The green energy future is here.
In the new Morningstar Utilities Observer titled ‘Utilities Leading the U.S. Energy Transition’, Morningstar Analysts Travis Miller, Andrew Bischof, Daniel Grunwald, Sam Siampaus and Brett Castelli find an epochal shift in how society consumers and delivers energy on the horizon.
In terms of investment opportunities in utilities, the authors highlight new energy infrastructure, renewable energy, electric vehicles, batteries, hydrogen, and carbon capture, while highlighted risks include financial, regulatory, and execution risks.
“Energy accounts for 80% of U.S. greenhouse gas emissions, making the energy sector the top target of any plan to fight climate change. Bill Gates’ How to Avoid a Climate Disaster, Pulitzer Prize winner Daniel Yergin’s The New Map, and the International Energy Agency’s Net Zero by 2050 report are the most recent illustrations of how reimagining energy's role in society will have substantial financial and geopolitical consequences. Utilities are at the center of the clean energy transition,” the report notes.
The authors forecast a 40% reduction in electric power sector carbon emissions during the next decade., which could get the U.S. close to net-zero power sector emissions by 2050, whereby emissions are eliminated or offset by carbon capture or carbon-removal technology. “Utilities will play a role in eliminating as much as 75% of energy sector carbon emissions, including emissions cuts in the power generation, transportation, commercial, and residential sectors,” the report finds.
Though this represents a 36% cut in economywide emissions from the 2005 peak, all else held constant, the authors also note that hitting net-zero emissions economywide by 2050 is unlikely, requiring an unprecedented shift in how the U.S. has consumed energy for the last 200 years.
Morningstar's 2030 Clean Energy Outlook
Our analysts forecast that clean energy will be 65% of electricity generation by 2030, higher than other forecasts but short of U.S. President Joe Biden's goal of 80% by 2030 and 100% by 2035. They believe solar will be a big winner during the next decade, eventually matching wind generation. However, nuclear and hydro generation remain at current levels
“State policies drive one-third of renewable energy growth. Federal tax policies are unlikely to change our forecast because wind and solar economics already match other generation types. Improvements in solar panel and wind turbine efficiency should offset capital cost inflation. Nearly 40% of our renewable energy growth forecast are identified projects, many with contracted pricing.
Renewable energy reduces volatile commodity costs that affect about half of customers' bills, leaving headroom for utilities' growth investment. Improvements in government siting, permitting, logistics, and project scale will support 27 GW of offshore wind by 2030,” the report notes.
The authors also expect coal's market share to drop to 6% of total generation by 2030, down from 19% at the end of 2020, while carbon capture technology could save newer coal plants representing about 10% of the fleet as costs come down during the next decade.
What Could Go Wrong?
In terms of the key risks, the authors highlight reliability, land use, customer bills, and politics as being some of the major issues utilities will face if the clean energy transition plays out as forecasted. “Customers might be willing to pay higher costs to avoid the destructive climate change-related storms, fires, and other extreme weather. Retiring emissions-intensive coal plants will result in stranded assets that are a concern for utilities investors, regulators, and customers,” the report says
You can find a copy of the report here.
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