The Name Game
Call it what you will. Corporate Social Responsibility (CSR). Environmental Social Governance (ESG). Socially Responsible Investing (SRI).

Blog Focus
This discussion and analysis will not dive into “the evolution of sustainable investing”, “sustainability and the corporate cost of capital”, or “sustainability and corporate financial performance” but on “Sustainability and Fund Performance”.

Meet The E, S, And G In ESG
The “E” includes everything from resource and energy management, waste and pollution, deforestation, carbon footprint, emissions reduction, and biodiversity impact.

The “S” covers health and safety, human rights, community relations, labor standards, supply chain monitoring, employee relations and diversity, and customer/supplier relations. 

The “G” ranges from executive compensation to shareholders’ rights to Board diversity and structure to bribery and corruption to political lobbying and donations to tax strategy and code of ethics.

Fund Evolution
Responsible investing initially focused on eliminating (“negative screening”) controversial sectors—gambling, alcohol, cigarettes, and weapons—to meet the ethical guidelines of faith-based investors who opposed them. Over time the screens widened to exclude fossil fuels, nuclear energy, conflict zones, and oppressive regimes. As these funds began to appeal to both retail and institutional investors, the umbrella of responsible investing widened.

Currently, there is no one-size-fits-all definition of a responsible investing fund, nor is there an official body regulating the use of the term. If funds choose to use the designation, they must follow any guidelines they create for themselves in their prospectus documents. They make their own rules and can choose how strict they want their portfolios to be. There is an organization in the U.S. named US SIF: The Forum for Sustainable and Responsible Investment. As a membership organization, it promotes the objective of advancing sustainable investing using ESG criteria “to generate long-term competitive financial returns and positive social impact”. That being said, it has no regulatory powers.

View From The Street – Goldman Sachs on July 14, 2020
Is ESG investing sustainable? With goals that always seem to be in flux and links to performance that appear uncertain, the sustainability of ESG isn’t a given, despite massive public interest. Recently, GS Senior Advisor, Steve Strongin, shared his views on what will make ESG an enduring investment discipline. He says ESG managers need to identify companies and situations where ESG principles are creating real long-term advantages, as well as situations where doing good also means doing well in terms of corporate performance. He also talks about why anticipating ESG flash-points—things like the Black Lives Matter movement—is key to ESG’s success both as an investment and corporate strategy. “It’s [about] looking for companies that think about tomorrow’s problems—tomorrow’s flash-points—and operate today as though tomorrow’s values were already in place.

Behind The Curtains — Fund Construction
1. ESM Integration
While negative screening remains a popular approach, the most widely adapted strategy by far involves so-called “ESG integration.” Fund managers use ESG data alongside traditional metrics when valuing companies, especially in the long-term. Notably, integration does not rule out investing in any particular sector.

2. Positive Screening
Positive screening involves investing only in a sector’s best in-class names. Index providers such as MSCI rank companies based on their implementation of these principles and fund managers will build out a pool of the top stocks in each sector; In addition, companies like Morningstar assign sustainability ratings to funds and ETFs (exchange-traded funds). This method does not result in exclusions by sector. In Canada, for example, this leaves fund managers open to owning the top 20th to 50th percentile of oil and gas stocks.

3. Moral Suasion
There are some funds that buy the same securities that a non-responsible investing fund would, and say they’ll use their power as shareholders to pressure companies into adapting those principles.

4. Pure Play/Thematic
Another type of fund focuses on thematic investing and is made up entirely of clean technology companies or those with women in leadership. These funds are few and far between, however.

Behind The Fund Curtains — Greenwashing
Excluding the few pure clean tech and renewable energy-focused funds, ESG funds/ETFs often try to get that halo of responsible investing without being true to principle. ESG integration and the competitive desire not to fall behind “benchmarks” allows many “green-marginal-at-best” companies to reside within portfolios. In Canada, most of Desjardins ESG ETFs describe themselves as being “low CO2” but still contain names like Enbridge, Coal India, and Pembina Pipeline Corp. Other Canadian funds are loaded with similar names including Cenovus Energy as well as Exxon Mobil, BP, Royal Dutch, and British American Tobacco. US funds go dirty with significant positions in Big Oil, Big Coal, and fossil-fuel burning Big Utilities. Justification comes from “green snippets” in their business lines. “Oil producers like Chevron, Royal Dutch, and BP have invested billions into corn-based ethanol biofuels and hydrogen fuel cells. Utilities like NextEra Energy and Duke Energy are transitioning away from coal-fired plants and into solar and wind to constrain costs. ExxonMobil makes lubricants for wind turbines.” Less dirty is good, right? In the minds of most portfolio/fund managers, an unequivocal yes.

