As with any Administration change that involves a party leadership switch at the White House, we expect significant changes to many industries, including the energy industry. Many of the new Administration’s policies and appointments to energy leadership positions reflect a significant shift away from the Obama Administration, which focused on advancing renewable energy sources, supporting development and deployment of clean technologies, and curbing the effects of climate change. This is evidenced by statements made by President Trump and his energy leadership appointees, specifically: exiting from or renegotiating the Paris Climate agreement; stopping implementation of the Clean Power Plan; reducing enforcement of environmental regulations or policies; and curtailing expansion of energy-related health and safety requirements.
As we consider potential changes, it is important to keep in mind that macro forces are also at work shaping the energy industry. We expect that these will largely determine future trajectory of the industry. Examples of some of these forces include:
- Flat to declining load growth for utilities, which has led to flat or declining revenues
- Aging infrastructure that is demanding increased capital investments to sustain current loads
- Technology innovation coupled with new consumer engagement models and the advance of deregulation in some US markets are giving utility customers more choices than ever before about their energy sources and providers
- The rapid decline of wind and solar costs such that they are recognized by numerous utilities, and their regulators, as a prudent portion of a least-cost, least-risk generation portfolio
- Growing demand for natural gas due to lower cost, which is influencing displacement and retirement of coal generation
- Shifting supply chains for fossil fuels, with the opening of LNG and crude export facilities in the US
- Rapid and steep decline in oil prices over the last three years, with prices just now starting to increase again
- The emergence and expansion of autonomous vehicles and their impact on energy demand, fuel consumption, infrastructure and the development of new products to support this technology
This is not to say that federal legislation does not drive corporate action and that the utilities, oil, and gas industries will not be influenced by the actions of the new Administration. We anticipate significant change over the course of the next four years. The following are North Highland’s predictions of how the incoming Administration will influence the energy industry.
Mr. Trump’s appointments to the leadership of the Department of Energy (DOE), Environmental Protection Agency (EPA), and State Department have led to a belief that the current focus on renewable generation will be replaced with renewed emphasis on fossil fuels development. However, many utilities have already taken steps to close existing coal-fired plants, bring more renewable generation into their portfolios, and invest in technologies to help them lower their carbon footprint. These decisions have been based on factors such as state policy, federal tax incentives, the shrinking cost of renewable energy resources like wind and solar, and customer demand. Renewables have recently been on a skyrocketing trajectory, and according to EIA, wind and solar electricity capacity has experienced rapid growth in recent years, increasing by more than 100% and slightly over 900%, respectively, between 2009 and 2015. (Source: EIA)
Mr. Trump’s stated intent to stop any implementation of the Clean Power Plan (CPP) will dampen the expected growth of renewable energy resources that would have occurred under this plan. (Source: EIA). It also means that previous economic assumptions about displacing coal-fired and natural gas generation or reducing output of fossil fuel generation to comply with the CPP will no longer be valid reference points when comparing the costs of renewables and other generation sources. We anticipate state and local regulators will continue to support development of renewables. On the federal level, It remains to be seen whether existing tax subsidies for renewable energy will remain under the new administration, and even absent these tax credits, whether coal in particular re-emerges as an economically viable option (Source: Power Magazine). The expected lessening of environmental regulations on fossil fuel extraction and generation, particularly if tax credits go away for wind and solar, could make investments by utilities in fossil fuel generation more economically feasible than ever before. Mr. Trump has also indicated support for clean coal and carbon storage and capture technologies, but it is uncertain what incentives and regulations he is targeting to support the cost-effective deployment of these technologies. (Source: Washington Post).
If a situation occurs where fossil fuel development becomes more economically advantageous, energy executives will face difficult decisions about how to balance the need to run cost-effective organizations and keep rates low for customers, while at the same time responding to customer demands for clean energy sources.
Mr. Trump has also asked his transition team to look into how to keep nuclear plants operating as part of the nation’s energy infrastructure (Source: Bloomberg). These comments come amidst plans by many operators to close nuclear facilities, including most recently Entergy Corp. who announced that it will shut the Palisades nuclear plant in Michigan in 2018, adding to the growing list of reactors planning to retire early.
There currently is no economical alternative to replacing the existing nuclear generation capability. However, safety concerns and increased year-over-year operating expenses economically disadvantage nuclear against cheap gas and coal. Nuclear, to a greater degree than other power segments, is highly susceptible to the next “event” such as Fukushima. Several new, less expensive and safer reactor designs are underway with strong private sector funding; however, these new technologies are probably a decade away due to licensing hurdles. With regards to environmental concerns, there has been some softening from the green industry relative to accepting or supporting nuclear as a zero-carbon source of power and as an alternative to more gas or coal production.
It remains to be seen whether Congress will consider additional subsidies to help keep existing nuclear facilities operating. We anticipate that nuclear, at a minimum, will continue to be a bridge until other technologies are scalable and cost effective.
