The Texas Crisis and Green Energy’s Future
As I observe the storm-caused power outages in Texas and the role of the state’s officials in the crisis, I’m reminded of what an editor once told me. Back when I covered politics as a reporter on a daily newspaper, he pulled me aside and said: “Remember, the only way to look at a politician is down.”
Today I want to focus on the nexus between climate change and investing. The dysfunction in Texas looms large in this tale. I’ll also steer you in the direction of companies that should prosper in the new paradigm of power generation.
The Lone Grid State…
Several states (notably Texas) are in the throes of catastrophic power outages that are leaving millions of people without power or heat in subfreezing temperatures. Many scientists blame climate change for the unusually cold weather, arguing that the rapid heating of the Arctic is pushing frigid air from the north pole much further south. Whether you think the concept of climate change is valid or not, the current crisis is real.
Most of the power outages have been caused by fossil fuel infrastructure that has been debilitated by the cold, but politicians have been spreading claims that renewable energy is the culprit.
Political leaders in Texas this week blamed frozen wind turbines for the state’s power outages and lashed out at the Green New Deal. It’s not the job of this column to take political sides, but I feel compelled to point out that these arguments against renewable energy are completely absurd. The truth is, Texas mostly relies on natural gas for electricity and the Green New Deal is only a proposal in Congress, not an actual law yet.
Wind turbines and other green energy sources make up a tiny fraction of the state’s power capacity. The power crisis in Texas stems from failures across natural gas operations and supply chains due to extreme temperatures.
What’s more, the Texas power grid was unprepared for the crisis due to deregulation, which put the grid in the hands of laissez-faire regulators. Texas officials knew in advance that winter storms could devastate the state’s power grid, but they left the choice of whether to winterize to local power companies, many of which opted against the costly upgrades.
There are three grids in the Lower 48 states: the Eastern Interconnection, the Western Interconnection, and the Electric Reliability Council of Texas (ERCOT). The first two grids are multi-state and entail federal oversight.
Texas carved out its own power grid because it wanted to avoid dealing with the feds. The following chart shows the consequences of the state’s secession-minded choice:
The mess in Texas does not mitigate but actually accentuates the importance of green energy, which remains a money-making megatrend for investors.
“C” for climate…
While the weather crisis is prompting Lone Star politicos to look for scapegoats, the corporate C-Suite is focusing on reality. Don’t just take my word for it. Look at the hard data.
On S&P 500 corporate earnings calls for the fourth quarter of 2020, the topic of climate change is leading policy discussions. According to a study conducted by the research firm FactSet, climate change as it relates to energy was cited or discussed by the highest number of S&P 500 companies (among the 344 S&P 500 companies that had reported actual earnings for Q4 2020 through February 10).
In terms of government policies discussed in conjunction with the Trump administration four years ago, tax policy was the number one topic, through the same point in time up to 2017 (see chart).
The Texas debacle demonstrates how climate change is upending the status quo and demanding novel approaches to energy.
In tandem with greater attention to climate change has been the rise of environmental, social and governance (ESG) factors. ESG is gaining prominence in the strategic decisions of Wall Street and corporations.
Consider BlackRock (NYSE: BLK), the world’s largest asset manager. With more than $7.4 trillion in assets under management, BlackRock recently launched several new exchange-traded funds (ETFs) that track ESG-focused companies.
Companies earn low ESG scores for several factors, such as absentee boards, poor safety records for products and workplaces, and excessive pollution. The premise is that a low ESG score increases a company’s exposure to costly litigation, fines and high employee turnover. By contrast, top ESG scorers are likely to be innovators and market leaders.
According to a recent study from Consultancy.org, an increasing number of pension plans around the world are placing a greater focus on ESG, particularly climate risk. The increase in wildfires, floods and extreme weather throughout the world poses a salient ESG theme, as scientists point to climate change as the cause.
How to profit from the renewable revolution…
The pandemic is hastening the adoption of green energies at the expense of fossil fuels. COVID-19 has pushed the energy sector toward an inflection point whereby oil and gas are increasingly replaced by renewable energies, such as solar and wind power. The Biden administration’s green-friendly policies will hasten these developments.
I expect the solar industry’s appeal to last for decades, as the U.S. and major developing countries such as China plow considerable resources into renewable energy and the price of photovoltaic cells continues to plummet.
Electric vehicles are on the rise as well. General Motors (NYSE: GM) announced last month a switch to only EVs by 2035. According to research firm Wood Mackenzie, EVs will comprise 18% of new car sales by 2030.
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