stable returns and long-term growth while shaping the future of energy.

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Twice a month with our newsletter distribution, we will discuss the market trends in one of our six themes below:

1. Renewable Energy (think solar, wind, hydroelectric)

2. Resources (think nuclear)

3. Circular Economy (think water)

4. Energy Storage (think battery power grid)

5. Carbon Capture and Storage (think Carbon dioxide CO2 capture)

6. Green Transportation (think electric vehicles)

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We also include their Environmental, social, and governance (ESG) scores. The ESG data focuses on sustainability, diversity, human rights, license to operate, business ethics, and corporate governance. Using 630 metrics, ESG scores provide a comparison of a company's practices with their industry peers. The higher the score the better the company in their peer group.

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