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Utilities' Clean Energy Transition: Our Forecast

Wind and solar generation will drive the U.S. economy's decarbonization plan.

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Editor's note: This article was originally published on Sept. 17, 2021.

The green energy future has arrived.

Energy accounts for 80% of U.S. greenhouse gas emissions, making the energy sector the top target of any plan to fight climate change--and reimagining energy's role in society will have substantial financial and geopolitical consequences.

Utilities are at the center of this clean energy transition. New energy infrastructure, renewable energy, electric vehicles, batteries, hydrogen, and carbon capture all represent growth opportunities for utilities. That said, the clean energy transition also presents financial, regulatory, and execution risk.

Understanding where the risks and opportunities reside is part of the art of creating a portfolio. At Morningstar, we've identified six distinct approaches to sustainable investing, a critical part of investing around climate change, to help investors address those risks and take advantage of the possibilities for future profits. They are: apply exclusions; limit environmental, social, and governance risk; seek ESG opportunities; practice active ownership; target sustainability themes; and assess impact

Here's a look at our expectations for U.S. utilities' green energy future.

Growth Expected for Clean Energy--but Still a Long Road to Net-Zero

We forecast that clean energy--including renewable energy, hydro, and nuclear--will grow to 65% of U.S. electricity supply by 2030. As shown on the chart below, this is a substantial increase from 2020, when clean energy stood at 40%.

This is more bullish than other forecasts, as ours incorporates more coal plant closures, wind and solar growth, small-scale solar, and clean energy imports.

Still, even our bullish forecast means that a huge gap needs to be filled between 2030 and 2035 in order to fulfill President Joe Biden's goal of decarbonizing the power sector by 2035.

His aggressive plan would require the United States to triple its current carbon-free generation. And constraints to doing so include finance, manufacturing, developing the necessary number of wind and solar projects, and electric grid reliability.

Fulfilling this goal will require substantial investment along the entire energy value chain, from manufacturers to utilities to renewable energy developers.

How Will Utilities Drive the Clean Energy Transition?

Utilities will play an essential role in eliminating as much as 75% of the energy sector's carbon emissions through decarbonization of the electric power sector and full or partial electrification of transportation, residential and commercial buildings, and small manufacturing.

New solar and wind generation investment will be the key drivers of the sector's clean energy transition. We forecast that by 2030, utility-scale wind and solar will more than triple to 1,530 terawatt-hours, or 33% of total generation.

Wind generation may have led the first wave of renewable energy investment, but developers are quickly shifting capital investment toward solar. Solar represents roughly two thirds of all planned renewable energy projects during the next three years, as shown below.

Solar is gaining popularity for a few reasons:

  • Solar tax policy is more stable than wind tax policy.
  • Solar has a more favorable generation profile than wind.
  • Utility-scale solar projects require only about 13% of the land per megawatt that wind projects require.

While we expect solar generation to take the lead in the 2020s, wind will still play a critical role in the clean energy transition. Wind energy doesn't always coincide with peak electricity demand in the way that solar does, but it does pair well with the seasonality of solar.

Who's Investing in the Renewable Energy Transition?

One critical factor in the speed and scale of this transition is corporate demand for renewable energy. We expect business electricity demand to start growing again as the economy recovers from the pandemic, creating an expanding base for renewable energy demand.

Particularly, we expect the technology and consumer sectors to invest considerably in renewable energy to keep pace with their environmental goals. For example:

  • (AMZN). With recent additions to its portfolio of renewable energy projects, Amazon has crowned itself the world's largest corporate buyer of renewable energy. Ultimately, its portfolio is expected to help the company reach 100% renewable energy by 2025 (well ahead of its 2030 target).
  • Microsoft (MSFT). Microsoft has set ambitious renewable energy targets, invested in a large wind and solar portfolio, and worked with industry peers to support other corporations' renewable energy investments. The company has already met its 2025 goal for 100% renewable energy and is now aiming for carbon-negative energy by 2030 across its entire value chain.
  • Apple (AAPL). Apple reached 100% renewable energy in 2018 but is still aiming to be carbon-neutral across all operations by 2030. It has also been working with suppliers to develop tools and systems that will ensure every device sold has a net-zero climate impact by 2030.

