Hey Investors: More Stable Power Bills, Richer Communities, and Increased Shareholder Returns Are Waiting
DOE funding can pump billions into clean energy and the American workforce, but investors aren’t hearing about it — yet.
The implementation stage of the Inflation Reduction Act (IRA), the climate bill passed in 2022, is taking shape. Around the country, more than $60 billion dollars of investment across more than 130 clean energy projects have been announced since the IRA was signed into law. It’s undeniable that the IRA is going to be a pivotal force in the shift to clean energy.
A key player in an equitable shift to a clean-energy economy will necessarily be investor-owned utilities (IOUs), which serve more than 70 percent of US electricity customers. So it makes sense that there are generous incentives and funding mechanisms written into the IRA to reward customers and investors for their enthusiastic participation in reworking how we power our economy.
The most important tool we have to increase the appetite for this historic shift, the Energy Infrastructure Reinvestment (EIR) Program, also happens to have enough flexibility to retrain our workforce and reclaim legacy fossil infrastructure for new uses — but some key utilities and their investors aren’t openly talking about it yet.
These are the reasons they should be.
The Key to a Smooth Shift to Clean Energy
The EIR program is a new DOE loan program that provides low-interest loans to clean energy projects, especially those focused on community reinvestment. A vast array of projects are eligible for this program — essentially anything that reduces the emissions-intensity of energy producers. It can also be used for workforce development, environmental remediation, and grid upgrades — if it improves how we power our economy, chances are you can pay for it with the EIR program. The financing adds up to $250 billion in loans, but there are only three-and-a-half years to issue them, so there is a set window of opportunity for utilities to take advantage of these resources.
One of the most important, game-changing ways IOUs can use EIR funding is to accelerate investment into clean energy and worker retraining — all while reducing costs to customers and growing shareholder earnings. The potential savings from the lower-interest loans could free up utility dollars so that they can pull forward investment in clean energy replacement and additions, community reinvestment, transmission upgrades, and more. If successful, EIR financing can be a huge win for utility customers, shareholders, and our workforce.
Here’s an example of a potential project: We first developed the hypothetical case of a mid-size IOU, with $5 billion in rate base, and a 1 GW fossil asset in its portfolio with $400 million left to pay off. We then assumed that the utility would reinvest in the energy community with a clean asset of equivalent generation potential (a 1.4 GW solar asset with 760 MW of storage). We further assumed that this new generation would utilize the relevant IRA incentives and adders to minimize project costs and maximize the return on investment.
The results we got after assessing a variety of reinvestment and financing scenarios were impressive, showing that with EIR funding, utilities enjoy higher profits while ratepayers have decreased costs. We describe our findings below (fair warning, there is some technical language involved).
The Benefits of a Shift to Clean Energy Are Waiting, for Everyone
Without EIR financing, we assumed a capital stack of 50 percent equity and 50 percent debt, which is typical of IOUs in the United States. The first scenario we modeled utilizes this financing ratio for replacement of the asset in 2031, the baseline year in which the remaining balance of the plant has fully depreciated. As Exhibit 1 indicates, this scenario is not ideal for utility customers or investors. Essentially, there isn’t room in customer bills to be able to invest in more profitable clean energy today.
This is where the EIR comes in. By adjusting the asset financing to 20 percent EIR debt and splitting the remainder evenly between utility debt and equity, and then reinvesting in clean energy assets in 2025, utility shareholders enjoy higher profits than the 2031 baseline scenario. Even with these increases in profits, utility customers are shielded from rate increases and earn the added benefit of energy resources that are immune to fuel cost turbulence.
Additionally, the IOU can allocate the cost savings realized through EIR utilization to some of the most pressing concerns in this shift to clean energy, such as workforce development for energy communities and grid improvements to help deliver all these benefits to customers.
All this sounds like relevant information for utilities to bring up on earnings calls — but they’re not doing it.
Utilities Are Not Telling Investors about Their Plans to Utilize the EIR Program — Yet
RMI has devoted significant resources, through outreach and engagement with utilities, investors, and utility customers, to get a better sense of how these stakeholders are feeling about the IRA’s potential. As part of this work, we listened to a representative sample of utility earnings calls to catalogue utility executive and investor excitement around the IRA and any plans to leverage it for stakeholder benefits. Exhibit 2 highlights that IOUs are indeed considering how to incorporate the IRA into their system planning and operations; but there were no mentions yet of utilizing the EIR program. Given the clear triple win for customers, shareholders, and the American workforce, we expect this to change.
Next Steps for IOUs and Their Investors
Investors have a role to play in encouraging utilities to leverage the EIR program. With earnings growth and reduced emissions at stake for shareholders, EIR resources are a value-add for IOUs. In the hypothetical example above, earnings increased by more than 13 percent when investment was accelerated with help from the EIR program.
Successful EIR-utilization will depend on an IOU’s specific position. RMI will be offering tailored support throughout the process, including outreach and education, technical and analytical support, and application process guidance. We’re excited to engage directly with IOUs to help assess how this program can most effectively suit their unique needs, and we’re already engaging with first-mover IOUs to help them achieve their best-case scenarios.
While the EIR program has not been a topic shared with investors yet, there are not many other ways to improve earnings and reduce emissions while minimizing customer rate impacts. Investors should be pushing utilities to utilize the program, and utilities should be incorporating it as they navigate their planning processes. The EIR program is an exciting and important part of the IRA that should flourish as implementation continues to progress.
It's time to start talking about it.