Last week, the majority-Democrat House of Reps. passed a massive infrastructure bill largely along party lines. It includes significant provisions for clean energy investment, as well as tax credit extensions for wind (5 years) and solar (6 years). Other areas of focus include electric vehicles and energy efficiency. However, with the currently majority-Republican Senate and President Trump, this is highly unlikely to go much further. That said, current odds are showing a greater than 60% chance that Joe Biden is successful in his presidential bid and that the Senate flips to a Democrat majority. Infrastructure/climate would be top priorities in a Biden administration.
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We’re updating our commentary on U.S. power demand in accordance with updated EIA data, as well as the latest weekly weather data from NOAA. Power demand was up 4% WoW and down 2% YoY for the week-ended 7/4. Relative to the 4-year average, demand was flat. This was an encouraging result as COVID cases have started to spike in certain big states. This was the best result we’ve seen versus the 4-year average since we began tracking the data in mid-March. Weather was more favorable than normal, but slightly milder than 2019, resulting in a tough YoY comp. CDDs were down 4% versus last year and up 21% versus normal. See more detail within for charts and tables, as well as the slides that we will continue to update intra-week – link.
PCG’s $9B bankruptcy exit share issuance overwhelmed the whole sector in June adding another 6.8% to utilities underperformance. For the first half, utilities are down 12.6% and trailing the S&P 500 by 860bps. We have heard one thing after another to explain utility stock weakness – COVID concerns, credit concerns, the beta spike in utilities, bad technical, bad quant, inflation fears, equity overhang. None of these are compelling to us. We think this is simply a very narrow and semi-bubbly market focused on growth/momentum and on playing the recovery. Utilities have become lost in the shuffle. We view this as a gift – the chance to buy stable 9-10% total return utilities at a 10-15% discount to the market in a low rate, highly uncertain environment. We see the increasing chance of a Democrat win in the election as the biggest catalyst as utilities are a clear relative winner – both due to clean energy opportunities and less exposure to corporate tax increases. Finally, we see utilities leadership in renewables transition and electrification as long-term tailwinds that will only make the sector more attractive over time.
NEI held its annual briefing last week, with an optimistic tone on the state of nuclear and its role in the clean energy future, while advocating for properly valuing carbon-free electricity. Thus far, this has been recognized at the state level with several (NY, IL, NJ, OH, CT) passing legislation for nuclear support in recent years. But, a recent study sees one-third of the U.S. fleet as unprofitable/at-risk in the next decade. These subsidies have also created complications with broader competitive markets (ie: PJM’s capacity market MOPR). Long-term, most seem to be in agreement that carbon pricing is the direction to go, as the best way to maintain competitive markets while allowing states to pursue clean energy goals. But thus far, little progress has been made. That said, there has been some recent momentum on this front after earlier this month FERC announced it would hold a technical conference on the topic.
We’re updating our commentary on U.S. power demand in accordance with updated EIA data, as well as the latest weekly weather data from NOAA. Power demand was up 8% WoW and flat YoY for the week-ended 6/27. Relative to the 4-year average, demand was down 3%. This data looks relatively constructive, though once again weather is likely lending a helping hand. This is one of the better results we’ve seen on a YoY-basis since we began tracking the data in mid-March. Weather improved from last week’s below-normal levels. CDDs were up 15% versus last year and 17% versus normal.
Earlier this month, we hosted NextEra Energy CEO Jim Robo for a fireside chat. Most notable was Jim’s vision around hydrogen being the next wave of growth in the path to decarbonization; comparing hydrogen today to what battery storage was a decade ago. While the technology type is clearly in its infancy and the cost curve still needs to come down with improvements in technology, we decided to look back at when NEE first started discussing battery storage. The ramp in economics may not be directly comparable, but it could give a sense of just how quickly a new technology could start to materialize in a meaningful way.
We’re updating our commentary on U.S. power demand in accordance with updated EIA data, as well as the latest weekly weather data from NOAA. Power demand was down 3% WoW and down 2% YoY for the week-ended 6/20. Relative to the 4-year average, demand was down 9%. This was a step-back from last week’s encouraging trend, though weather is likely playing a big factor. This tied for the worst weekly performance versus the 4-year average since we began tracking the data in mid-March (last week was the smallest decline relative to the 4-year average). Weather was much more moderate than last week’s above-normal levels. CDDs were down 2% versus last year and 12% versus normal. See more detail within for charts and tables, as well as the slides that we will continue to update intra-week.
We like how the balanced business models of the IPPs help protect from volatility in earnings and cash flow. Acquisitions by VST (Ambit/Crius) and NRG (Stream/Xoom) made sense strategically and financially – helping better match generation/load and driving EBITDA accretion without additional leverage. A big part of this is because standalone retail businesses trade at low-single digit multiples, but can effectively re-rate higher as part of a bigger business, with cost savings opportunities as well.
Power demand was up 2% WoW and up 4% YoY for the week-ended 6/13. Relative to the 4-year average, demand was down only 1%. This was the best weekly result we’ve seen since we began tracking the data in mid-March. Demand was up YoY for the first time over this period and this was the smallest decline relative to the 4-year average. Weather certainly helped, with CDDs up 21% versus last year and 18% versus normal.
Last July, CA enacted AB 1054, establishing a framework that caps wildfire liability, making CA utility stocks investable again after two years of severe wildfire damages and uncertainty. But nearly a year later, (i) EIX stock is trading around the same depressed relative levels as it was pre-AB 1054; (ii) PCG is on the verge of exiting bankruptcy but at deeply discounted equity valuations; and (iii) SRE has diversified from CA. While we remain on the sidelines in PCG due to the uncertainty over its post-emergence overhangs, we believe investors are underappreciating the net benefits of the CA framework; this is evident in heavily-discounted EIX. Ultimately, we believe rate base growth and regulatory construct will attract investors. This primer is intended for dedicated-utility investors and generalists who are interested in CA names.
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