Duke Energy Commerical Power to Benefit From Solar Projects

-2.07%
Downside
96.09
Market
94.10
Trefis
DUK: Duke Energy logo
DUK
Duke Energy

Duke Energy (NYSE:DUK) is one of the largest electric utilities in the U.S. along with American Electric Power Company (NYSE:AEP), Exelon Energy Corp, Allegheny Energy (NYSE:AYE) and Progress Energy (NYSE:PGN). Duke Energy has approximately 35,000 megawatts of electric generating capacity in the Carolinas and the Midwest, as well as natural gas distribution services in Ohio and Kentucky.

Even though the firm operates in external markets, the majority of the value for the company comes from the U.S. Franchised Electric & Gas segment. This segment alone contributes nearly 80% of our near $18 stock value for Duke Energy, which stands roughly in line with market value. Its Commercial Power business contributes around 9% to its stock price.

Commercial Power owns, operates and manages power plants and engages in the wholesale marketing and procurement of electric power, fuel and emission allowances related to these plants as well as other contractual positions. Commercial Power also has a retail sales subsidiary, Duke Energy Retail Sales (DERS). DERS serves retail electric customers in certain regions of Ohio. The division is also responsible for developing and implementing customized energy solutions. Through Duke Energy Generation Services Inc. and its affiliates (DEGS), Commercial Power develops, owns and operates electric generation for large energy consumers, municipalities, utilities and industrial facilities. In addition, DEGS engages in the development, construction and operation of wind and solar energy projects and is also developing transmission and biomass projects.

Initiatives for Duke Renewables

In addition to this, Duke Energy Renewables, part of Duke Energy’s Commercial Businesses, is a leader in developing innovative renewable energy solutions, including wind, solar and biopower projects, for customers throughout the United States.

Duke Energy Renewables already has two commercial solar farms in North Carolina and three nationwide. In addition to this, it acquired the Murfreesboro project in December 2010 from SunPower Corp., which designed and will build the solar photovoltaic system.  The project is approximately 120 miles northeast of Raleigh, N.C and is expected to start this spring and wrap up in late 2011. Once completed it is expected to generate 6.4 MWh DC (equivalent to 5MW AC) and be capable of generating enough electricity to power about 700 average-sized homes.

This solar farm will primarily serve GreenCo Solutions and North Carolina Electric Membership Corporation, who will purchase renewable energy certificates and electricity, respectively, from the project, under a 20 year agreement.

GreenCo Solutions, a company owned by 22 electric cooperatives, will buy all renewable energy certificates (RECs) generated by the Murfreesboro project to assist its members in meeting their solar power requirement under the state’s Renewable Energy and Energy Efficiency Portfolio Standard (REPS). In addition to this, the electricity produced from the facility will be purchased by NCEMC, the power supply organization for the majority of the state’s electric cooperatives. [1]

The Revenue per MWh for Commercial Power increased from around $84 in 2005 to $90 in 2008, largely due to an increase in energy prices reflective of an increase in input costs. It declined to $80 in 2009 due to a fall in demand following the economic downturn. Going forward, as the economic environment improves and demand picks up, we expect the Revenue per MWh to increase to around $100 by the end of the Trefis forecast period.

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However, we believe with further development of solar farm projects like the one discussed above, Duke Energy Renewables has the potential to generate further upside to Commercial Power’s Revenue per MWh. If it increases to around $120 by the end of our forecast period, it would mean an upside of nearly 6% to our current price estimate for Duke Energy’s stock.

Notes:

  1. GreenCo to Purchase Renewable Energy Certificates from New Duke Energy Commercial Solar Project in North Carolina []