(NYSE:AEP) (NYSE:DUK) How these U.S. utilities will benefit from investing in renewables
For the most part, electric utilities in the United States have relied heavily on coal as a source of power. In recent years, some have switched to natural gas, due to the steep decline in gas prices and the relative benefits of gas as an alternative to coal. But for those who believe natural gas is simply a bridge fuel to cleaner sources of energy, their efforts have not gone far enough.
The good news is that some U.S. utilities have broken from the herd, and made investing in renewable energy sources a strategic imperative. For example, Duke Energy (NYSE: DUK) and American Electric Power (NYSE: AEP), have pioneered the push toward renewable energy among utilities. Their investments will likely provide a significant contribution to their future growth, as the country steadily moves away from coal.
A watershed moment for U.S. utilities
The stark change in attitudes among utilities is notable. A decade ago, coal comprised the vast majority of electricity generation in the United States. But all that is changing, and utilities are taking a leadership role in this.
Monthly, Quadrillions of British Thermal Units
Duke Energy has invested $4 billion in wind and solar projects since 2007. Combined, Duke owns 2,500 megawatts of wind and solar assets. In addition, Duke was an early investor in biopower—a renewable energy made from any organic material from plants or animals. This includes things like wood energy, animal waste, and municipal discards. The relative benefit of biopower is that it provides electricity on demand with high capacity, much like fossil-fuels, but with the added benefit of being carbon-neutral. Duke has contracts to purchase more than 300 megawatts of electricity from biomass power plants in the Carolinas and Florida.
For its part, American Electric Power also holds an impressive portfolio of renewable energy assets. It has had an active wind development program since the mid-1990s. Its six regulated utility operating companies have agreements to purchase nearly 2,000 megawatts from wind power facilities across seven states.
In addition, American Electric Power has significant hydroelectric and solar assets. The company has 17 hydro-electric facilities in Virginia, West Virginia, Ohio, Indiana, and Michigan, which together generate more than 800 megawatts of electricity. In 2013, American Electric Power's Ohio division signed a 20-year power purchase agreement for solar energy. And, the company uses biodiesel for unit start-up and flame stabilization at several of its power plants. These efforts resulted in American Electric Power’s 2014 carbon emissions falling 18 percent from 2005 levels. In all, its total wind and solar portfolio has total capacity of 3,145 megawatts.
It’s hardly a coincidence that these are two of the strongest-performing utilities. As the following chart indicates, these stocks have handsomely rewarded shareholders with compelling stock price gains and dividend payments in recent years.
Conversely, it’s probably no coincidence that the major utilities that continue to cling to coal—such as Southern Company (NYSE: SO)—continue to struggle. Southern built a massiveplant, called Kemper, to generate power from lignite coal. Generating power from lignite was a cornerstone of the clean coal movement because it supposedly produced fewer harmful emissions than traditional coal burning techniques, at a lower cost as well. But the Kemper project has been besieged by start-up delays and a seemingly never-ending string of huge cost over-runs.
In 2014, Southern Company took a $729 million charge against earnings due to increased cost estimates for construction of the Kemper project, in addition to $553 million in extra costs related to construction of Kemper’s integrated gasification combined cycle (IGCC) project. Last year, the company was hit with $226 million in increased cost estimates for Kemper.
Overall, the project is expected to come in several billion dollars above initial projections. To be fair, Southern has made significant investments of its own in renewables, including recent acquisitions of solar facilities in California and Texas. But its renewables efforts will continue to be overshadowed by the major headaches caused by the Kemper fiasco.
Why diversifying into renewables will pay off
As the country sees the devastating environmental effects of burning coal to generate electricity, there is significant public and political pressure to change course. The low price of natural gas has accelerated the move away from coal, but the longer-term solution is renewable forms of energy such as solar, wind, and biofuels. In response, some of the nation's largest utilities, like American Electric Power and Duke Energy have proven they're taking this commitment seriously.
Analysts are taking note as well. Investing in renewables is likely to help American Electric Power and Duke Energy grow future earnings. The average analyst forecast calls for American Electric Power to grow earnings per share fractionally this year and by 5 percent next year. Analysts expect Duke Energy to grow earnings per share by 1 percent in 2016 and 4 percent in 2017.
For perhaps the first time, renewables may actually secure a meaningful place within the nation's energy picture. Utility giants American Electric Power and Duke Energy are devoting billions in investments into developing renewables. While it's no guarantee that their efforts will pay off, management teams of each company are optimistic about the future of renewable energy.
Companies to watch:
Dominion Resources (NYSE: D): Dominion has several solar generating facilities and projects, and more than 1,500 customers with solar panels installed at their homes or businesses. Furthermore, it has two major wind projects—the NedPower Mt. Storm Wind Farm in Virginia, which produces 264 megawatts of electricity, and the Fowler Ridge Wind Farm in India, which produces 301 megawatts. Also, last year Dominion acquired an 80-megawatt solar facility in Virginia, which is expected to be operational by the end of this year. And, Dominion has announced plans to build a 400 megawatt solar plant in Virginia, to begin operations within the next five years.
FirstEnergy Corp. (NYSE: FE): First Energy has also invested significantly in renewables. It has 1,900 megawatts of renewable capacity available, and has nearly 500 mega-watts of wind power under long-term contracts. Approximately 11 percent of its total energy resources are comprised of renewables. These investments should pay off. Analysts expect First Energy to grow earnings by 5 percent this year.
Bob Ciura is an independent equity analyst. Since 2012, his work has focused on fundamental investment analysis of publicly-traded companies in the energy, technology, and consumer goods industries. Bob has a Bachelor's degree in Finance and an MBA in Finance.