Supreme Court Nixes Obama's 'Clean Power Plan'

Last week, the U.S. Supreme Court ruled against the Environmental Protection Agency's ability to broadly regulate greenhouse gas emissions—essentially rejecting former President Obama's "Clean Power Plan" as proposed by the Biden Administration.

The decision was met with swift and fiery condemnation from the political left, and generally praised by the right. But it will have little to no impact on the pace of decarbonization in power and transportation sectors.

The decision is a significant step toward meeting energy transition goals, as it increases the flexibility of private sector and individuals to do so. This in turn should reduce the cost of changes, which will ease concerns about electricity and transportation affordability.

The current prevailing view in the media is that only government intervention can bring about fast enough change to prevent global climate disaster. But in reality, the US deployment of wind and solar energy and retirement of coal-fired power plants actually accelerated under former President Trump, despite his Administration's opposition.

According to US Energy Information Administration data, net electricity generation from coal fell by -37.6% from 2016 to 2020. That's less than the -18.2% decline seen between 2012 and 2016 during Obama's second term, and it contrasts with the 16.2% increase in coal-fired generation in 2021, the Biden Administration's first year in office.

From 2016 to 2021, the US's total renewable energy generation excluding hydroelectricity increased 33.7 percent. That was lower than the 42.8 percent increase during Obama's last four years in office, but including 2021—which reflects Trump's decisions to build—renewable energy growth from 2016 was 47.8 percent. Solar net generation tripled over that time period despite steep tariffs on imported solar panels imposed by Trump administration officials

State regulators' unwavering support for utilities' energy transition plans was critical to the growth of renewables. The rapidly declining price of components like wind turbines and solar panels, along with the obsolescence of coal power plants built in the 1950s, 60s and 70s, also played a role.

The biggest disruption in renewable energy deployment over the past decade or so was caused by the Biden Administration, not the US Supreme Court.

In my April 26 "Income Insights" article, "Uncle Sam Up-ends US Solar," I reported on the US Commerce Department's decision to impose potential tariffs as high as 250 percent on solar panels imported from four Southeast Asian countries. As a result of this move, 51 gigawatts of solar projects, or 46 percent of what was expected to enter service this year, were delayed.

The Biden Administration tried to revive solar deployment by giving in effect a two-year "tariff holiday" on whatever Commerce decides. The president also said he would use the Defense Production Act to triple US solar panel production by 2024. A group of developers, including AES Corp and Clearway Energy (CWEN), supported that move with a promise to buy 7 gigawatts of solar module capacity from domestic manufacturers starting in 2024.

Even the tariff holiday that's apparently not enough for First Solar  FSLR . The company has complained bitterly and publicly about Biden’s tariff holiday. Now it's reportedly decided to build a new facility in either Europe or India rather than the US, citing "uncertainties" about "trade policy and tax incentives."

In any case, the US Supreme Court’s recent EPA decision is irrelevant for the speed of US solar and wind power deployment. NextEra Energy's NEE "Real Zero" plan announced last month would create a new source of demand for wind and solar manufacturing, through electrolysis. The company's output would be used to run its utility facilities currently powered by natural gas, with an aim to convert completely by 2045.

If NextEra's strategy begins to bear fruit, we can expect to see other companies following suit. Midstream companies and major oil and gas producers such as Chevron Corp CVX are already in the process of testing hydrogen blending in their systems, for example.

Private sector decisions that are based on economics have nothing to do with the EPA mandates or Supreme Court decisions.

Energy up-cycle is the key driver of energy stock investment returns, which has years to run because of a widening sector-wide investment deficit. Utilities should continue to maintain support from state regulators for long-term investment plans that focus on improving efficiency and reliability while reducing pollution and keeping prices low.

Not all companies will succeed. That's why we investors need to be highly selective about the individual energy and utility stocks that we own. ETFs based on pre-packaged indexes including the good, bad, and ugly won't do it for us.

Next week, I'll post the July issue of Conrad's Utility Investor, which covers my top picks for 2022's second half. The Supreme Court's decision to rope in EPA, however, has the potential to be a windfall for one sector - and we should start paying attention now.

That's US Communications, the wireless and fiber broadband communications leaders like AT&T Inc (T), Comcast Corp & CMCSA. Before the ruling, it seemed that these companies would be subject to much stricter regulation from Federal Communications Commission, including a more severe version of so-called "net neutrality" than was in effect prior to Trump Administration.

The new restrictions on the EPA will likely affect the FCC. That's another reason to buy stocks in this group, where leaders are trading at bear market valuations despite outperforming the S&P 500 so far this year.

Happy Independence Day!