If you want the money, especially from the government, you have to endure monetary duress.
Call it what you like. But that’s what we call it. No, this isn’t about the IMF. They’re too obvious.
If you’ve hung around the utilities business a while, as an investor or whatever, you know it’s been a rollercoaster ride of various not so handsome investments often in areas where these firms had little if any experience.
Quite often, though many will try to deny it, these investments were forced on the utilities owing to environmentalist bullying. It goes back years.
Believe it or not before tiktok.
We recently heard from Al Gore, the dude who invented the Internet, another sign the climate change tribe is worried as in scared shitless. All that money, from you to them, going to slip, slide away.
So you just wound up a 20-year career as a dog groomer and now you want to start a breakfast joint but you have extreme difficulties flipping your sunny side-up eggs without breaking the yolk.
And we’re not sure but that’s bacon we smell burning.
As a quick aside it might surprise you that some of the country’s largest utilities are trying to unload their solar and wind junk. Not profitable enough.
Or that big mutual funds like BlackRock are playing both sides of that boulevard. Meaning in short they don’t want to miss the huge money being made in the hydrocarbon patch despite the objections of Bernie and Elizabeth while singing the PC required notes of the ESG gangs.
Some folks might get edgy and call Larry Fink and BlackRock hypocrites. Not us.
Here’s an article to fill in some history for those who doubt that theme, government monetary duress.
“Electric utility managers run in herds so to speak. Decades ago they decided to build nuclear-generating stations and almost every utility company that could did it. Financial meltdown followed— caused by runaway cost escalations made even worse by rampant inflation. (Most of the plants eventually operated but the builders’ finances tanked and both equity and fixed income investors suffered.)
“Then the “herd” decided to diversify into varied industries: real estate, mining, paper, lending, and one company even processed spent hens into chicken soup. Most of these ventures ended badly too. The lesson learned? Only go into businesses you understand. So the “herd” plunged into power generation but with some foreign utility and generation investments.
“The result? Huge write-downs. So it’s back to basics for the U.S. electric utility industry which has worked out fairly well so far. So what comes next? The biggest spending spree in the industry’s history, thanks to the Inflation Reduction Act, is because the only way to receive the varied financial incentives is by investing money for the designated purposes.
“Perhaps ironically the “herd” is now investing in the same carbon-free and carbon-reducing concepts they fought in the courts for years while smilingly endorsing far-off climate goals. What changed? The government offered carrots instead of sticks and made offers that would be financially hard to refuse. Huge Spending Ahead
“But that brings us to financing. A few years ago, we estimated that the electric industry would have to invest an average of $350-400 billion a year over 20 years to decarbonize existing utility plant and replace related assets due for retirement. That estimate did not include any allowance to finance growth in sales, because, at the time, sales growth had stalled. Since that estimate, we’ve seen a pandemic, inflation, war-induced shortages, and now a huge batch of government incentives that could restart sales growth in the industry.
“After making some heroic assumptions about improved productivity of renewables and storage (20% above current estimates) and adding in a roughly 30% increase in construction costs since the original estimates as well expenditures needed to meet newly expected growth, we believe that required expenditures for decarbonization, modernization, and growth requirement will have to exceed $400 billion per year, in real terms.
“We estimate that the electric utility industry will spend something like $170-$180 billion on capital projects in 2022. That number equals roughly 10% of non-farm business capital spending in the U.S.”