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By Ronald B. Silvestri
The Inflation Reduction Act could usher in a golden age for energy generation, storage and distribution. That could breathe new life into the utilities sector.
We believe the multi-decade, clean-energy mega-trend—further turbocharged by the recent Inflation Reduction Act (IRA)—should provide utilities with incremental growth opportunities.
For decades, utilities have been a steady, if not a scintillating attraction for equity investors. Modest growth, regulated profits, and aging infrastructure drew focus on value and yield, as opposed to innovation and growth.
But the times, as Mr. Dylan sang, they are a-changin’: Over the next decade and beyond, the IRA is set to unleash nearly $400 billion worth of tax credits and other stimulus that we believe should benefit the utilities sector and stoke investor return potential.
Recall that a utility’s earnings tend to grow as capital expenditures increase. While utilities are regulated, the IRA’s largesse offers the potential for them to invest more in their businesses as additional clean-energy growth opportunities emerge. For investors, that could translate into potential incremental earnings and dividend growth.
To further decarbonize the sector as fossil-fuel-powered facilities retire, the IRA provides a wide range of incentives for investment opportunities in wind energy, next-generation battery storage, photo-voltaic technologies, green-hydrogen production, and more. Just 15 years ago, coal generated nearly 50% of U.S. electricity; that number has dropped to about 20%, and we expect it will shrink to perhaps less than 5% by 2035. The modernization of the aging power grid provides yet another long-term growth opportunity given the need to accommodate more renewables and vehicle electrification.
In all, we expect the clean-energy benefits of the IRA to catalyze a new, golden age of infrastructure growth opportunities for utility investors for decades to come.
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