Behind The Fund Curtain — The Technology Stock Problem
ESG Index Funds are hot. That may be a risky thing for investors. Index funds that use an ESG stock-screening process are beating core S&P 500 funds this year. An overweight to one sector of the market helps explain the outperformance. Not only do investors need to weigh the risk of concentrated bets but ESG stocks may duplicate existing holdings. Outperformance and underperformance always need to be examined. And there are two likely reasons why a fund could outperform its benchmark. Either by overweighting the outperforming sector, or by lowering the expense ratio. In the case of the recent strong run, the answer is an overweight to the technology sector. The Vanguard ESG ETF has a 28% sector weighting to technology, which is significantly higher than the S&P 500 and iShares ESG fund’s roughly 20% weighting to the sector. It may be an advantage now but could be a bigger risk when things turn sour or, at least, experience mean reversion.

The ESG Technology Stock Problem — Bad Behavior
Alphabet (parent of Google) has faced worker walkouts for its handling of sexual misconduct claims against executives and just began a Board review. Apple’s new credit card was dinged with allegations of algorithmic gender discrimination. Amazon has been criticized for years over the direct reports to Jeff Bezos being almost exclusively white and male. On a very different matter and not really their direct fault but, according to an article from Energy Innovation & Technology LLC, technology companies across the globe likely consumed around 205 terawatt-hours (TWh) of electricity in 2018, or 1% of global electricity use. While this lies in stark contrast to earlier extrapolation-based estimates that showed rapidly-rising data center energy use over the past decade, it still amounts to major-league carbon pollution since 64.5% of the world’s electricity comes from fossil fuel-burning plants. Numerically, their share of carbon dioxide emissions amounted to 331,000,000 tons of CO2. That’s a lot of fizzy drinks.

Empirical Research — Committed But Few Are Following Through
As money flows into ESG funds, new evidence shows that most asset managers aren’t actually changing their investment behaviors. This observation is based on research published on March 20, 2020 by Soohun Kim and Aaron Yoon in their report, “Assessing Active Managers’ Commitment to ESG: Evidence from United Nations Principles for Responsible Investment (PRI)”. Among their findings: 1) funds typically enjoy a large influx of cash after publicly signing on to a prominent set of ESG investment principles, 2) publicly committing to the Principles led to no ESG score improvements (after six quarters) for the average investment portfolio, 3) the number of environmental controversies experienced by firms in the portfolios actually increased after they became signatories, while the number of social controversies decreased, 4) PRI signatory funds had lower ESG scores than non–signatory funds, 5) signatory funds voted less often on ESG issues after committing to the principles, 6) signatory fund returns actually fell after making a pledge, and 7) funds that tended to beat the market in the past did a better job of incorporating ESG into their portfolios after signing onto the Principles. Because there is no accountability for signatories, it appears some investment managers are reaping the benefits of an empty promise. What’s more, because there is a lack of an agreed-upon standard for companies to disclose and quantify their ESG performance, it is difficult even for well-intentioned investors to make responsible portfolio decisions and report their progress.

Empirical Research — Performance Metrics
The Early Years
In the early days of responsible investing, negative-screening (excluding sin and vice stocks) was all the rage. An extensive review and meta-analysis by Deutsche Bank in 2012 showed neutral results, though several small more specialized funds were able to capture a degree of outperformance. Importantly, they did not underperform. In fact, no academic studies found underperformance at either the security or fund level.

The ESG Integration Years
One study in 2019 by Wayne Winegarden of the Pacific Research Institute attempted to portray underperformance by ESG funds. The counter-argument focused on skewed capitalization selection and that the weighting to mid/small cap stocks and “pure” clean tech and renewable energy companies accounted for lower-than-benchmark returns. Large-Cap funds dominant the ESG universe and are uniformly used for return analysis.

A contention made by Morgan Stanley, that looks like a bit of cherry-picking, showed a review of sustainable mutual funds in existence for seven or more years had equal or higher median returns and equal or lower volatility than traditional funds for 64% of the periods examined. What sayeth 36%?

