A Look At Duke Energy’s Renewable Assets

by Trefis Team
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Duke Energy (NYSE:DUK), one of North America’s largest utility companies, has been gradually increasing its exposure to the renewable energy space. The company has  invested over $3 billion since 2007  towards building up a fleet of about 15 wind farms with a capacity of over 1,600 MW  and 21 solar farms with a capacity of over 100 MW. [1] Although renewables still account for just about 3% of the company’s total generation capacity of 57.5 gigawatts (GW), they could prove a to be reasonably valuable asset for Duke in the long run. In this note, we take a brief look at Duke’s renewable business and the broader role of renewables in the utility industry.

Trefis has a $72 price estimate for Duke Energy, which is almost in line with the current market price.

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Meeting  Renewable Portfolio Standards

At present, many utility-scale renewable energy projects are being driven by regulatory requirements, rather than by convenience or cost advantages. Renewable energy plants actually make for a relatively complicated addition to a utility company’s generation fleet. Electricity load varies through the day, rising through morning hours and typically peaks during the late evenings, after which it declines once again. Supply from renewables, on the other hand, is quite intermittent and this makes load management (matching electricity supply and demand) complicated. In order to boost renewable generation, more than half of the U.S. states require utility companies to derive a certain portion of their electricity from cleaner sources through regulations such as renewable portfolio standards. Currently, most of the power and renewable energy credits generated by Duke’s renewable assets are sold through long-term power purchase agreements to load serving companies, which in most cases have regulatory obligations to derive a certain percentage of their power from renewable sources.

What Will Drive Growth In Renewables For Duke?

The share of renewables in Duke’s portfolio could be poised to increase significantly going forward, as costs continue to fall and government regulation on emissions becomes more stringent. Duke operates a large number of coal-fired power plants that are facing increasingly stringent regulations relating to carbon dioxide and air toxin emissions. There is a possibility that in the future, the company could continue to run coal power plants that have CO2 emissions above stipulated norms by offsetting these higher emissions through credits that it receives from a solar or wind power farm that it owns.

Additionally, the company could invest more into renewable assets such as solar,  given their stable cash flows when contracted with long term power purchase agreements. The company recently announced plans to divest much of its midwestern generation assets, which catered to the volatile wholesale markets, and we believe that there is a possibility that the company could allocate some of these proceeds (which could be as much as $2 billion) to its renewable business. Reinvesting the proceeds into the renewable assets such as solar could make the stock more attractive to typical utility investors, who tend to prefer companies with a lower earnings volatility.

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  1. Duke Energy 2013 Form 10-K []
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