Duke Energy Gains From Growth in Brazil’s Electricity Demand

Duke Energy (NYSE: DUK) is one of the largest electric power companies in the United States, supplying and delivering energy to approximately 4 million U.S. customers. In addition to this, its international business owns and operates diverse power generation assets in Latin America, including a portfolio of renewable energy assets.

International Energy principally operates and manages power generation facilities and engages in sales and marketing of electric power and natural gas outside the U.S. It conducts operations primarily through Duke Energy International, LLC and affiliates, and these operations principally target power generation in Latin America.

We estimate that the International Energy division contributes around 12% to our $17.96 price estimate for Duke Energy’s stock.

International Segment

The revenue per MWh for International Energy increased from around $40 in 2005 to around $66 in 2008, largely due to an increase in demand from growing markets in Latin America. It declined in 2009 to $58 largely due to a fall in demand due to the economic downturn. We currently expect the revenue per MWh to reach $75 by the end of the Trefis forecast period.

The total MWh produced by International Energy, which averaged around 18 million between 2005 and 2008, increased to 20 million in 2009 as the firm’s international customer base grew as a result of the international expansion initiatives that the company had been focusing on.  In its 2009 10K, the company stated that International Energy is currently focused on optimizing the value of its current Latin American portfolio as well as expanding the portfolio through investment in generation opportunities in Latin America. Going forward, we expect the company to further expand its international operations and the total MWh produced increasing to around 30 million by the end of the Trefis forecast period.

Latin America Electricity Demand Carried By Brazil

Though the recent global economic crisis slowed the region’s economies and lowered demand for electricity, especially in the industrial sector, the region’s demand for electricity is expected to return to growth as the economic environment improves. ^[1] Brazil in particular is a bright spot as over 50% of International Energy’s generation facilities are based in Brazil.

Electricity generation, in Central and South America is expected to increase by around 2% per year till 2035, increasing from around 240 Gigawatts in 2007 to 400 Gigawatts in 2035. Brazil is carrying the region as the EIA estimates the net electricity generation to grow at around 2.7% between 2007 and 2035, nearly doubling by 2035 from 2007 levels. For the rest of Central and South America, the estimate is an annual growth rate of 1.1% between 2007 to 2035. ^[1]

Electricity prices in Central and Latin America both for industry and households have also been increasing since 2007. With input costs like the cost of raw materials (like fossil fuels) increasing for producing electricity and economic growth fueling demand growth, we expect electricity prices in the region to further increase. ^{[2] [3]}

If revenue per MWh crosses $90 by the end of our forecast period, it would mean around 5 % upside to our current estimates.

Drag the trend-lines in the charts above to see the impact of various Revenue per MWh and Total MWh Produced scenarios on Duke Energy’s stock value.

See our full analysis for Duke Energy here.

1. US EIA International Energy Outlook 2010 [↩] [↩]
2. Electricity Prices for Households [↩]
3. Electricity Prices for Industry [↩]