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Duke Energy: Renewable Assets Providing Stable Returns but Require Back Up

Duke EnergyWhen Duke Energy announced its 2016 second quarter results, the overarching theme had been that it was making the transition to a new energy future — one that crossed the wake from the 20th Century to the 21st Century. To that end, it has been moving from coal to natural gas, and to renewables.

Some of the big news to come out of the results released last Thursday is that just one regulator stands in the way of its $4.9 billion merger with Piedmont Natural Gas, a local distribution company: the North Carolina Utilities Commission. The deal is expected to close by year-end.

“For us, the opportunity is in southeast,” says Steve Young, chief financial office for Duke Energy, in a phone interview. Besides the purchase of Piedmont, he points specifically to the Sabal Trail Pipeline and the Atlantic Coast Pipeline. The former would run 500 miles and traverse through Alabama, Georgia and Florida while the latter would go through North Carolina, Virginia and West Virginia.

While the buy-out of the local distribution company is a cornerstone of the utility’s business strategy, Young also says that the company’s green blueprint is just as important. Generally, utilities are focused on stable cash flows and dividends. And renewables that produce such predictability are commonly called “YieldCos” — centered on tax credits and sales to customers under long term contracts, often around 15 years.

As for Duke, it either contracts for or owns roughly 3,000 megawatts of wind and solar energy. For those farms that it constructs, it is finding buyers ahead of time that are creditworthy and that enter into long-term contracts for the output. Duke is receiving tax benefits for building such plants while the utilities that buy from it are required to do so under their state renewable portfolio mandates.

In its 2016 Sustainability Report, it says that it has plans to own or purchase 8,000 megawatts of wind, solar and biomass capacity by 2020.

“Costs have fallen too but when I think of stable cash flows, it is a focus on the ability to generate a return. Renewable energy is the area where those contracts have been,” adds Jeremy Fago, PwC’s U.S. power and utilities deal leader, in a prior talk with this writer.

To be sure, the drawback to this strategy is the variability of wind and solar — that the weather doesn’t always permit. In the case of wind, it has a capacity factor of 40 percent, CFO Young says, adding that solar has a capacity factor of 20 percent.

Duke’s role is to educate electricity consumers, explaining that the renewables must have back up power. If Duke purchases renewables from elsewhere and integrates them on to its system, the public will know the situation.

For Duke, the weather variance is not an obstacle. That’s because the utility has ample power assets that can be turned on when the sun is not shining.

And, if Duke sells its renewable power to another utility, Young adds, then that company must have a broad group of assets to accommodate for the variability. Because utilities are typically buying green energy under state renewable portfolio mandates, they do so knowing its drawbacks and will have the back up power ready to go when it is needed.

“Typically, when we build a solar farm, we sell the output to another utility,” says Young. “It is then its responsibility to weave that into its system. We don’t have storage to back it up.

“When we buy from a solar farm, our surrounding system provides the back up power,” he adds. “When you think about the scale of a Duke Carolina, it is quite large. These solar farms are small. So we have a body of assets to provide back up. But if this grows and grows to where solar is rampant, then back up is more critical.”

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