The US energy sector is reaching an historic inflection point on renewable energy where utilities may build renewable infrastructure and decommission fossil-fuel based production under their own financial steam.
Jim Wright, fund manager of the Miton Global Infrastructure Income fund, says the switch from fossil fuels and coal generation to renewables will be driven by economics rather than politics and policy.
He says: “Basically, the work we have done, suggests that we are coming very close to an inflection point in the US because of the falling capital cost of the renewables such as wind turbines and photo-voltaic cells. Potentially in the next couple of years, we are getting to a point where, on an unsubsidised basis, they are cheaper than the cheapest fossil fuel – combined cycle gas – and significantly cheaper than coal.”
Politics does still have an influence however. He believes the US is particularly investable because many US states have clear political and regulatory lines driving policy – something that is not always the case in Europe and Asia.
A typical US state set up consists of a public utility commission led by politicians with professional staff and utilities which have a rate base, regulated assets for power generation and transmission and a regulated return.
He adds: “Historically the utilities want to grow their rate base, and the authorities want an efficient reliable network with no blackouts. We know they are worried about bill shock for customers which can happen if there is too much costly investment.
“The real game changer now is when the utilities can go to the regulator and say we are going to decommission this existing coal plant and replace it with new wind power. We will build the generation and the transmission lines but this means cheaper electricity. This is new. We haven’t seen it before. It is a win-win.”
He says it is worthy of note that it is not a state such as California leading the way but Texas and that while you might well typically associate Democrats with renewables and Republicans with fossil fuels, it is economics is driving these decisions.
“Everyone likes cheap energy”, he adds.
Wright also makes the case for the growth characteristics of his fund alongside the defensive qualities you get from typical infrastructure investment noting the some of the fund’s holdings have double digit growth and double digit dividend growth.
“This is an income fund, but we think we can grow it on an annual basis, partly because of the inflation linkage we get from infrastructure but partly because of the long term growth trends that we can identify.”