Technological innovation, cheaper production and maintenance costs, and new government incentives passed into law in 2022 have accelerated the country’s transition to renewable energy and the decarbonization of electricity in the U.S., according to Fidelity’s Douglas Simmons.
"Renewable energy is the best thing to happen to utilities since air conditioning,” says Simmons, portfolio manager of Fidelity® Select Utilities Portfolio (FSUTX) since 2006. “The U.S. is moving from a ‘petro state’ to an ‘electro state,’ meaning the country is undergoing a transition from oil to electricity, and I consider utilities one of the largest beneficiaries.”
Certain electric utility providers that have traditionally operated coal or natural gas-powered electricity plants are incorporating plans to boost spending on the development of new renewable power production, such as wind and solar facilities, because the economics to do so are now more compelling, says Simmons. He notes that it is cheaper for utilities to make electricity with wind and solar energy than by burning gas or coal.
He attributes this shift to three major factors. First, there are virtually no commodity costs associated with wind and solar energy once the renewable plants are built, he says. In comparison, higher prices for natural gas, which fuels turbines in many electricity plants, are forcing more utilities to contemplate the development of wind and solar energy facilities to grow their power capabilities.
Second, he adds, is that it is significantly less expensive, in terms of labor, to operate and maintain a solar energy facility than a gas-fired power plant. Third, the costs to acquire and install the most technologically advanced renewable energy facilities have notably declined, according to Simmons.
“The economics of these renewable options has significantly improved,” the portfolio manager says. “This growing economic advantage and increasing appeal of clean energy are accelerating the renewable buildout.”
In addition, the U.S. Inflation Reduction Act, signed into law in August, earmarks federal spending and investments in solar, wind, hydrogen, and nuclear energy, propelled by tax credits and financial incentives, and puts the U.S. on a course to achieve a net-zero greenhouse gas emissions economy by 2050, says Simmons.
“Never before have we seen such a coordinated, bi-partisan effort to address climate change,” he contends. “While the shift to renewable resources was already well on its way, I believe these new, supportive policies turbocharged the country’s shift to renewables.”
From an investment point of view, Simmons notes that “utilities with a focus on renewables have posted solid profit growth with their capital investments, and renewables remain a massive capital expenditure opportunity with a long runway for growth.”
The fund has owned shares of several companies focused on building out their renewable capabilities to meet the rising demand for these solutions, Simmons says. Three in particular—Constellation Energy (CEG), NextEra Energy (NEE), and Sempra Energy (SRE)—were among the fund’s largest holdings at the end of February.
“These companies are at the epicenter of a shift in the U.S. away from coal-generated power and toward renewable energy sources, which could translate to faster earnings growth for utilities over the long term,” says Simmons. “I’ve positioned the fund in companies I believe stand to gain the most as the U.S. switches more of its power fleet to wind and solar. In my mind, certain firms are positioned better than others to take advantage of this shift.”
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