The US utilities sector is undergoing a transformation amid a state-wide push towards a low-carbon economy and increasing pressure on big energy companies to “go green”. As the shift to clean power accelerates, Geoff Wan, Credit Analyst at Hermes Investment Management, assesses the investment landscape in the US utilities sector.
“Lacklustre demand for power has been driven by, among other things, energy efficiency measures. Today, the adoption of LED lighting is rapidly rising, electrical appliances and equipment performance standards have improved, household thermal insulation is more efficient and conscious efforts have been made to be less wasteful of electricity. On the supply side, excess capacity is to blame.
“Meanwhile, lower commodity prices and cheaper renewable energy generation and storage costs are adding to the woes of US independent power producers (IPPs) – that is, utilities operating in the unregulated power sector. These adverse effects have reverberated across a number of key US regional electricity markets. For example, demand in New England’s grid (IS-NE) has fallen by about 0.5% year-on-year for the past three years. Moreover, the challenging operating environment has resulted in a wave of bankruptcies and mergers, with companies scrambling to scale up and cut costs in a bid to survive.
“Against this backdrop, conventional US independent power producers are also competing with renewable energy producers and what’s more, they are gaining ground. Last year, renewable energy accounted for 17% of total US power, up from 15% in 2016.”