A more definitive study published by the IMF (International Monetary Fund) in October of 2019 in Sustainable Finance: Looking Farther came to this conclusion: There is no conclusive evidence in the literature that sustainable funds consistently out-or-underperform conventional funds. They did note, however, that restricted investment can reduce diversification benefits and limit investment opportunities, leading to underperformance. In the absence of clear evidence of underperformance of ESG funds, investors have justified allocation to the funds on the basis of similar fees between ESG and regular funds. Nonetheless, anecdotal evidence suggests that fees of sustainable active management funds are often higher than those of other active funds, posing a hurdle for wider adoption, especially by public pension funds. In sum, the research indicates that investors don’t necessarily need to sacrifice returns when they make investments in ESG portfolios.

The Trump Card — Labor Department Weighs In
HISTORY. The funds industry has said that sustainable investment funds and approaches are appropriate in public and private sector retirement plans. In 2015, the U.S. Labor Department affirmed that environmental, social, and governance issues can potentially influence risk and return of the investments in a plan. Therefore, the Department said, it is appropriate for fiduciaries to consider these issues in selecting or monitoring investments. The unspoken caveat was that investments in ESG screened companies should not negatively impact long-term returns or heighten volatility.

On June 23, 2020, the Labor Department announced a proposed rule that would keep retirement plans from increasing risk or decreasing returns in pursuit of “a social or political end. Others say existing law achieves that end.

According to the Department, the move “reminds plan providers that it is unlawful to sacrifice returns, or accept additional risk, through investments intended to promote a social or political end.”

Such investments have grown immensely in recent years, to roughly one of every four dollars under management. While little of that was in workplace retirement plans, some experts think 401(k) plans will play an increasing role in such investing.

A department spokeswoman said Democratic and Republican administrations had simply differed over the years in framing the obligations of employee plan administrators.

“Democrats say the standard is that it’s OK for you do to this as long as it comes out the same,” she said, referring to risk and returns. “Republicans say it’s illegal for you to do this unless it comes out the same.”

Jon Hale, the head of sustainability research at Morningstar, said the practical effect of the new framing could be to deter plan administrators from adding E.S.G. options to 401(k) plans for fear of violating the law. Even if the proposal does not come to pass, he said, employers might decide to avoid E.S.G. investments because they see them as a potential political minefield.

Nonetheless, this proposed rule only affects retirement plans so most of the ESG world can pretty much continue as it has.

Conclusion — Green Curious Not Green Pure
With the exception of a very few offerings in equity and fixed-income space, what you see branded is not what you actually get.

Probably the best way to say it is that “there is always going to be some degree of necessary compromises made when it comes to investing based on one’s ethics”.

What we know for certain is that like all investment strategies, no one approach equals or outperforms forever, and when strategies do work, it’s as likely to be because of the external market environment as a fund’s unique objective.

Feeling good about how you’re investing is a legitimate starting point, but it’s not an end unto itself.

Benefits
Microgrids allow for new levels of resilience (in light of emerging threats to global power grids ranging from extreme weather events, earthquakes, and wildfires to terrorist threats) and reliability to reduce distribution outages and provide for higher power quality.

While high utility rates in certain isolated load pockets have incented development, new technologies have lowered capital costs significantly. Microgrids can help organize mixed asset fleets of DER (distributed energy resources) at the distribution network level. Microgrid deployments include: 1) biomass, 2) CHP (combined heat and power), 3) diesel, 4) battery storage, 5) fuel cells, 6) hydro, 7) solar PV, and 8) wind. Controls for the microgrid can be managed through storage and communication packages internal to the microgrid. Microgrids can increase reliability for site hosts but also provide flexibility to distribution system operators as components can bid directly into wholesale markets if appropriately configured.

Global/US Footprint & Growth
Based on a mid-2019 report, the microgrid market (both planned and installed) identified 4475 projects totaling close to 27GW (26,965 MW) of capacity worldwide. A companion study projected growth in spending from $8.1 Billion currently to $40 Billion in 2028, sporting a CAGR (compound annual growth rate) of 21.4%. US microgrid capacity was nearly 9GW (8.879 MW) in 2019. Globally, on a customer segment basis, remote microgrids and commercial and industrial (C&I) represent nearly 70% of installations.

Asia is the largest overall market, North America is the top market for grid-tied capacity, and Latin America is the fastest growing market, notably because of Puerto Rico’s power restoration efforts post-hurricane Maria in 2017.

