Carbon Winners and Losers - There’s a New Rule in Town
A seismic shift in the power generation landscape is starting to sink in. It has been two weeks since the EPA announced its new proposed carbon rules, one of the flagship efforts of the Obama Administration to address climate change. This shift is meant to move the country in the direction of inevitable changes coming to the energy economy. It is important for investors to know which companies and sectors stand to benefit from the new rule.
What the rule says
The basics of the proposed rule are this: States need to come up with ways to reduce power plant emissions. The goal is to allow flexibility to States so that they can implement innovative strategies to reduce the “pollution-
The EPA is framing the effort with four “building blocks” in order to reach carbon reduction goals. These are:
1. Improved operations at power plants.
This means building more efficient plants, or retrofitting existing ones.
2. Substituting high carbon generating plants with lower carbon generation.
In effect, replace coal-fired plants with natural gas.
3. Substituting fossil fuel plants with low and zero carbon generation.
A call to enhanced deployment of renewables.
4. Increase demand side efficiency.
Lower the energy use of homeowners, businesses, etc.
All four of these building blocks have strong implications for alternative energy investors. They are listed below in order of relevance to the companies we track here at the Roen Financial Report.
Substituting fossil fuel plants with low and zero carbon generation
This building block is at the heart of the mission of the Roen Financial Report, moving beyond fossil fuels and into the realm of renewables. These two very different companies are among my top picks to benefit in this category.
Source: SolarCity Q1 2014 Earnings Conference Call
SolarCity Corp (SCTY) is an innovative, full service solar installation company that has had more digital ink spilled about it than most any other alternative energy company (including my own analysis (http://www.roenreport.com/
Increase demand side efficiency
Efficiency is one of our favorite investment themes. This is low hanging fruit – it benefits end homes and businesses by saving money, it benefits utilities by reducing the need to build more capacity, and it benefits the environment. The three companies below are well positioned leaders in this category
EnerNOC, Inc (ENOC) helps commercial and industrial users reduce electricity use during peak demand, which can significantly reduce a company’s energy consumption. EnerNOC’s services include demand response, energy efficiency, energy procurement, emissions tracking and trading support. This Boston-based company recently won an auction for over $185 million in capacity payment in the PJM Interconnection capacity market for 2017/2018, which should bode well for its bottom line. ENOC is up 41% for the year, and over 220% from its lows in 2012.
Tetra Tech, Inc (TTEK) is a diversified company that provides environmental services, energy efficiency consulting, carbon management and other services. This large California-based company works on projects world-wide and brings in almost $2 billion in revenues annually. TTEK has been a component of the Paradigm Portfolio (http://www.roenreport.com/
Ameresco Inc (AMRC) is a small Massachusetts-
Substituting high carbon generating plants with lower carbon generation
The case is now clearer than ever that coal will be phased out in favor of natural gas. Though substituting one fossil fuel for another may not be the ultimate solution to solving our climate problems, it is undoubtedly a critical short-term step to addressing base-load needs while reducing carbon emissions. Three companies have been selected which stand to benefit from this trend.
NextEra Energy, Inc (NEE) is a large, profitable Florida-based power company that generates more than half its power from natural gas. NextEra is in the process of completing a major development cycle where it is modernizing older, less-efficient fossil generation facilities and building more efficient, cleaner natural gas-fueled plants. For example, its Port Everglades plant was demolished in 2013 to be replaced with plant that should have half the emissions. Also, NextEra is developing a new natural gas pipeline to Florida targeted for completion in 2017. In addition, NEE generates 8,000 megawatts of electricity from renewable resources.
As a utility NextEra offers steady stock price growth with an attractive yield. With over 4.5 million customer accounts, NextEra Energy is well over the industry average in assets and earnings growth. We consider NEE to be above fair value at current levels, but it remains a good long-term investment.
Sempra Energy (SRE) Sempra Energy is a holding company that owns two southern California utilities, as well as energy assets in other parts of the United States, Mexico, and South America. This San Diego based company has over 17,000 employees and provides products and services to more than 31 million consumers worldwide. Sempra has a strong portfolio of natural gas pipelines, storage and generation facilities. As with NextEra, Sempra also has an array of solar and wind facilities that it manages. Sempra has had steady sales and strong earnings, but has a relatively high PE. It is deemed to be just above fair value, so is a good buy in the $85-$90 price range.