US utility companies are borrowing big because interest rates are so low. Investors are keen to buy utility bonds because they offer safe and strong returns.
So the bond cash — a record $90 billion in 2019 — is resulting in utility companies making more green energy investments.
Utility companies are investing in wind and solar, and also modernizing their grids with the cash from the bonds.
‘Financing costs are lower than we ever thought they would be,’ Morgan Stanley analyst Stephen Byrd said in an interview. ‘The low-interest rate environment helps the deployment of renewables.’
Capital spending by utilities is set to reach an all-time high of $136 billion in 2019, according to industry group Edison Electric Institute.
While utility credit ratings remain strong, they could take a hit if current levels of spending and borrowing continue.
Since many electric companies are regulated monopolies, investors see them as a safe bet.
Utility bonds currently have an average yield of around 3%. A 10-year treasury note yield high, in comparison, is today at 1.93%.
The College Investor website says utilities are good investments because they’re recession-proof, they’re easy to understand, cash flows regularly, and “my dog could be a utility CEO.”
What they mean by the dog statement is that utility companies have guaranteed pricing, customers, and a necessary product, so they are more resilient in the face of any potential bad leadership.
In June, the Energy Foundation (EF) reported that the electric industry could raise between $250 to $500 billion with green bonds. That assessment came from a report, “Assessing the Potential for US Utility Green Bonds,” from Boston University’s Institute for Sustainable Energy (ISE).
Green bonds were first issued by the European Development Bank in 2007. Since then, they have increased globally at 60% annually.
EF and ISE highlight Southern Power using green bonds to fund wind and solar, and DTE Energy in Michigan using them as well for green energy.
We at Electrek are obviously not in the investment advice business. But if people are investing in utility bonds and green bonds that result in utilities moving away from fossil fuels and building sources of clean energy, then we’re all for it.
Investing in grid modernization is also vital in order to prepare for clean energy and the rising numbers of electric vehicles on the roads.
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