Additionally, the large global integrated energy companies are pursuing renewable energy investment to address investors' ESG concerns and to offset the potential long-term drop in fossil fuel demand. Key examples of these companies include:

  • BP (BP). BP has the most aggressive targets among its peers as it aims to reach net-zero carbon emissions by 2050. The company has plans to reduce hydrocarbon production, reduce refining capacity, expand its current renewable energy portfolio, and direct over 40% of investments to low-carbon electricity and energy, customer convenience, and mobility.
  • Total (TTFNF). Total is pursuing a 2050 net-zero target by investing in renewable energy while still planning to grow its hydrocarbon business. Its renewable energy investment will focus on solar, but the company will also try to leverage its offshore oil and gas experience by investing in offshore wind farms.

What Else Will the Clean Energy Transition Require?

Building out solar and wind infrastructure is only part of the path to net-zero emissions--there are several other pieces of the puzzle that represent additional investment opportunities for utilities:

  • Upgrading the transmission and distribution system. Utilities could have to double or triple the 150 million megawatt-miles of transmission lines in the U.S. to reach net-zero emissions. This could require a substantial capital investment--and though this would raise certain parts of consumers’ electric bills, it could be a net benefit for many consumers.
  • Preserving the U.S. nuclear, geothermal, and hydro fleet. We think the era of policymakers pressuring to retire nuclear facilities has subsided. Few clean energy generation forms provide the scale and reliability of nuclear facilities, with refueling needed only every 12-18 months and facilities often running at 90%-plus capacity factors. Utilities also must maintain their hydro facilities, especially in areas like the Northwest. Geothermal generation will remain the smallest clean energy source in the U.S. but still experience marginal growth.
  • Integrating an increasing amount of energy storage (especially batteries). Storing electricity--especially intermittent renewable energy--for future use will determine the speed and scale of the clean energy transition. Technologies such as batteries, pumped hydro, and demand response help smooth short periods of energy imbalances. And hydrogen and carbon capture with underground storage have the potential to smooth energy market imbalances across days or seasons.
  • Exploring hydrogen as a complement to renewable energy. Utilities see hydrogen's future as a source of long-term clean energy storage. As hydrogen costs come down, it has the potential to replace gas and oil as a carbon-free weekly/monthly/seasonal grid-balancing solution.
  • Adapting to the changing role of natural gas. We consider natural gas a bridge fuel: We expect that it will remain the largest source of U.S. power generation at least through 2030 but then begin to fall.

What Could Hold Back the Clean Energy Transition?

While the clean energy transition is happening, there are challenges and risks to our forecast that utilities must address. These include:

  • Reliability and resiliency. Electricity reliability will become an even greater focus as the U.S. turns to clean electricity: One large reliability event could derail our forecast and the entire decarbonization effort.
  • Land use. It's an ongoing debate whether the U.S. has enough land area to support a solar and wind fleet large enough to power most of the country. Key considerations include whether any forest area will need to be cleared for wind and solar farms, the use of existing agricultural land, and how solar can be maximized in urban areas.
  • Customer bill impacts. The clean energy transition will probably affect two components of customers' electric bills: Lower wholesale electricity prices could offset some of higher distribution charges.
  • Regulatory risk. The focus on clean energy by policymakers and investors increases utilities' regulatory risk by increasing the investment those utilities need to make. The more capital needed, the more support utilities need from regulators to earn a fair return on their investments.
  • Stranded assets. As policymakers move away from coal generation, utilities must work with regulators to ensure proper recovery of coal investments. Failure to receive appropriate recovery could result in stranded assets, depressing shareholder returns.
  • Politics. There's some degree of uncertainty regarding political support for renewable energy. Although the Biden administration is on board, state and local officials will determine how fast projects can be sited and developed. Offshore wind is one area where politics will play a key role.
  • Natural gas distribution. Several states and municipalities have recently gone wobbly on natural gas, but we think gas will remain a key energy source in the near term. While we don’t think retail customers will stop having access to natural gas and start using hydrogen directly for heating and cooking anytime soon, we do think that utilities will start experimenting with renewable natural gas.

Travis Miller does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.