In the US, most microgrid projects are custom configured and largely limited to public facilities like schools, hospitals, and military bases, although chip makers represent a solid exception. Many are dependent on fossil fuels and not renewable energy sources.

Overall Market Assessment
The global market for microgrids continues to grow, but is not yet a smooth ride to widespread viability. Although microgrid technologies have dropped in cost, and controls functionality has improved, regulatory barriers and long project development cycles continue to frustrate efforts to move the market fully into the mainstream. 

Market Segments
Segments are generally divided into six major areas: 1) campus/institutional, 2) commercial & industrial, 3) community, 4) remote, 5) utility distribution, and 6) military.

US Utility View—Thumbs Up, Down, or Sideways?
While an optimist or equipment seller can say the power sector is moving from a centralized system to a distributed system, it can be said, at least for incumbent utilities, that the train hasn’t exactly left the station. A broad view would say utilities essentially have three choices, either to obstruct, facilitate, or engage and implement.

On the plus side, utilities see benefit from microgrids in several ways: 1) supporting distribution operations vulnerable to stability issues stemming from high renewable energy penetration, 2) providing a non-wires alternative to areas of growing electricity demand, and 3) deferring or supporting capital upgrade projects. In addition, there are revenue opportunities if they can fully or partially own microgrids.

On the negative side, utilities view on-site generation, battery storage, and microgrids as disruptive technologies. They see declining revenues from decreased sales, conflicts over where microgrid operators can string lines and connect to the distribution system, and worries about reliability when
customers separate themselves from the grid.

In 2019, according to the Edison Electric Institute, 50% of all microgrids had some type of utility involvement compared to 10% several years prior. This defies the perception that utilities are often slow to innovate and resistant to disruptive change.

A lingering question remains, ‘should microgrids and distributed energy resources be coordinated by a central entity, akin to the way ISOs/RTOs coordinate the bulk power market?’ Unfortunately, a lack of market rules and a disjointed regulatory environment are primary factors at play.

In the end, utilities will have to adopt to a changing landscape of fewer entities to pay necessary monies for utility upgrades and expansions. At last count, utilities are collectively investing $100 billion to upgrade their networks. It is therefore incumbent upon State regulators to decide how to share those costs based on the premise that the grid is an essential public resource.

Electric vehicle charging infrastructure comprises components which are installed for private BEV (Battery Electric Vehicles) and PHEV (Plug-in Hybrid Electric Vehicles).  Components include chargers, management of charging, electric utility support for charging, and compliance with local and federal standards/codes. The infrastructure charging market is typically delineated by charger type (slow/fast), by connector protocol (CHAdeMo, CCS, others), by application (commercial/residential), and by charging method (AC/DC).

By application, commercial adoption is expected to gain majority market share by 2026. The segment is expected to grow at a CAGR of 41.0% over the forecast period.

The market size for the globalresidential electric vehicle charging infrastructure segment is anticipated to increase from USD 324.7 million in 2016 to USD 22,430.5 million by 2026, growing at a CAGR of 40.6% from 2018 to 2026.

CHAdeMO is expected to account for the largest market share among the fast charging standards available throughout the forecast period. However, CCS (Combined Charging System/AC and DC) is anticipated to be the fastest growing service segment, with an estimated CAGR of 46.9% over the forecast period, primarily due to strong adoption expected in the western European region. The Asia Pacific (AP) region is expected to stay the predominant region over the forecast period. This is driven by the Japanese auto manufacturers’ focus on developing electric cars. Also, China registered more than 300,000 new electric vehicles (EV) in 2016 and further Chinese government focus has placed a priority on creating favorable circumstances for various EV stakeholders, including investors. The AP region is anticipated to grow at a CAGR 41.0% over the forecast period.

The growth of the commercial and private electric vehicle market is attributed majorly due to initiatives undertaken by the Governments. Based on regions, the market is classified into North America, Europe, and Asia Pacific. While Asia Pacific is expected to remain the largest market, the North America region is anticipated to emerge as the fastest growing region through 2026.  Currently, the Asia Pacific market is roughly 4x larger than the European market, 3x the North American region. The Global market is forecast to rise from $2.118 Billion in 2017 to $56.959 Billion in 2026, signaling rapid adoption of Electric Vehicles, both residential and commercial.

