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What does Biden’s Energy Policy Mean for Utilities?

Up until now, the United States government has failed to take any meaningful action to address the climate crisis. The energy plan announced by Joe Biden in July would therefore mark a significant step forward in the country’s commitment to tackling global warming. It is an ambitious plan which will appeal to the more progressive, younger wing of the Democratic party for whom the environment is a top issue. However, it will also create enemies among the powerful lobbyists in D.C. representing energy companies who now face the potential of a radically different regulatory environment if Biden wins the election.  

When Joe Biden overcame Senator Bernie Sanders to win the democratic nomination, there was a risk that the Democratic party would fracture. For many progressive members of the party, Biden simply does not represent them. He is viewed as an establishment pick who is too conservative on many of the issues that they care deeply about. Indeed, many Sanders supporters were angry at the way the nomination process went and believed that the former vice president was always the preferred candidate and that the media and party insiders made sure he won. This led to genuine concern within the Biden campaign that their frustration and disenfranchisement would result in many not showing up to vote in November.

In response to this concern, after securing the nomination in April, Biden’s team quickly reached out to the Sanders team to suggest a collaboration. This conciliatory move was a wise one.  They launched six working groups to tackle the critical issues facing the country: one of which was to focus on climate change. They also made sure that some of the leading progressives in the party, such as Alexandria Ocasio-Cortez, were invited to take part in these committee meetings. After two months of work behind the scenes, the Biden energy plan was released to the public in July.

With climate change being such a key issue for younger voters, it was important for the plan to be bold enough that it would inspire them to get out and vote. While some on the left have criticised the plan for not providing a timeline on phasing out fossil fuels, or for the lack of an outright ban on fracking, the majority of progressives have applauded the plan for its ambition. A quick skim of some of the plan’s goals reveals why: $2 trillion in spending over the next four years on clean energy and a target of 2035 for carbon-free electricity; more rapid adoption of electric vehicles and improvements to the energy efficiency of 4 million buildings; re-joining the Paris Climate Agreement on Day 1; and substantial investment in projects such as zero emissions mass transit, nuclear power, battery storage, and carbon capture technology which are critical in the transition to a net zero carbon economy.

There is no doubt that this plan marks a substantial improvement to his offering last summer, which is probably why many environmentalists are pleasantly surprised by it. These are large sums allocated to the environment and the sheer scale and scope of the plan would certainly have a huge impact on the energy utilities industry in the country. According to analysis by Reuters, if Biden’s plans were to come into force, the energy mix would be radically transformed in the next 15 years and emissions would drop by 90%.

Of course, there are critics of the plan. In addition to the usual arguments that focus on the unreliability of solar and wind energy, Biden’s plan has been criticised for is infeasible and unrealistic because it requires technology that does not even exist yet and is not commercially viable at the large scale needed. Further, the investments needed to make the plan work would be too costly and these costs would ultimately be passed on to the consumers.  

These criticisms should not be ignored. However, if we are to even come close to halting global warming, then ambitious goals and targets need to be made and large investments need to be made in new technology. There are certainly risks to these investments, but they are significantly smaller than the risks of doing nothing.

The election of Joe Biden would represent a huge shift in America’s willingness to act on climate change. The Trump administration is crowded with climate change sceptics and during his first term he has set about dismantling environmental regulations and Obama-era climate policies. According to research by the Rhodium Group, Trump’s policy rollback will have resulted in 1.8 gigatons of additional CO2 emissions by 2035. 

One of Trump’s 2016 campaign promises was to bring back coal mining jobs. However, the share of coal used to generate electricity has actually dropped from 33% to 23% (as per data from EIA) over the last 4 years and many utility companies are already planning to phase out coal by the end of the decade. It is clear that the energy industry is already moving in the direction of cleaner energy – Biden’s plan would simply expedite the process.

The utility industry is well known for its slow rate of change. It is highly regulated and there are low profit incentives for investing in green technology. The Biden plan would force the industry to adapt to the urgency of the climate crisis. Currently, many of the utility companies that rely heavily on coal and natural gas to produce electricity have announced carbon neutrality targets but not until 2050. These companies will be forced to transition more quickly. It is clear then that Biden’s plans for much more rapid climate neutrality put him at odds with major players in the sector.

Being a highly regulated industry, the capital markets will focus closely on any potential changes in policy in electric utilities. In the last couple of months, investors seem to be pricing in a more favourable outlook for companies that focus on renewable energies, while traditional large energy companies have fallen out of favour. Since the first of July, the S&P 500 has climbed 8.6% while some of the largest electricity generators in the US (excluding NextEra Energy which has a high proportion of renewable energy in its mix) have seen their market cap stay relatively flat.

For utilities that have already begun the transition, such as NextEra (NEE), and any company that manufactures parts for solar or wind power generation, a Biden win in November would be a significant boost. Investors have taken notice of these opportunities. Since the announcement, the share prices of publicly traded renewable energy companies have far outperformed the benchmark S&P500 index with First Solar (FSLR) gaining over 40%.

US Utility performance around the time of Biden’s announcement. Renewable focused utilities are shown in green, conventional utilities are shown in brown. Quantopian September 2020.

Of course, as with any transformative policy proposal, the lobbyists in Washington will be working hard on behalf of vested corporate interests to try and maintain the status quo. Some of the highest-polluting energy companies in the country have tried to appease investors with vague statements about long term goals that don’t require any immediate, meaningful change in their operations. Were Biden to win in November, this would no longer be good enough – and that scares many of the traditional companies in the utilities industry.

The Trump campaign will continue to receive large donations from the major energy companies in the lead up to November. This is no different than any prior presidential campaign for a Republican candidate. The difference this year is that they have a lot more at stake. With Biden’s new energy plan and his current lead in the polls, the markets seem to be predicting that a fundamental shift could be about to occur in the utilities industry.