- Compliance with the Biden administration’s planned 2035 net-zero carbon-emissions target for electricity generation would require aggressive carbon abatement by U.S. utilities.
- Boosting zero-carbon capacity to support retirement of fossil-fuel power plants would limit asset-stranding risks and would replace aged infrastructure.
- Despite widespread adoption of decarbonization targets by U.S. utilities, only a handful are projected to reach near-zero carbon intensity for electricity generation by 2035.
President Joe Biden is targeting net-zero carbon emissions in the United States by 2050, but the target date for electricity generation would come 15 years sooner. Is the U.S. utilities sector prepared for net-zero emissions by 2035? What are the investment implications?
Our analysis shows that current planned investments fall far short of what would be needed to meet the new administration’s climate goals. The lack of clear government policy likely has been a contributor to this shortfall. The incoming Biden administration’s climate policy proposals may lead utilities to take the long view with their capital allocations or risk being left with stranded assets or lost opportunities. For their part, investors may want to monitor these developments closely.
Reducing Carbon: What It Would Take
Decarbonizing U.S. power generation by 2035 would be a difficult task, as coal and gas remain major fuels for electricity production. Fossil fuels contributed around 63% of total U.S. electricity generation in 2019, just over 4,000 terawatt hours.1
Replacing U.S. coal and gas-fired power-generation output with renewables could require new generation capacity of around 700 to 800 gigawatts (GW)2 in the next 15 years (excluding potential demand growth due to electrification, assuming no additions to nuclear-energy capacity and an average load factor3 of 30% for renewables). This amount is roughly equal to the current stock of 250 GW coal-fired and 540 GW gas-fired capacity in the U.S.
Planned Investments Fall Short
Around 80 GW of additions in new zero-carbon capacity are planned between 2020 and 2024, including hydro and nuclear, according to the U.S. Energy Information Administration. This is just around 10% of the estimated amount needed by 2035. That gap represents a huge amount of new energy infrastructure to be brought online in a relatively short period; the slow start increases the challenge.
Our review of companies’ investment plans4 points to similar findings. As the exhibit below shows, planned investments in new renewables capacity accounted for 8% of total capital expenditure planned — lower than planned allocations for conventional generation (10%) and gas transportation networks (12%).5
Meanwhile, 37% of planned investments are allocated to electric networks. Modernizing the electric grid is important for decarbonization but, without additions to zero-generation capacity, the 2035 target would remain out of reach.
Renewables Account for Under 10% of US Utilities’ Planned Investments
Unallocated networks = unclear if it relates to electric or gas networks; conventional generation = coal- and gas-fired, oil-fired, nuclear; renewables generation = wind, solar, hydro and other or any capex classified as renewables by the reviewed companies; unallocated generation = identified as allocated to generation assets, but unclear generation fuel; other green = electric vehicles charging, batteries, hydrogen.
U.S.-based companies, constituents of the MSCI ACWI Investable Market Index and classified in the utilities sector as of July 2020, excluding those exclusively engaged in water supply and sewage. Companies' investment plans broadly cover the period of 2020-2025, but exact periods vary. Source: MSCI ESG Research as of October 2020, company disclosures.
Most US Utilities Lack Adequate Decarbonization Plans
The challenge for U.S. power generators (and their investors) is to seize the investment opportunity, rather than posing a stranded-assets risk. Most coal-fired power plants currently in operation are almost 40 years old, meaning that investments have largely been recovered.6 Gas-fired power plants, on the other hand, are newer. Most were built in the early 2000s, but most would reach the lower end of their technical useful lives during the 2030s.7
We identified 42 companies that are constituents of the MSCI ACWI Investable Market Index as of July 2020 classified in the U.S. utilities sector that have power-generation activities. Based on the companies’ disclosed decarbonization targets (or lack thereof), we estimate that only five U.S. utilities (12% of power generators) plan to reach a near-zero carbon intensity for their electricity generation by 2035 (see the exhibit below). Some of those companies already have a very low-carbon fuel mix and hence carbon reduction may not present a significant challenge for them. Another seven companies have net-zero commitments, albeit targeting 2050 rather than 2035.
Estimated Carbon Intensity of Power Generation in 2035 for Selected US Utilities
Data as of May 2020, except for WEC Energy and Pinnacle West’s data updated as of November 2020. Carbon intensity of power generation is calculated as annual carbon emissions (in CO2 ton) divided by annual power generation (in MWh). It is expressed as ton CO2 per MWh (tCO2/MWh). Company target intensities for 2035 were approximated based on disclosed company targets; where decarbonization targets fall prior to or after 2035, the target is equally prorated over the period. 3) Company target intensities are estimated assuming generation output in 2035 in MWh remains at 2018 level. 4) Where companies do not appear to plan to make any reductions in carbon intensity (no empty blue bar), companies either have no decarbonization target or they have already overachieved their initially planned targets and the solid blue bars represent their 2018 carbon intensity. Company abbreviations: PSEG = Public Service Enterprise Group Inc.; PGEC = Portland General Electric Co.; EPEC = El Paso Electric Co. Source: MSCI ESG Research
Unprepared companies may want to go back to the drawing board if the Biden administration’s climate targets are adopted. “Net zero by 2035” may become their new mantra. For investors, that means paying close attention to company decarbonization targets and capital-expenditure plans to help assess how well U.S. utilities are addressing the transition to a net-zero world.
1“Statistical Review of World Energy 2020.” BP, June 17, 2020.
2A gigawatt is 1/1000 of a terawatt. Electricity-generation capacity is shown in gigawatts and electricity-generation output in terawatt hours.
3Plant load factor represents the time that a given power generation plant is in operation as a percentage of the total number of hours in a year.
4U.S.-based companies, constituents of the MSCI ACWI IMI Index and classified in the utilities sector as of July 2020, excluding those exclusively engaged in water supply and sewage. Industry classification follows the Global Industry Classification Standard (GICS®), which was jointly developed by MSCI and Standard & Poor’s. Companies’ investment plans broadly cover the period of 2020-2025, but exact periods vary.
5Gas-transportation networks also face asset stranding risk as the use of gas declines (subject to regulatory provisions).
6“Form EIA-860,” U.S. Energy Information Administration, September 2020.