Many equity analysts seem bullish about former Vice President Joe Biden’s plans to remake the American power industry if he is elected president. Biden has proposed a plan for the country to generate 100% of its power from carbon-free sources (solar, wind, nuclear, etc.) by 2035. These analysts have assumed that as utilities invest more in new sources of power, the increased spending would trigger a virtuous circle: the rate base would increase, which would drive earnings growth and potentially push share prices higher. These equity analysts are likely correct. But as credit analysts, we are looking at these clean energy investment opportunities through a different lens.

A credit perspective

We view the Biden proposals as potentially negative for credit in the intermediate term. The word ``potentially’’ is critical here because the proposed Biden plan is short on details and raises many questions for us. Who will foot the bill for the sizable investment required to transform the power sector? How much help will the federal government provide, and in what capacity? And finally, is the proposed 2035 deadline a mandate or a goal? If this proposed transition to a carbon-free system takes longer (most utilities are using 2050 as their target for transitioning to carbon neutrality) we anticipate the financial burden on regulated utilities and customers would be lighter. We would view that scenario as credit neutral.

Evaluating the Biden plan

One thing is evident: the two presidential candidates’ policies on energy are far apart. If Trump wins, we would expect more of the same in the power sector. Coal generation would likely be phased out and renewable generation, coupled with battery storage, would likely become a growing share of the generation mix over time. However, Trump has indicated that he would let state regulators and utilities determine how quickly that transition would materialize. We believe a Biden presidency would bring disruption. More importantly, his proposals would require a substantial amount of new capital spending to transform the country’s generation fleet. The US currently gets only about one-third of its power from carbon-free sources, a mix of nuclear and renewables. While no one can say exactly what it would cost to reach the 100% target, we believe the ultimate price tag would likely be trillions higher than the $2 trillion federal investment Biden has proposed.