Utilities are taking on record debt levels. Good.
As counterintuitive as it may sound, sometimes a borrowing spree is a good thing. Take America's power utilities: They've sold a record-breaking $90 billion in bonds so far in 2019. In absolute dollars, that's a pretty significant increase over the last decade, from $15 billion worth of bonds in 2008. Compared to total economic output, power utilities' borrowing has also increased over that time span, from roughly 0.1 percent in 2008 to 0.39 percent last year.
Far from an excessive indulgence, this is welcome news. Why? Three interlocking reasons: First, overall interest rates are extremely low right now, making this an excellent time for just about anyone to take on new debt or refinance old debt. Second, a lot of the money is going to finance much-needed new green energy capacity. And third, the extra investment will only help the economy.
Let's take those points in turn, since they also offer broader lessons beyond the power utilities' specific situation.
First, interest rates throughout the economy have been falling almost nonstop since 1980 and are now at almost unheard of lows, making borrowing cheaper than ever. Selling bonds, of course, is one of the key ways that governments and big companies like utilities do their borrowing. The lower interest rates fall, the less yield that bond issuers have to offer to convince people to lend them money.
As Bloomberg notes, utility bonds tend to provide a yield of about 3 percent, while 10-year bonds issued by the U.S. Treasury Department — the gold standard for safe and risk-free investment — are now yielding around 1.93 percent. Thus the current situation makes utility bonds a good deal, not just for the utilities themselves, but for the investors buying their bonds. "Since many electric companies are regulated monopolies, investors see them as a safe bet," Bloomberg explains. The utilities get cheap credit, and investors get an investment almost as safe as Treasury bonds, but with a higher return.
That's a lesson for other actors in the economy as well. If you've got a big project in mind that you think could increase productivity over the long term, now's the time to borrow and make it happen. That's especially true for state and local governments, who tend to be extra skittish about debt, but whose investments in education, health care, and infrastructure are crucial to raising productivity across all sectors of the economy. (Since the federal government can literally create all the U.S. dollars it wants, its finances operate by rather different rules.)
The next good thing about this story is what utilities are using the bond sales for. Some of them are using the new bonds to pay off old bonds, thus switching out their old debt for new debt at lower rates. But about two-thirds of the latest borrowing is going to capital spending — which is to say, new real-world economic activity. And a lot of that new activity is installing green energy.
Duke Energy, for instance, is America's single biggest power producer, and has issued about $7 billion in bonds. It's pledged to eliminate all its carbon emissions by 2050. Over a dozen utilities across the country have made similar pledges at this point. Not surprisingly, the vast majority of the service areas for those utilities lie in states that have issued some sort of clean energy mandate — in many cases demanding 100 percent carbon-free power by mid-century.
In short, clean energy mandates work, and utilities are responding by accumulating the financial capital they'll need to meet those commitments. Which is good news, considering how little time we have left to cut carbon emissions down to a safe level.
Finally, there's the matter of what this means for the economy as a whole.
The long fall in interest rates is something of a paradox: It's a great opportunity to cheaply fund new investment, which can boost economic growth. But the very fact that interest rates have gotten so low to begin with is a sign of our economy's ill-health.
Right now, the economy's upward trajectory is being sustained by consumer spending, with business investment surprisingly lackluster. That utilities are stepping up investment is a good sign, but the recovery would be on more solid ground if other businesses did the same. So far they aren't doing much of that, even as the overall corporate debt load has reached astonishingly high levels. Instead of going into real investment, much of that borrowing is going to fund further payouts to wealthy shareholders.
This means that consumer spending, while robust enough to keep the economy from going into recession, is not robust enough to incentivize more investment. This semi-slump state means demand for credit remains lackluster, so interest rates stay low, and shareholders can keep demanding that their companies borrow more to juice payouts instead of investing in real growth. Even worse, if the economy ever does recover and interest rates do rise, then all that debt will become a lot more dangerous: companies won't be able to shoulder it, precisely because they didn't use it to do anything useful.
In this sense, you could see state-level clean energy mandates as a form of economic stimulus: By demanding that utilities switch to new energy sources, they are forcing companies to do something useful with their borrowing, regardless of what overall consumer spending is doing. National regulations demanding completely clean American energy on similar timelines could achieve the same on a far larger scale.
That gets to a final lesson of the utilities' borrowing spree: If we want other companies across the country to start behaving the same way, using their borrowing to generate actual new economic activity, then the federal government will need to step in. There are a lot of policy mistakes behind how the economy got to its present impasse, from the failure to run adequate stimulus in the Great Recession, to not combating inequality, to allowing monopolies and market power to grow unmolested. And we'll need to address them all.
As welcome an opportunity as they are, those low interest rates are also a sign that national policymakers need to get their act together.
Want more essential commentary and analysis like this delivered straight to your inbox? Sign up for The Week's "Today's best articles" newsletter here.