How Much Does It Cost to Power America’s Industrial Renaissance?
Demand for clean energy manufacturing is surging. The US has started heavily investing in clean energy related production, a shift strongly associated with the Biden administration’s Inflation Reduction Act (IRA). This landmark legislation was specifically designed to combat inflation by investing heavily in domestic energy production with a strong emphasis on clean energy technologies. Since last year, AlphaGeo has been tracking private investment flows related to the 2022 IRA as reported by US government, focusing on the importance of climate risk and socio-economic indicators on the financial performance of public limited companies based on the greenfield investment choices they are making.
A major question is whether these investment decisions consider the rising costs and concerns over energy prices and demand. Here we explore whether private investments are flowing into areas with higher or lower projected energy costs based on our modeling of the expected future climate stress and impact on utilities costs nationwide.
Figure 1 shows the top 50 locations receiving the most investment by the firms most frequently appearing in the US government dataset, (as identified by our Natural Language Processing (NLP) algorithm. We can see that most of the investment is concentrated on the East Coast followed by western states such as California, Arizona, and Washington. This is logical because these areas possess superior infrastructure and human capital, and because firms tend to expand their operations in areas of existing activity.
However, one of the biggest factors that contribute to a company’s running costs is their energy spending. AlphaGeo employs various data science models to calculate energy forecasts using climate and insurance data from several sources.
Figure 2 shows the projected annual net change in overall utility consumption, combining cooling and heating demand shifts over the coming years using a high emission scenario (SSP 585). There is a notable increase in overall utility consumption on the East and West Coasts, where investment is also growing. This trend is expected, as higher activity levels naturally drive-up energy demands. Comparing Figure 1 with Figure 2, we see increased energy consumption estimates where the White House reported investment is flowing in, particularly the darker shaded urban areas that already feature significant industrial activity. This suggests that even as businesses increase their investments in areas familiar to them, they will have to contend with elevated energy costs in the future.
Alongside operational expenses such as utility costs, climate stress will also necessitate increased expenditure on maintenance and retrofitting of assets due to the rising incidence of natural disasters such as fires, floods, and hurricanes. Figure 3 shows the recommended percentage of operating income to be set aside for retrofit expenditure based on these factors as well as anticipated cooling demand. In many locations these costs could weigh on profitability and financial performance.
Let us take New York, NY, as an example (Figure 4). In New York City, we forecast an annual increase in energy utility of 1.85% per year, as well as an increase in retrofit costs of 6.91% of income. Insurance premiums due to climate hazards also increase significantly by 10.76% per annum, adding significantly to the running cost of businesses. We see in Figure 1 that New York is receiving a substantial inflow of investments and being the financial hub of the world, it already hosts several major companies. These combined factors suggest that while New York (and other similar cities) continues to attract significant investment, the rising costs associated with energy, retrofits, and insurance may pose challenges in the future.
Our correlation analysis of the geographies of rising investment, elevated climate stress and anticipated future costs for energy and maintenance suggests that many of the locations central to the new American Industrial Renaissance are likely to experience significant climate volatility — hence we urge investors to incorporated these future costs into their cash flow models as well as consider alternate locations for greenfield activity that feature higher natural resilience.
