15
MAR
2018

In the Headlines – March 16th, 2018

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Are Batteries Now on a Trajectory to Replace Fossil Fuels?

Three weeks ago, a U.S. agency sent the clearest signal yet that fossil fuels’ days are numbered. It is true enough that the carbon-burning economy has been declared to be on its death bed many times before, but this came with a time frame related to the ultimate killer: the battery. The Federal Energy Regulatory Commission ruled that so-called energy-storage companies such as Tesla Inc. and AES Corp. can compete against traditional power plants in U.S. wholesale markets by the end of 2020. “This is a watershed event,” said Joel Eisen, an energy law professor at the University of Richmond, not unlike the time when regulators opened up the telecommunications market in the 1970s with rulings that ushered in the digital age by giving computers fair access to phone lines.

Batteries, once relegated to powering small devices like remote controls and watches, are now poised to energize the things most central to daily life, from smartphones to cars to entire homes and offices—and Big Oil’s taken notice. At CERAWeek by IHS Markit—an annual conference that has drawn some of the largest names in the world of fossil fuels to Houston this week—executives met to talk batteries, not once, but twice. “The question is no longer if batteries will disrupt the power sector,” IHS wrote in a description of one of the discussions, “but rather how much and how fast?”

It has long been discussed that the ascent of lithium-ion batteries—which are durable, energy-dense and easy to recharge—would mark the beginning of the end of the fossil-fuel age. As it is, electric cars being made by the likes of Tesla, General Motors Co. and Warren Buffett-backed BYD Co. have replaced gasoline tanks in more than 3 million cars on the road globally. Predictions are that battery-fueled electric cars will outsell those that run on gasoline by 2040. Based on one estimate from Bloomberg New Energy Finance, that will wipe out 8.5 million barrels of transportation fuel demand a day.

Now the advance of batteries into power markets threatens the reign of natural gas, which at the moment generates about a third of U.S. electricity. In California and Arizona, utilities including PG&E Corp. and Pinnacle West Capital Corp. are abandoning gas plants in favor of renewable energy projects. These solar and wind farms can now use energy storage systems to stash their power and unleash it as needed. “Batteries are like bacon,” Vibhu Kaushik, director of grid technology and modernization at utility Southern California Edison, said at CERAWeek. “They just make everything better.” The Brattle Group has estimated that the energy commission’s recent ruling could help unleash as much as 50 gigawatts of battery-stored power into U.S. markets, enough to light up 6 million homes. Over the next five years, growth in energy storage will be “more exponential, than linear,” said Alexandra Goodson, who works for the battery maker Saft.

The battery-storage revolution is not just around the corner. Lithium-ion pack costs will need to halve again from today’s levels for electric cars to fully compete with gasoline-burning ones, said Albert Cheung, head of analysis for Bloomberg New Energy Finance. Manufacturing will need to ramp up, as well as production of raw materials needed for the batteries. The technology also still relies on policy mandates and incentives in most markets. That said, prices are a fifth of what they were eight years ago. And they are projected to keep falling. Battery costs are expected to drop below $100 per kilowatt-hour, making electric cars competitive on price by 2025.

Oil and gas companies and utilities alike are already forecasting exactly when energy storage will take hold in cars and on the grid. BP Plc sees oil demand peaking in the 2030s as hundreds of millions of electric cars hit the road. The chief executive officer of oil and natural gas giant Total SA said at CERAWeek that he’s already driving an electric car.

“We’re reaching an inflection point,” said Steve Westly, founder of sustainability venture-capital firm Westly Group and former controller and chief fiscal officer for the state of California. “In the future, people will talk about energy in terms of kilowatts per hour instead of oil per barrels.” Scott Prochazka, chief executive office of CenterPoint Energy Inc., is less certain. “I don’t see it becoming a replacement,” Prochazka said. “I see it as a great technology—I don’t see it as a solution.”

Citations

  1. https://bloom.bg/2FDJFxK – Bloomberg
  2. http://bit.ly/2CCupMa – The Brattle Group

Non-bank Mortgages May Be an Echo from the Great Recession

Low interest rates, easy credit, poor regulation and toxic mortgages—these were just a few reasons regulators gave for the collapse of the US housing market a decade ago. Since then, regulators have improved the standards that lenders use when Americans apply for mortgages. But today increasing danger lurks in the mortgage market, and economists say it could put the financial system at even greater risk when the next recession strikes or too many borrowers fall behind on their mortgage payments.

