CERAWeek 2024 Does Energy Politics

But you'll learn a lot more about energy by checking out companies’ actual earnings calls.

Last week marked the beginning of spring in the Northern Hemisphere. It was also CERAWeek 2024 in Houston, Texas. Sponsored by S&P Global, this year’s meeting as always focused on all things energy. And the speakers and attendees list was a literal industry who’s who.

As an energy-focused investment analyst for the better part of four decades, I’ve attended more industry conferences than I care to count. And I’ve frequently gained valuable insights just from osmosis.

For example, in the previous decade I attended an Edison Electric Institute Financial Conference featuring the CEO of rooftop solar leader SunPower Corp (NSDQ: SPWR), Tom Werner. At the time, the popular narrative in the investment press—stemming from the views of certain sector analysts—was distributed solar energy was a deadly threat to electric utilities.

So the theory went, when consumers and businesses installed solar panels on their roofs, they became lost to the utilities as customers. As more went solar, utilities would be forced to raise rates on remaining customers to avoid a plunge in revenue, which would induce more to leave and so on. And the result would be a “death spiral” for the utility business.

As I listened and observed, it became clear to me that Wall Street had it all wrong about the relationship between residential solar and utilities. I placed bets accordingly. And since then, utilities have turned distributed energy into in profit center, upgrading power grids and offering it especially to large corporations.

Some companies like AES Corp (NYSE: AES) and Vistra Energy (NYSE: VST) have enriched themselves by becoming big players in battery storage, a key element for expanding distributed solar. And in fact, it’s the rooftop companies that appear to be in a death spiral. That includes SunPower, which Mr Werner returned to last month in a rescue attempt.

EEI’s annual Financial Conferences are exceptionally focused meetings. And if you’re willing to put in the effort, you can literally see every presentation and talk to everyone you want.

That’s a massive contrast to this year’s CERAWeek with its myriad high profile speakers and topics. And with a legion of journalists covering and primary information available including presentations, you can pretty much absorb all the information you need just by putting in the time at the office—with the caveat that it’s not as much fun without the cocktail parties and events, and there’s no networking.

So what can we get out of CERAWeek from the metaphorical 30,000 feet up? First off, a lot of quotes that confirm the fractured state of energy politics.

One that got a lot of press was during a private capital panel, when a speaker asserted the “energy transition is on policy-driven lift support.” His fellow panelists agreed that injecting private capital into green industries was “worrisome” because of dependence on government incentives.

Oil and gas industry executives—who traditionally have dominated this conference—were also ready to grab the spotlight. Saudi Aramco CEO Amin Nasser’s money quote was policymakers should abandon the “fantasy” of phasing out oil and natural gas, and rather ensure “adequate” investment in hydrocarbons to avoid energy shortages. ExxonMobil (NYSE: XOM) CEO Darren Woods stated “if the cost (of the energy transition) is too high for consumers to bear, they won’t pay.”

EQT Corp (NYSE: EQT) CEO Tony Rice lamented the lack of US midstream infrastructure needed to bring shale natural gas even to domestic markets—pointing out that while gas demand in this country has risen by 50 percent since 2010, pipeline and storage are up just 25 and 10 percent, respectively.

I wouldn’t argue with that. And certainly scarce midstream capacity is a big reason EQT has made a generous takeover offer for its former midstream unit Equitrans Midstream (NYSE: ETRN), which owns roughly half the 303-mile Mountain Valley Pipeline. Thanks to the relentless intervention of Senator Joe Manchin (D-WVA), MVP next month will become the first major new pipeline built in years to carry Appalachian natural gas to the Atlantic Coast. And it could very well be the last, as it took an act of the US Congress to get it over the finish line.

On the “other side” was US Energy Secretary Granholm, who assured attendees including the more skeptical that the energy transition is still “inevitable” and in fact accelerating. And electric utility companies and power producers in attendance chimed in as well, arguing the big issue is faster and more affordable permitting for renewable energy projects, as well as the transmission infrastructure and grid connectivity needed to support growth.

Of course, not every speech was strictly politics. NextEra Energy (NYSE: NEE) CEO John Ketchum highlighted a theme I expect will only grow in coming years: Accelerating growth of electricity demand, especially from data centers as they upgrade their artificial intelligence capability.

NextEra now estimates annual growth in electricity demand of 1.8 percent. That’s almost double the 1 percent projected a year ago by the US Energy Information Administration, and it contrasts sharply to the basically flat growth of the previous decade.

NextEra’s supply solution, however, is rather novel for a CERAWeek, given the conference’s fossil fuel roots: Ramping up onshore wind, solar and energy storage. The company projects a more than 3-fold increase in renewable energy generation to a range of 370 to 450 gigawatts by the end of the decade. And management fully expects to secure a lion’s share of that demand, thanks to a decades-long policy of securing sites and transmission accesses and a new system to locate the best sites for new data centers.

If there was common ground at this year’s CERAWeek, it’s that more investment in energy is needed to stave off massive price increases if not outright shortages in coming years. And I certainly wouldn’t argue with that either. But staking out energy politics lines in the sand if anything hurts that cause, as it only feeds uncertainty and discourages risk.

Utility capital spending has surprised many with how resilient its been in the face of “higher for longer” borrowing costs. Accelerating demand growth is the primary reason. But tax credits have been key to helping companies afford it with interest rates elevated. And that includes the soup to nuts 2022 Inflation Reduction Act, which features tax credits for everything from carbon capture and nuclear to hydrogen and battery production.

With elections looming in November, IRA is very much on the ballot. And so are the subsidies that have sustained America’s oil and gas sector for decades. So it’s small wonder CERAWeek discussion would focus on energy politics this year, despite its reputation for focusing on more technical issues.

Political rhetoric, however, only makes it harder to understand what’s really happening. And tThat’s why you’ll get a much better idea of what’s really going on in energy by looking at a transcript of a recent earnings call by EQT or NextEra, for example. It’s where executives must face tough questions from those who study their companies for a living. And unlike on a stage where Q&A is tightly controlled by moderators, dodging is at their peril.

We’ll have a fresh opportunity to see how energy bosses answer the tough questions when Q1 earnings calls start in about a month. And our www.energyandincomeadvisor.com and www.conradsutilityinvestor.com will highlight all the key details for energy and utility companies that matter.