Background Info

On March 8, 2020, Saudi Arabia initiated a price war with Russia, facilitating a 65% quarterly fall in the
price of oil. Over a few weeks, US crude oil fell by 26% and Brent oil fell by 24%. The price war was
triggered by a breakup in dialogue between OPEC (Organization of the Petroleum Exporting Countries)
and Russia over proposed oil production cuts in the midst of the 2019-2020 coronavirus pandemic.
Russia walked out of the discussion, leading to a breakup of OPEC+ (14 OPEC members + 10 other oil
producing nations). Oil prices had already fallen 30% since the start of the year due to a drop in demand.
The price war is one of the major causes and effects of the on-going global stock market correction.
(Wiki).

Short-Term Observations and Long-View Considerations

• The conflict showed little regard for setting off a potential credit crisis among global banks with
• outstanding loans to highly indebted companies (particularly shale producers in the U.S.)
• END GAME SCENARIO. A backdoor attempt to drive competitors into bankruptcy and shore up prices that way
• Saudi’s production cost is estimated to be $8-9, Russia $19, and US Shale/Texas Basins (low-end
• $20s-30s, high end $46-54); US Shale/Bakken Williston Basin (NDakota/Montana) $23-70
• Fossil fuel abundance and climate change policy threaten the future prosperity of the so-called ‘producer economies’
• Recent meetings and publications by international organizations signal that producer economies must change their economic development models
• Recent forecasts and scenarios highlight the uncertainty that exists when it comes to assessing future ‘peak global oil demand’ as opposed to ‘peak oil supply’
• The OECD’s (Organization for Economic Co-operation and Development) oil demand peaked in 2005 and many of the world’s largest oil consumers have since peaked or are now experiencing slowing in demand
• Some see peak demand coming in the 2020s, others in the 2030s (Wood MacKenzie 2036) ExxonMobil is an outlier assuming it won’t have peaked by 2040
• Overturns the assumption that oil producing economies rationed their oil supplies in the belief that a barrel not produced today would be worth more when produced in the future
• Saudi Arabia has a diversification strategy, while Russia is on a path to increase its reliance on oil and gas exports
• To balance their fiscal budgets, Saudi Arabia needs $80/barrel, Russia $45.
• Climate Change mitigation threatens producers’ prosperity and influence
• PRODUCER MANTRA. No country should have to sacrifice economic prosperity or energy security in pursuit of environmental sustainability
• REALITY/NEW OIL ORDER. The shale revolution has heralded an era of ‘fossil fuel abundance’ but the rapid growth of renewable power generation is challenging the role of fossil fuels in the energy mix—particularly coal and gas—and making possible an electrification pathway to low carbon transportation that will negatively impact oil demand
• RECENT DEVELOPMENT. OPEC+, with sparring countries Saudi Arabia, Russia, and Mexico finally reaching a consensus production reduction agreement, agreed to drop daily production by 9.7 million barrels/day. Problem is, from a price support standpoint, that daily usage is forecast to decline as much as 25mm Bbl/day.
• CURRENT US RESPONSE. Shutting wells. Trump administration weighs paying drillers to leave oil in the ground amid glut. Possible addition of 23mm barrels to US Strategic Petroleum Reserve.
• CRYSTAL BALL PROGNOSIS. Lower oil prices ahead where only the most cost-competitive oil will be produced, notwithstanding the impact of geopolitics

Summary

While it is logical on the surface to conclude that Saudi Arabia and Russia are myopically focused on
holding market share, it is far more complex than that. By unifying with other OPEC members to support
the price of oil historically, they in a sense facilitated more US shale development, thereby undermining
their own efforts. Hence, a new more Machiavellian strategy may be in play.

In sum, the falling cost and growth of low carbon energy sources and the emphasis on decarbonization
means that the dominance of fossil fuels is being challenged. And that it may be near-term aided and
abetted by a post-pandemic, slow growth (as opposed to a U-Shaped or V-Shaped) global economic
recovery.

The baseline economic view now assumes a recession for 2020 Q2 to Q4 with a turnaround in Q1 2021 for Gross Domestic Product in the US (Wood Mackenzie estimate).  JP Morgan sees the economy contracting by 40% in Q2 and unemployment reaching 25 million job losses (20% unemployment). Do we repeat the 2008/2009 turnaround for a “V-shaped” economic recovery or do we see a very different shape to the economic recovery? There were differences in the causes of 2008/2009 as opposed to the speed of the coronavirus impact which may delay how quickly we recover.

