A pre-production Ford F-150 Lightning is shown in Bruce Township, Mich., May 12, 2021. The electric truck is aimed at the heart of the American auto market, a deliberate effort by Ford to move electric vehicles from specialized niche products to the mainstream.Paul Sancya/The Associated Press
The number of electric vehicles on the road is going to soar over the next decade, putting far more strain on our electric grid. Investors looking for a way to capitalize on the trend might want to take a closer look at utilities.
Sure, there are flashier investments tied to this theme. Car manufacturers that are either all-electric, such as Tesla Inc., or ramping up their electric fleets, such as General Motors Co. , have been rewarded with rising share prices and surging valuations.
Independent renewable energy power producers have also been popular among investors betting on a greener future, in which more of the world’s energy supply will come from wind and solar farms.
But the low-risk regulated utility is ultimately where electric vehicles get their juice, putting utilities in the middle of a broader electrification trend that will see businesses and households draw more electricity from a grid fed by cleaner energy sources.
That adds an intriguing growth component to a regulated sector best known for stability and dividends.
“Electrification is a big part of our corporate strategy, which is to plan, design and build a grid for the future,” said Mark Poweska, chief executive officer at Toronto-based Hydro One Ltd.
“When you tie electrification with climate goals, in North America and around the world, we really see a big opportunity for utilities overall,” Mr. Poweska added.
This sort of enthusiasm is based largely on momentum for electric vehicles, which has been picking up in a big way this year.
GM surprised many observers in January when it announced a plan to cease producing gas-powered cars altogether by 2035, which is an earlier-than-expected target.
The new Biden administration is planning to spend as much as US$174-billion to expand charging stations and add incentives to buy electric vehicles, a plan that will surely resonate internationally.
This week, the International Energy Agency warned that the world will need to take significant steps to get to net-zero carbon emissions by 2050. These steps include ensuring that electric vehicles comprise 60 per cent of new car sales by 2030.
Add energy-efficient buildings to the mix, as we move from oil- and gas-fired furnaces to electric heat pumps, and it becomes clear that energy grids will need to change significantly to meet rising electricity demand.
Forecasts can vary widely by source and time frame, but they all suggest that electrification will underpin demand growth that has been lacklustre in recent years.
Among the more eye-popping figures, research from Princeton University concluded that electricity demand in the United States – where Canadian utilities like Fortis Inc. and Emera Inc. have extensive operations – may need to double (or more) for the country to reach net-zero greenhouse gas emissions by 2050.
The Independent Electricity System Operator, which oversees Ontario’s energy market, expects that electricity demand from electric vehicles could rise as much as 15 per cent a year between 2022 and 2040 – to 4.1 terawatt hours a year from just 0.4 TWh today.
This expansion is the equivalent of adding another London and Sudbury to the province’s grid, according to the IESO.
At the same time, power grids will have to shift toward renewable energy while retiring greenhouse gas-emitting assets, since there is little virtue in running an electric car from a coal-fed power plant.
“There is no doubt that the demands on the grid and on generation are going to be tremendous as we move off of conventional fuels, especially transportation,” said Martin Grosskopf, a portfolio manager at AGF Investments who manages the firm’s sustainable investing strategies.
However, some investors prefer to stay clear of utilities right now, given the current mix of energy sources that can include coal and gas.
Mr. Grosskopf is one of them. In the sustainable mutual funds he oversees, he focuses on areas such as renewable energy power producers, supply chains for wind turbines and infrastructure that connects power sources to grids.
But regulated utilities?
“They have a footprint that can be pretty egregious in terms of the current environmental impact,” Mr. Grosskopf said.
Nonetheless, many investors may find that there is a compelling environmental case for investing in utilities. As utilities tackle carbon emissions in the years ahead and become greener, investors might be willing to approach them as a kind of transition play that fits in with ESG (environmental, social, governance) principles.
Consider Nova Scotia Power, a division of Halifax-based Emera. By 2040, the utility estimates that energy demand will rise 17 per cent to about 13.5 TWh a year, under a scenario where 60 per cent of new vehicle sales are electric within a decade.
To reach this goal, Nova Scotia Power will retire all of its coal-generating assets – which supply around 35 per cent of the province’s energy needs – between 2030 and 2040, while significantly expanding its renewable energy footprint through, for example, wind.
“Today, if someone purchases an electric vehicle in Nova Scotia, it is already cleaner than burning gasoline from an emissions perspective. But over time, it will get greener as our grid continues to evolve,” said Chris Milligan, senior manager, system planning at Nova Scotia Power.
It’s a considerable undertaking that could make Emera, the utility’s parent, more appealing to retail and institutional investors who want to align their holdings with ESG principles. In January, Bank of Nova Scotia analysts upgraded their rating on the stock to “sector outperform,” based partly on Emera’s improving ESG profile.
But the growth that electrification promises is key to an investment here, giving utilities an attractive profile over the longer term.
“Typically, when we looked at forecasts, things like electrification around transportation had not been added into the mix. We’re just starting to see that fall into forecasts on a longer-term basis,” said David Hutchens, chief executive officer of St. John’s-based Fortis.
Of course, this growth needs to be put in the context of utilities. Against a backdrop of slow population growth, energy conservation efforts and a North American economy that is shifting toward less energy-intensive sectors, electricity demand has been relatively stable in recent years. In Ontario, for example, demand has been essentially flat over the past five years.
That is about to change – if not as dramatically as Princeton’s projections – adding a tailwind that has been noticeably absent.
If there is a rapid economic recovery after the pandemic, the IESO expects that net energy demand in Ontario will rise by an average of 1 per cent annually through 2040, driven not only by electric vehicles but an expanding agricultural sector and public transit as well.
If that doesn’t sound like much, the growth translates to 32 TWh of additional capacity, or 23-per-cent overall growth over the next two decades.
The International Energy Agency expects that global electricity demand from electric vehicles will rise to 550 TWh by 2030, or six times 2019 levels, as car owners transfer gasoline expenditures to their electricity bills.
“There is the other side of electrification, too, that will happen in other areas. There is the electrification of homes, like heating, and industrial processes. So there are other pieces that will add to the demand increase,” Mr. Hutchens said.
Utilities have served investors well over the years, generating decent returns and rising dividends even when electricity demand has faltered. As electrification builds and demand picks up, utilities could find themselves in the middle of a long-lasting trend, giving investors a whole new reason to stay put.
Full disclosure: The author owns shares in Hydro One.
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