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Stock Analyst Update

What Clean Power Plan Repeal Means for Utility Growth

We don't expect this move to have any impact on the sector and are maintaining our fair value and moat ratings for all utilities we cover.

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We are maintaining our fair value estimates, moat ratings, and moat trend ratings for all utilities after Environmental Protection Agency head Scott Pruitt announced plans to repeal the Clean Power Plan, promulgated in 2015.

We don't expect this move to have any impact on the utilities sector. We forecast U.S. carbon emissions will fall 28% from 2005 levels by early next decade, based on renewable energy and natural gas generation displacing coal generation. Low natural gas prices and gas turbine efficiency improvements are forcing coal plant shutdowns and reduced run times. Additionally, most uneconomic coal plants retired before complying with the EPA's Mercury and Air Toxics Standards.

We continue to forecast U.S. renewable energy capacity will double during the next eight years based on state renewable energy portfolio standards and improving economics. We think the move to abandon the CPP could even embolden states to strengthen renewable energy standards, similar to moves made by politicians and corporations following the administration's announcement to withdraw from the Paris climate agreement. Corporate renewable energy purchases have also shown to be material source of renewable energy demand. We expect this to continue to grow as businesses realize the economic and public perception benefits.

Utilities operating in states with constructive regulation and environmental policy support could realize 7%-9% annual earnings and dividend growth the next three to five years. Best positioned are utilities like  Dominion Energy, (D)   Duke Energy, (DUK)  American Electric Power, (AEP) and  CMS Energy, (CMS) which are investing billions of dollars in new gas infrastructure and transmission infrastructure supporting renewable energy development.  NextEra Energy (NEE) and  Xcel Energy (XEL) should maintain their lead as the top U.S. renewable energy companies.

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Andrew Bischof does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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