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US utilities to boost capital spending in shift away from coal

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Expect U.S. electric utilities to boost capital spending, as the industry continues its shift away from coal and toward natural gas and renewable energy as part of many companies' decarbonization efforts, according to CFRA Equity Research.

Potential state and federal carbon regulations, as well as advantages to renewable generation are pushing some regulated utilities to seek out less carbon-intensive energy sources, CFRA analysts Christopher Muir and Shang Yang Chuah said in their 2019 survey of the electric utility industry. The increased renewable generation will likely lead to higher capital spending levels for companies and drive rate base growth.

Overall, CFRA projects capital expenditures for the S&P 1500 Electric Utilities Index will see a growth rate of 5.5% in 2019 and 4.5% in 2020.

Power plants primarily using gas, wind or solar as their main fuel make up an overwhelming majority of facilities slated to come online through 2023 and are currently in various stages of development or under construction. While investments in new natural gas-fired plants are the most popular option among regulated utilities, these companies are also increasing their exposure to renewables with new wind and solar capacity.

CFRA believes economic and environmental pressures, such as renewable energy's declining costs and increasing competitiveness and pressure from climate change advocates, are largely driving utility investment in renewables, rather than state renewable mandates.

"As utilities pursue a low-carbon or carbon-free future, we expect substantial investment in energy storage assets due to the intermittent nature of wind and solar resources, as well as a mismatch between the timing in daily peak supply and peak demand," Muir and Chuah wrote. "Nevertheless, the substantial increase in investments will expand the utilities' base rates, leading to higher customer rates and [earnings per share]."

The same market trends, particularly lower natural gas prices, have also fueled coal-fired plants' declining usage and accelerated retirements. While CFRA believes that the Affordable Clean Energy rule will extend existing coal plants' operating lives and reduce the need for new generation, an analysis by S&P Global Market Intelligence has found that operators behind these projects are still moving forward with retirement plans; some 13.5 GW of coal-fired capacity went offline in 2018, the second-highest year for coal plant retirements, while another 9.7 GW is scheduled to go offline in 2019.

In addition to new generation to replace coal, CFRA expects utilities to increase capital spending for system modernization, system upgrades and storm hardening. Customer growth and capital expenditures on utilities' delivery systems are helping boost rate base and higher customer rates.

"The electric and multi-utilities industries are viewed as defensive industries with relatively predictable and steady earnings growth over longer periods of time driven by rate increases and customer growth," Muir and Chuah wrote. "We project that the amount and number of rate increases in the next few years will be helped by very strong capital spending levels."