2020 outlook: Utilities

Is the golden age of renewables here?

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Key takeaways

  • Utility companies that can embrace energy efficiency and conservation may benefit from a secular transition from coal and other traditional sources to renewable energy.
  • Renewable energy, which includes wind and solar, is forecasted to grow from approximately 10% of energy generation today to nearly 40% in 2030.
  • Energy storage, which increases reliability and availability of renewable energy, is another area of potential growth for the sector.

Anemic electric-power sales growth across the US, mainly due to a mostly solid domestic economy and structural shifts in energy efficiency and conservation, has resulted in modest earnings growth for most companies within the utilities sector. However, despite little organic growth across the sector, there are some notable secular changes that are poised to benefit certain utilities companies.

Most significantly, the transition of the power fleet from coal to renewable energy is propelling the sector into the "Golden Age of Renewables," stoking higher growth for companies embracing this secular shift. Coal-powered plants continue to close at a steady clip, while nuclear plants are also shutting down, albeit at a slower pace, as the economics and demand for renewables improve. As consumers have become more aware of the effects of climate change and are now beginning to prioritize cleaner energy, the buildout of renewable energy plants is accelerating at a record pace. Energy from wind and solar plants is becoming more and more accessible, as well as economically viable. Since 2008, renewable energy generation in the US has doubled.

In the next 10 years, renewable energy, which includes wind and solar, is forecasted to grow from approximately 10% of total US energy generation today to nearly 40% in 2030, mainly at the expense of coal, natural gas, and nuclear. Even though tax credits for developing renewable energy resources are expiring, advances in technology have made the renewable industry economic on its own. In fact, most wind and solar plants can be built in about a year and brought online much quicker than any new gas or nuclear plants. Additionally, given these favorable economics, as coal plants are retired, states are looking to renewable sources as replacements.

While renewable energy plants continue to gain traction, renewable energy storage is another potential area of growth within the utilities sector. Currently, there is not enough storage capacity to house all of the energy that renewables are generating. Storage capacity, which increases reliability and availability, will need to increase substantially to meet the dramatic projected growth in renewables.

With the increased adoption of renewable energy generation, the earnings growth of the utilities industry is positioned to expand at a higher rate than the sector historically has seen. Federal and state regulation remains supportive, as governments continue to encourage companies to invest in renewable energy, and the public appears willing to pay for these more economically sound and greener options.

Next steps to consider

Research the Fidelity® Select Utilities Portfolio (FSUTX).

Get the details on the lineup of mutual funds.

Go back to the full 2020 sector outlook.

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