by Krystal Daibes Higgins, CFA
Vice President
Equity Research
As summer wraps up, the kids head back to school, and the weather becomes crisp, I can’t help but remember the ice storm that hit Portland earlier this year during one of the coldest weeks. Portland residents were left without electricity for several days, my family included. While it was frustrating to wait for the power to come back on, we were thankful our house didn’t have a tree through the roof or a busted pipe like so many other houses in our neighborhood.
The power outage was a stark reminder of the vulnerability of the U.S. power grid, which is aging and underfunded. Outages are becoming more common given the increased occurrences of extreme weather, the rapid shift toward the electrification of transportation and buildings, and advancements in artificial intelligence (AI) technology. In fact, Goldman Sachs estimates that our energy consumption will increase by an average of 2.5% every year until 2030. While it doesn’t seem like much, some utilities are having to double their demand forecasts for the next five years. In Texas, the state’s grid will probably need to support 152 gigawatts of demand on peak days, which is double what it can handle today. [1]
Policymakers and industry experts are frantically working together to meet the rising demand for electricity not seen in decades. The problem is that technology and demand are moving much faster than cities and states can plan, let alone implement real solutions. The disconnect between timelines presents a greater chance of outages at the worst possible times. Texas, which maintains its own grid, collapsed in 2021 when temperatures were dangerously low, resulting in nearly 250 deaths from hypothermia and carbon monoxide poisoning.
However, Texas is in a prime position to attract massive capital investments in data center technology that powers AI. Investment flows are usually a good thing, but politicians on both sides of the aisle fear the stress it will place on its already old and creaky grid system before a long-term solution can be found.
While it will certainly be a challenge for utility companies and policymakers in the next few years, there are long-term investment opportunities arising, most likely from all categories of the energy sector, from traditional to renewables, as well as real estate investment opportunities.
It Is Time
In other news, the moment investors and economists have all been waiting for is finally here: the first rate cut since the pandemic’s economic distortions is likely to take place in September. For a long time, market participants expected the Fed fund rate to come down, but stubborn inflation delayed the Fed’s decision. Now, after more than four years of pandemic economic upheaval—from elevated money supply, disruptions in the supply chain, and strong demand for workers causing persistent inflation—we have started to turn the corner. In a speech made by Fed Chair Jerome Powell this morning, the Fed indicated that inflation is on a sustainable path back to 2%.
Market analysts are anticipating three cuts by the end of this year, totaling one full percentage point. Rate cut expectations could be too aggressive, and we therefore expect the magnitude of cuts to be lower given the continued health of the labor markets. However, the direction of rates is clear, and the progress made is encouraging.
Takeaways for the Week
Aging and underfunded power grids in the U.S., exacerbated by extreme weather and increased electrification, are struggling to meet rising energy demands, particularly in states like Texas that face severe peak-day shortages.
The Federal Reserve is planning its first rate cut since the pandemic in September, signaling growing confidence that inflation is on a sustainable path back to 2 percent.
[1] Bloomberg