A growing segment of the mortgage market is being financed by so-called non-bank lenders—financial institutions that offer loans to consumers but do not provide saving or checking accounts. Borrowers with poor credit have increasingly turned to these alternative lenders instead of traditional banks. The alternative lenders are subject to far less regulation and have fewer safeguards when borrower defaults start to pile up.

“A collapse of the non-bank mortgage sector has the potential to result in substantial costs and harm to consumers and the US government,” economists at the Federal Reserve and the University of California, Berkeley, write in a paper released recently at a Brookings Institution conference. As of 2016, non-bank financial institutions originated close to half of all mortgages. They originated three-quarters of mortgages with explicit government backing, underscoring the risk to taxpayers.

“The experience of the financial crisis suggests that the government will be pressured to backstop the sector in a time of stress,” the authors write. The danger is that non-bank financial institutions may have fewer resources to weather economic shocks to the mortgage market, like a rise in interest rates or a decline in house prices. “What happens if interest rates rise and non-bank revenue drops? What happens if commercial banks or other financial institutions lose their taste for extending credit to non-banks? What happens if delinquency rates rise and servicers have to advance payments to investors?” the authors write.

“We cannot provide reassuring answers to any of these questions,” they note. In the past few years, the non-bank mortgage sector has exploded because of low interest rates and commercial banks happy to supply lines of credit to non-banks at favorable rates, the authors write. But with it comes serious risk.

Non-banks face a higher risk that lines of credit will be pulled quickly in time of financial stress. Financial institutions often offer non-bank lenders short-term lines of credit to fund mortgage loans. They are also exposed to so-called liquidity risk: They still have to pay mortgage investors even when borrowers skip payments. They also cannot tap the Federal Reserve and the Federal Home Loans Banks to meet their liquidity needs like banks can. What is more, these non-banks tend to originate mortgages that are less sound—less likely to be repaid—to minority and low-income borrowers. Those borrowers are likelier to be vulnerable to delinquencies triggered by economic shocks like a fall in house prices, according to the authors. In 2016, 58% of the mortgages originated by non-banks went to low- or moderate-income borrowers.

The warning comes as the administration, regulators, and lawmakers are beginning to consider ways to reform the US housing market more than a decade after Fannie Mae and Freddie Mac were seized by the government in 2007. “Less thought is being given, in the housing-finance reform discussions and elsewhere, to the question of whether it is wise to concentrate so much risk in a sector with such little capacity to bear it, and a history, at least during the financial crisis, of going out of business,” the report warns.

Citations

  1. http://cnnmon.ie/2Fn1PR1 – CNN Money
  2. http://brook.gs/2IfN9Fe – Brookings Institute

The Good News Is . . .

Good News

  • Total nonfarm payroll employment increased by 313,000 in February, and the unemployment rate was unchanged at 4.1%, the U.S. Bureau of Labor Statistics reported. Employment rose in construction, retail trade, professional and business services, manufacturing, financial activities, and mining. The average workweek for all employees on private nonfarm payrolls rose by 0.1 hour to 34.5 hours in February. In manufacturing, the workweek increased by 0.2 hour to 41.0 hours, while overtime edged up by 0.1 hour to 3.6 hours. The average workweek for production and nonsupervisory employees increased by 0.2 hour to 33.8 hours. In February, average hourly earnings for all employees rose by 4 cents to $26.75, following a 7-cent gain in January.
  • Korn Ferry International Inc., a global organizational consulting firm, reported earnings of $0.70 per share, an increase of 32.1% over year-earlier earnings of $0.53 per share. The firm’s earnings topped the consensus estimate of analysts by $0.12. The company reported revenues of $447.5 million, an increase of 17.2%. Management attributed the results to strong growth in all of its consulting and executive search business segments.
  • The health insurance giant Cigna said that it had agreed to buy Express Scripts, the largest pharmacy benefit manager in the United States, in a $52 billion deal that would further reshape the health care industry. The deal is the latest in a recent wave of consolidation across the health care sector, which has been marked by spiraling costs and roiled by Amazon’s announcement in January that it was teaming up with Berkshire Hathaway and JPMorgan Chase to try to simplify coverage, a move that unsettled established industry players. The deal would combine Cigna, one of the largest insurers in the United States, with a company that is responsible for the drug plans of more than 80 million Americans. Under the terms of the deal, its shareholders would receive $48.75 in cash and 0.2434 of a share of the combined company, equivalent to $67 billion in cash and stock, including the assumption of $15 billion in debt.