Wholesale energy demand has slumped since the stay at home order has impacted jobs and the economy.  For example, PJM (which operates a wholesale electricity market in the Northeast) reports weekly energy forecasts are down by 5 to 7% through the end of March and likely lower. Other wholesale electricity operators are reporting similar trends. Since demand is lower, cheaper resources are used to meet demand. This favors an increase in wind and solar transmission connected resources, since the US Energy Information Association reports lower variable costs for these resources. Both the California Independent System Operator and PJM report renewables (from all sources) are 12% of grid dispatch. As the market clears for low cost, less air emitting resources, both pollution and prices should drop in the near term.

• Fossil fuel generators are running less due to lower demand, based on preliminary data from March and April. Experts say it may also slow investment in energy efficiency and clean energy projects.  (RMI)
• In addition to changes in load and energy usage, operators are also seeing shifts in the timing of demand. “One of [the] clearer signals from the past few weeks is a changing load shape as people stay home and office buildings, whose lighting and HVAC loads are a big driver of afternoon peaks, have seen their occupancy fall, This has caused an observable flattening of the load curve in many regions, from one with a twice-daily peak (characteristic of normal springtime shapes) to a flatter, lower peak.”  (RMI)
• The New York Independent System Operator (NYISO) is observing daily peak loads trending about 4% lower than typical for this time of year, officials said.  
• The Electric Reliability Council of Texas (ERCOT) said that while it has seen little impact to daily peaks, morning loads are currently 6% to 10% lower than what forecast models would typically predict.  Based on the data from the weeks of March 22 and 29, weekly energy use is down by approximately 2%. 
• In the Midcontinent Independent System Operator territory, the grid operator says its load shape “continued to shift during the last half of March as more states implemented stay-at-home orders. Morning and evening load levels are lower than normal and morning peaks have moved closer to noon compared to 9 a.m. in previous weeks.”  
• The New England Independent System Operator said it is still seeing load declines of 3% to 5%, similar to what it witnessed two weeks ago.  
• In the Southwest Power Pool (SPP), officials said they are witnessing a 4% to 6% reduction in load, compared to similar days and temperatures for previous years.  
• In California, grid operators from March 17 to March 28 saw load reductions of 5% to 8% on weekdays, and 1% to 4% on weekends, with the heaviest impact occurring over the morning peak hours.  “Based on experiences in Italy and Spain, the ISO expects load reductions to level off about three weeks after the [shelter-in-place] order’s implementation. The California grid operator saw day-ahead market prices decline $5/MWh, when compared to before and after March 17, while real-time market prices saw a reduction of $10/MWh.” 
• And in Florida, immediately after the stay-at-home order went into effect last week,  there was a clear drop-off in demand of more than 10%. However, warmer temperatures in the past few days have pushed air conditioning loads back up.  (RMI)
• Looking ahead, there could be changes to the national fuel mix due to the coronavirus shutdown. “Going forward, we would expect to see coal generation fall faster than gas, as gas fuel prices are depressed due to falling demand and coal plants, especially when gas is cheap, are generally more expensive to operate, We anticipate that even this temporary, near-term drop in load might lead to long-lasting impacts on coal plants, whose economics get worse as they run less, and set off a fresh wave of retirements.” (RMI)
• In addition to changes to load shape, energy usage and the nation’s fuel mix, the pandemic could have longer-term implications for clean energy projects. “But what may be a bigger impact is the long-term effect of paused or slowed investment in both generation projects and behind-the-meter efficiency programs. The present crisis has pushed ‘pause’ on the investment necessary to meet increasingly aggressive climate and clean energy goals set by states across the US.” (RMI)

Early indication from metropolitan transit ridership indicates a substantial drop for ridership on trains and buses. For example, Orange County California bus ridership reported a 40% drop with stay at home orders. While pictures of urban areas show no traffic on city streets, metropolitan operations and maintenance expenses are rising with sanitization efforts, offsetting some of the lower fuel costs. Discretionary ridership may require a long period of recovery as work at home efforts may stall recovery. 

As states begin to open markets after the coronavirus pandemic, there are three areas we are watching closely to determine impacts on consumer electric vehicle purchases and usage. What will happen to funding for EV subsidies/tax relief and the ability of states to enact tighter than federal standards? Why are these incentives important in key metropolitan areas? Will state and metropolitan areas continue to invest in charging infrastructure?

States, cities, and utilities continue to develop comprehensive electric vehicle policy packages.