A key challenge for utilities is that they are making long term business decisions that will outlive the new Trump Administration. These energy “bets” cannot be turned on and off based on short term political policy. Since generation portfolio decisions are typically multi-decades long, we anticipate that utilities will take a “wait and see” approach, while continuing to diversify generation portfolios and decrease reliance on fossil fuels. We expect utilities to also continue focusing attention on developing alternate revenue streams beyond income generated through customer rates. These include investments in energy management and efficiency solutions, electric vehicles, green pricing programs, and partnerships with third-party providers and/or owning and operating distributed energy resources through rate-based investments. It does not appear on the surface that the Trump Administration will impact utilities’ ability to be successful in these pursuits. A key question is whether utility management sees the perceived preferences of the new Administration, plus a majority Republican Congress, as a long-term paradigm shift away from cleaner generation such that it warrants a revisiting of long-term planning and investment strategy. We do not anticipate that utilities will make major strategy shifts, however it is likely the pace of investment will be slower over the next four years.
Oil and Gas
Oil companies have been operating in survival mode for the last three years as prices have faced steep declines and regulatory scrutiny has increased. This has led to mass layoffs, asset sales, bankruptcies, and drastic reductions in capital spending. The election of Mr. Trump and recent announcement by the Organization of Petroleum Exporting Countries (OPEC) members and Russia to cut production beginning this month has already had a positive impact on future oil prices. The expected easing of regulatory oversight by the Trump Administration of drilling and production activities, coupled with higher oil prices, could put the oil and gas industry in growth mode for the first time in several years (Source: Los Angeles Times). This will likely stimulate increased production by completing wells and more capital investments in new drilling programs, which will complement investments oil companies have been making over the last several years to adapt technology to make existing rigs more efficient (Source: Offshore).
Additionally, it is anticipated that the Trump Administration will slowly roll back inspection and certification regimes started under the Obama EPA administration. These regimes for hydrogen sulfide and methane have been considered a burden by the oil and gas industry, leading to higher costs of production, and will support the possible restart of some idled wells.
Mr. Trump has also expressed support for increased oil and gas pipeline development and will likely try to overturn decisions made by the Obama administration to halt development or extend the permitting process for proposed pipelines (Source: Reuters.) Midstream oil and gas businesses are poised to benefit from a more laissez faire attitude from regulators as a result of the Trump Administration’s policies, however market forces like the price of oil, the growing export market for gas and the public’s impact on permitting, will continue to have much more of an impact on the growth of the oil and gas industry.
In addition to benefiting from rising oil prices following the OPEC announcement, natural gas drilling and production activities will become easier if the Trump Administration follows through on promises to ease restrictions on hydraulic fracturing. However, only higher prices will spur more development. Mr. Trump has also promised to bring back coal generation and increase leasing opportunities on federal lands, which conflicts with his stated goals for increased natural gas production. Competition already occurs between shale gas and coal mining extraction, especially when resources are located on the same properties and cannot be co-developed in a way to optimally extract both resources. Despite Mr. Trump’s statements to support both natural gas and coal, in this case, it appears momentum is on the side of natural gas based on comments by his appointees to the EPA, DOE, and State Department who are advocating for natural gas as a displacement to coal (Source: Link).
Despite Mr. Trump’s pledged support for coal generation, it is likely that the low prices of natural gas, decreasing costs for cleaner energy sources like wind and solar, and growing public concern about climate change, will lead to the continued displacement and retirement of coal generation facilities. The elimination of the Clean Power Plan and reduced enforcement of Clean Air Act criteria air pollutant regulations affecting coal more urgently (e.g., regional haze) can extend the life of some coal-fired units, but it is challenging to see how they will result in meaningful growth of coal-fired generation and generation capacity given competing economics from gas and renewables.
Where do we go from here?
Energy companies should be taking another look at their short and long-term strategies in order to evaluate how best to position their businesses for growth based on the stated beliefs, promises, and anticipated federal legislative actions of the incoming Trump Administration. Whether the election results and resulting federal policy represents a paradigm shift away from the “greening of generation and the grid” to generation sources and a grid more reminiscent of the past is a central question that utility management must answer. Existing generation that faced near-term cost pressures from environmental regulations could continue to generate power profitability given full depreciation. But investment in new coal-fired generation in particular would represent a belief that the recent past is actually an aberration and that traditional energy portfolios will re-emerge and persist. Additionally, we anticipate that a rebound for oil and gas production in the US is likely by the end of 2017 and in to 2018; however, we do not see a return to the “shale miracle” that persisted a few years ago, given that the underlying economics for that boom do not persist today (Source: Link.)
In some cases, the opportunities that will now open up may be in conflict with customer sentiment and business leaders in the industry will need to weigh any potential strategy changes and investments against customer and commercial impacts. The question at the end of the day for energy and utility executives is not whether they can, but whether they should, take advantage of some of the new opportunities that will arise based on the Trump Administration’s expected policies.