Citations

    1. http://bit.ly/2iYbHWM – US Bureau of Labor Statistics
    2. http://cnb.cx/2lwnm3s – CNBC
    3. http://bit.ly/2p49DA9 – Korn Ferry International Inc.
    4. http://nyti.ms/2FIMu0D – NY Times Dealbook

Planning Tips

Financial Strategies to Prepare for Retirement

Time seems to move quickly when you are saving for retirement. In your 30s retirement felt like a lifetime away, but when you celebrate your 50th birthday you need a healthy nest egg to retire comfortably in the coming 15 to 20 years. But what if your balance is a little lean? What if your dream is to travel or spend time with grandchildren instead of work? There is still plenty of time to save. It is not too late to retire with enough money to make you feel comfortable as you exit the workforce, but it will probably involve looking for ways to save, upping your contributions, and looking for higher returns. Below are some strategies you can use to achieve your savings goal. Be sure to consult your financial advisor to determine what is best for your situation.

Get Rid of Your Debt before Retirement and Rein in Expenses – Looking at saving and investing strategies is important, but debt, especially high-interest-rate credit card debt, could wipe out any investment gains. You should not use your retirement savings to pay off debt, but how can you rein in spending to get to a debt-free lifestyle long before retirement? Do not accumulate assets only to give it all back in debt payments. You have to spend less to gain more. One of the best ways is to downsize. That giant home you are living in with all the bedrooms? Sell it and get something that fits an empty-nest lifestyle while still leaving room for the kids and grandkids to visit.

Make Catch-Up Contributions – The Internal Revenue Service (IRS) puts limits on how much you can contribute to your tax-advantaged retirement accounts each year. In 2018 you can put up to $18,500 into your 401(k). This includes employee salary deferrals along with after-tax contributions to a Roth IRA within your 401(k). This is the total for all 401(k) accounts, not a per-account limit. However, the IRS allows you to contribute an extra $6,000 as a catch-up contribution if you are age 50 or older, bringing the total to $24,500 for 2018. Unlike so many IRS rules, the catch-up rule is as simple as it sounds. If you are 50 or older you can catch up on funding your retirement accounts. You may contribute up to $5,500 to your individual retirement accounts (IRA) in 2018, with a catchup contribution of $1,000 if you are 50+, for a total of $6,500. There may be other IRS rules concerning contributions that apply to you, but you should aim to contribute the maximum each year if you’re behind.

Up Your Risk – It is not hard to find advice encouraging you to dramatically lower your risk level in your investments as you get to your 50s, but most planners believe that is too early to retreat to predominantly low-risk assets, such as bonds and cash instruments. You can only up your contributions so much; however, combine that with higher rates of return on what you have and you will move much closer to your goals. If upping your risk profile keeps you awake at night, though, the strategy might not be for you. Talk to a financial advisor and get an opinion on how you can tweak your portfolio for higher returns.

Understand Social Security – Social Security is not easy to wrap your brain around, so start with this. The longer you can delay taking it, the greater your monthly checks will be. Although you can file for benefits at age 62, waiting until 66, the Social Security full retirement age for the current generation of retirees, will increase them by one-third. Waiting longer raises the amount even more, until you reach age 70, when you must start taking benefits.

Consolidate Accounts – If you switched jobs at least once in your career, you might have multiple 401(k) plans with as many providers. Consolidate them into one account for easier management. There are plenty of options, including consolidation into an IRA. Talk to a financial advisor about the best way to get all or most of your retirement assets under one roof.

Citations

    1. http://bit.ly/2IjEu4I – AARP
    2. http://bit.ly/2p1GNBe – US News & World Report
    3. http://bit.ly/2FJLFEW – Investopedia
    4. http://bit.ly/2FpSRqk – Bankrate.com
    5. http://bit.ly/2FpPPT8 – US Dept. of Labor
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