Lex letter from New York: green envy

Dear readers,

As temperatures drop in frigid New York this month, my husband and I have battled over the Nest thermostat. He sets it to a balmy 25C behind my back. Unfortunately, more heating, plus power for always-on home office computers, has led to wallet-emptying energy bills.

My husband’s solution to our thermo-spat is to install solar panels. His reasoning: we get free electricity and an income from selling off any excess energy we produce. But this household is not the only one with renewable energy ambitions. Consider the transformation of utility NextEra Energy, which has gone from brown to green power over the past decade.

And NextEra’s strategy, similar to that of Denmark’s Orsted Energy, has paid off handsomely for shareholders. A carbon liability looms for many utilities and Lex has noted the impact of higher carbon costs. ESG-focused investors seek out good portfolio candidates.

With a market value of about $162bn, NextEra could be the biggest power producer you’ve never heard of. Rebranding itself from the more banal Florida Power & Light partly explains that. NextEra’s stock price rose 27 per cent last year and has outpaced the S&P 500 for the past decade.

NextEra — America’s largest generator of wind and solar power — briefly surpassed ExxonMobil in market capitalisation in October last year. It has been dubbed a “green supermajor”. About three-quarters of its ebitda should come from renewable energy sources this year.

All this would have been unthinkable just 10 years ago before clean power was seen as commercially viable. But NextEra has proved adept at mining tax subsidies from state and federal governments to finance clean energy projects around the US. State mandates that require utilities to ramp up the percentage of power derived from renewables also created a market for its output.

Demand for renewable energy should grow under President Joe Biden. He has put combating climate change at the top of his agenda. Since taking office last month, Mr Biden has signed a series of directives — including a freeze on new oil and gas leases on US federal land, doubling offshore wind-produced energy by 2030 and replacing the entire fleet of federal government cars and trucks with electric vehicles. 

GM, meanwhile, this week announced plans to sell only zero-emission cars and trucks by 2035.

All this sounds bad news for traditional oil and gas producers. Even before the pandemic, the industry was already under pressure from investors to reduce carbon emissions. Covid-19 and the subsequent collapse in crude prices resulted in billions of dollars of losses and impairment charges for Big Oil.

That might explain reports of merger chats last year between the heads of ExxonMobil and US rival Chevron. A merger between the two US oil companies would enable cost-cutting, but would probably not meet approval with antitrust watchdogs. Neither has yet dared to take the aggressive steps of UK peer BP, which has promised to shrink its carbon emissions to zero by 2050, cutting oil production by 40 per cent well beforehand.

Elsewhere in the US oil patch, smaller US shale oil explorers such as Devon Energy and Pioneer have bought up smaller drillers. The industry is consolidating in an attempt to survive.

Investing in energy has changed for the good. The future, if my husband’s solar panel dream is to be believed, is green.

Have a great rest of the week.

Pan Kwan Yuk
Lex writer