Transmission of electricity
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The US energy grid is at a crossroads. It is facing an unprecedented increase in electricity demand driven largely by the development of artificial intelligence and high-tech manufacturing. At the same time, supply is constrained by increasing power plant retirements. You don’t need an advanced degree in economics to predict the consequences.
Policymakers are scrambling to find answers before the inevitable power shortages and skyrocketing prices begin. But for every potential solution that would ease grid pressure — keeping facilities online, speeding up permit reviews and cutting red tape — policy measures are being taken that would hurt the energy industries’ ability to attract investment and use capital.
Last year, the Federal Energy Regulatory Commission (FERC) considered and then stopped changing the long-standing general licensing policy for investment companies. The current rule requires investment firms to obtain FERC approval to purchase securities of a utility only when they acquire a value of more than $10 million. The Commission was considering whether this so-called general level of authorization is too generous. Of particular concern were the passive investment strategies of investment managers – think index funds – that require these investors to continue to allocate a set percentage of their assets to utilities and energy companies.
Increasing the stringency of the general authorization would have a negative impact on the US energy industry. At the time, I warned that creating “additional investment barriers” would hurt utilities’ ability to “raise necessary capital,” hindering their ability to “expand capacity and improve current energy infrastructure.”
Fortunately FERC agreed. Until then FERC Chairman Mark Christie he wrotewhile BlackRock’s environmental advocacy raises concerns, “public utilities already face large and growing capital needs, including financing investments in utility assets such as power generation.” Given these capital needs and BlackRock’s commitment “not to use its holdings to influence the management of the utility,” the extension of BlackRock’s general authorization will help ensure that the utility sector has access to the resources it needs to continue to expand grid capacity
Having just dodged that bullet, a new threat to increased energy investment threatens to do the same – a lawsuit led by the Texas Attorney General. The lawsuit claims Vanguard, BlackRock and State Street conspired to artificially suppress the carbon market through anti-competitive practices.
The lawsuit is a response to these investment managers’ investments in coal companies, given their public support and past involvement in these same environmental organizations, which promote policies that are detrimental to the coal industry. As I have previously argued, asset manager support of these environmental, social and governance (ESG) policies is troubling and creates significant conflicts of interest between asset managers’ fiduciary responsibilities and their ESG commitments.
However, in practice, the AG’s actions will simply limit the coal industry’s ability to raise capital – which is clearly at odds with the AG’s stated purpose. As FERC’s decision emphasizes, prioritizing the need for efficient capital allocation is essential if the US grid is to provide Americans with cheap and abundant electricity.
The lawsuit also doesn’t take into account the fundamental market changes created by the fracking revolution. This market-driven innovation increased the supply of – and subsequently reduced the cost of – natural gas. Relatively cheaper and cheaper natural gas has fundamentally changed the economics of electricity generation. It is largely thanks to relatively cheaper natural gas that coal operations have declined across the country.
In 2005, coal was the largest source of electricity, creating about 50 percent of the country’s electricity. Natural gas produced about 19 percent. Above the last 12 monthsNatural gas accounted for 42 percent of total production while coal accounted for just 16 percent. their shares in electricity production have been exchanged. This reversal of the generation share was promoted by over 100 coal-fired plants converted in or replaced by natural gas-fired plants between 2011 and 2019. As the power generation mix shifted toward natural gas and other technologies, downstream coal consumption and production subsequently declined.
Although Attorney General Paxton claims to be protecting the coal industry, if the lawsuit is successful, these investment firms will likely be forced to divest their holdings in the coal companies named in the lawsuit. This forced liquidation will deprive the coal industry of access to an important source of capital. According to one analysis from the American Council on Capital Formation’s chief economist, forced divestments will deprive the collective coal industry of more than $17.5 billion in capital. This knock-on effect is in stark contrast to the needs of the energy sector, which needs significantly more capital investment to keep pace with our energy infrastructure.
Ultimately meeting the expected increase in electricity demand will require more capital investment in power generation, transport and infrastructure. Disrupting investment sources – whether through FERC rulemaking or AG lawsuits – increases the likelihood of future outages and higher costs for consumers. If the goal is to promote broad prosperity, such actions are simply the wrong political path.