Various state and local authorities are reducing consumer purchase barriers with policy, incentives, infrastructure buildout, and awareness campaigns. States adopting California’s ZEV regulations catalyze the market, expand model availability, and provide assurance for charging infrastructure investments. In 2018 and 2019, Colorado is adopting similar ZEV regulations, and New Jersey and Washington State have signaled their commitment to electric vehicles by joining the International Zero Emission Vehicle Alliance. Markets like Atlanta, Austin, Columbus, Denver, New York, Portland, Seattle, Washington, DC, and those in California continue to construct and implement their own electric vehicle promotion policies to help reach their emission-reduction goals.

Consumer incentives remain important.

Electric vehicle prices have greatly decreased even as their electric ranges have increased. Yet, incentives remain important to reduce electric vehicles’ upfront cost. Consumer incentives, typically worth $2,000 to $5,000, were available through 2018 in nine of the 11 major metropolitan areas with the highest uptake. The exceptions are Seattle, where the state incentive expired in May 2018, and Washington, DC, where some drivers benefit from nearby Maryland’s state incentive. Incentives like carpool lane access and preferential parking policies benefit electric vehicle drivers in Nashville, Phoenix, Raleigh, Salt Lake City, and many areas in California. As the federal $7,500 electric vehicle tax credit begins to phase out for some manufacturers, continued state, city, and utility incentives will remain important.

Electric vehicles and the charging infrastructure network grow in tandem.

Even though most charging occurs at home, electric vehicle market shares are typically larger where there is greater availability of public regular, public fast, and workplace charging infrastructure. Markets with high electric vehicle uptake have at least 400 public charge points per million people. By contrast, half of the U.S. population lives in markets with charging infrastructure at least 60% below this benchmark. In the top electric vehicle markets, about 10 to 25% of the available public charging is fast charging. The top electric vehicle markets also typically have at least 150 workplace charge points per million people, and San Jose, with the highest electric vehicle share in 2018, had about 9-times this value.

1. Customer Opt-Outs create demand volatility Customer “opting out” can change the public power load profile (either energy or peak load). Risk Managers may increase financial reserves to handle opt-out customers. Risk Managers may adjust risk exposure of open positions (both physical and hedge) to compensate for opt-out customers. Further, marketers and other utilities put pressure on rates for key customers. Not to exceed pricing changes terms and conditions for third party suppliers and the types of price hedges offered in the market. Rather than change rates, public power groups may wish to alter procurement strategies to maintain their competitive rate structure.
2. Market Risk Given new supplies from distributed and renewable resources, there is uncertainty of financial performance due to variable market prices and price relationships (basis risk from different sources). Requires regular management review, approved procurement strategies, and sound limit structures are required to manage these risks.
3. Regulatory Risk Legislative/Regulatory proceedings and directives impact the operating environment. Renewable portfolio standards, distributed resource requirements and storage incentives have triggered different portfolio mixes over time.
4. Volumetric Risk Both supply and demand volume fluctuations require different portfolio tools. Operating reserve increases to manage variable resources may be required, but embedded within third party contracting. Risk managers may need to quantify variability in procurement timing and costs in supplier negotiations. We have found that customers are adopting/modifying formal procurement strategy, monitoring trends in customer onsite generation (distributed energy resources), assessing impacts of economic shifts, and adjusting for changes in customer volume/composition.
5. Model Risk Several customers have developed and re-trained advanced forecast models to account for surprises in energy and capacity. Testing and improving forecast errors have become more complex with demand and supply delivery risks.
6. Operational Risk Uncertainties in the macro environment have led to surprises in operations including human resources, technical resources, systems, and/or operating procedures. This is a big impact to insurance and oversight by third party insurance carriers.
7. Counterparty Credit Risk Suppliers have become cost conscious creating potential controls issues. Control counterparty credit risk is usually controlled through strict limit controls established by credit policy, but many public power groups are seeking further information upstream from system, energy and other third parties in the supply chain.
8. Risk Measurement Methodology Most public power risk managers are reporting identification, measurement and communication of risk to stakeholders. Risk Managers routinely quantify risks associated with procurement-related business activities and performance relative to goals. Some risk managers have been calculating projected procurement costs on an annual basis at various probabilities and “stress testing” for extreme climate conditions such as hurricanes or wildfires. Most Risk Managers will re-evaluate methodologies on a periodic basis to reflect changing/evolving regulatory regime and competitive landscape.