- The ‘American Jobs Plan’ proposes spending more than $380bn on the clean energy sector
- As the world’s largest generator of wind and solar power, NextEra Energy could be a big beneficiary
At the end of last month, the Biden administration unveiled plans to spend $2 trillion (£1.4 trn) on US infrastructure over the next decade. While a considerable proportion of that total is directed at traditional infrastructure, such as roads and bridges, Biden has used this opportunity to reiterate his commitment to combatting climate change.
The ‘American Jobs Plan’ – which could easily have been called the ‘American Climate Plan’ – proposes investing more than $380bn in the clean energy sector, on everything from electric vehicle (EV) charging infrastructure to modernising the electrical grid. It also provides a 10-year extension to tax credits for renewable energy generation, totalling an estimated $400bn.
If all of this spending actually takes place, the question is, how significant will this be for the clean energy sector?
“Even during the Trump administration, the renewables build out in the US was still going strong,” says Jennifer Boscardin-Ching, senior client portfolio manager at Pictet Asset Management. “It showed that the transition towards clean energy is not dependent on regulation alone. We’re now at the point where it just makes economic sense from a cost or competitive advantage perspective.” Indeed, according to Bloomberg New Energy Finance, wind and solar are now the cheapest source of new electricity generation for two-thirds of the world’s population.
So, Boscardin-Ching says “what the Biden administration's goals will probably serve to do is accelerate all of this and support the transition that is already happening”.
Biden is aiming for the US to generate carbon-free electricity by 2035, which will require a considerable shift towards renewables. Only a fifth of US electricity came from renewable sources last year, versus around two-fifths for the UK and European Union.
NextEra energy could prove a winner
NextEra Energy (US:NEE) – which is a top 10 holding of the Pictet Clean Energy Fund (LU0448836949) – looks particularly well-positioned to enable this transition in the US as the world’s largest generator of wind and solar power. It is aiming to construct up to 30 gigawatts (GW) of new renewables capacity by 2024, equivalent to 1.5 times its entire operating renewables portfolio at the end of 2019.
But the opportunity lies beyond just renewable assets. Boscardin-Ching says “one of the largest bottlenecks in terms of the renewable energy build-out in the US is the lack of transmission line capacity”.
A large-scale shift towards wind and solar power sources will require an overhaul of the US’ aging grid networks, and Biden’s plans involve ploughing $100bn into modernising US power infrastructure, supporting the buildout of at least 20GW of high-voltage capacity power lines.
That would still leave the need for considerable private sector investment; a study by trade body WIRES suggests that annual spending on transmission will have to rise from $15bn at present to $40bn by 2050. NextEra is the leading transmission company across North America, operating in 10 US states.
Biden is also proposing investing $174bn to accelerate the shift towards EVs, establishing incentive programmes to build 500,000 EV chargers by 2030. Rebecca Myatt, portfolio manager at the First Sentier Responsible Listed Infrastructure Fund (IE00BDBRBW92), notes that “in order to have such a large network of charging stations, you will require the transmission and distribution to pull power to centrally located places where all those charging stations will be installed.”
NextEra started life in 1925 as electric utility Florida Power & Light (FPL), and FPL is still the largest contributor to earnings, accounting for around two-thirds of revenue and three-quarters of operating profit in 2020. But as its renewables portfolio continues to expand, this should become a more significant part of the picture, with long-term contracts providing visibility over earnings and a predictable source of cash flow.
In the three months to 31 March, the group increased its adjusted EPS by 14 per cent year-on-year to $0.67. It is guiding to a full year adjusted EPS of between $2.40 and $2.54 – up from $2.31 in 2020 – and expects 6 to 8 per cent growth in 2022 and 2023.
It’s worth noting that NextEra is also a recent addition to the Dividend Aristocrat club – meaning that it has increased its dividend for 25 consecutive years – and expects to grow its annual payout by a tenth through at least 2022.
The shares are trading at a rather pricey 30 times consensus 2022 earnings and there have been concerns about rising valuations among green energy stocks and a potential bubble. But Chris Greenland, manager of the Sanlam Real Asset Fund (IE00BJ5CB886), believes in taking a long-term view. “The opportunities ahead for these businesses are not just in the next two or three or five years; this is a multi-decade opportunity,” he says.
Greenland is not the only fund manager to take this stance. “We have barely begun the whole-economy transformation required to avoid the worst effects of climate change,” says Deirdre Cooper, co-manager of the Ninety One Global Environment Fund (GB00BKT89K74), where NextEra is the second largest holding. She says that the path to net zero will require “vast additional spending and innovation” and that investors have “yet to fully recognise the growth potential of decarbonisation, making it one of the most exciting structural-growth investment opportunities of our times”.
Biden’s plan is an ambitious opening gambit, and whether it is implemented in part or in full, the direction of travel is clear. “We will not be open to doing nothing,” says Biden. “Inaction is not an option.”
