Despite the withdrawal, we continue to forecast U.S. renewable energy capacity doubling during the next eight years.
By Andrew Bischof, CFA, CPA | 06-02-17 | 02:30 PM | Email Article

We are maintaining our fair value estimates, moat ratings, and moat trend ratings for all utilities after President Trump announced plans to exit the Paris Climate Agreement.

Andrew Bischof, CFA, CPA, is a senior equity analyst for Morningstar.

Despite the withdrawal, we continue to forecast U.S. renewable energy capacity doubling during the next eight years. State renewable portfolio standards, or RPS, and other local policies remain the industry's primary growth driver, not federal environmental policy. Our analysis indicates that renewable energy, including hydro, will grow to meet nearly 20% of U.S. electricity use by 2025, up from 15% now, based solely on existing state RPS.

We think Trump's move to abandon the U.S. Clean Power Plan and Paris Agreement could even embolden states to strengthen renewable energy standards, offering upside to our forecasts. Supportive tax policy and pro-manufacturing initiatives also offer upside. And corporate renewable energy purchases should continue to grow as businesses realize the economic and public perception benefits. Thus, we are not surprised that many business leaders denounced Trump's decision.

We also forecast carbon emissions from the power generation sector will keep falling toward Paris Agreement targets given the growth in renewable energy and gas generation. Low natural gas prices and turbine efficiency improvements are forcing coal plant shutdowns and reduced run times for competing coal generators, which emit twice as much carbon as an equivalent gas plant. 

Utilities operating in states with constructive regulation and environmental policy support could realize 7%-9% annual earnings and dividend growth the next three to five years. Best positioned are utilities like Dominion Energy, Duke Energy, American Electric Power, and CMS Energy that are investing billions of dollars in new infrastructure. NextEra Energy and Xcel Energy should widen their lead as the top U.S. renewable energy companies.

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Andrew Bischof, CFA, CPA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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