A New Upside Driver for Utilities

Erratic economic growth and sinking energy prices have made investment in solar power an unexpected upside catalyst for US electric utilities’ earnings growth.

Two days after closing the sale of its remaining gas- and coal-fired merchant plants, Duke Energy Corp (NYSE: DUK) announced plans to install 500 megawatts of solar power in Florida.

This announcement followed on the heels of Duke Energy investing $225 million in REC Solar Commercial Corp—a deal that made the North Carolina-based utility an instant player in distributed electricity. The company also plans to roll out 720 megawatts of solar-power capacity in the Carolinas.

Dominion Resources (NYSE: D) owns almost 25 gigawatts of nuclear and thermal power plants and operates more than 33,000 of natural gas pipelines. The utility has 400 megawatts of solar-power capacity under development in Virginia and another 744 megawatts across seven other states.

Meanwhile, Sempra Energy (NYSE: SRE) and Southern Company (NYSE: SO) reportedly have contemplated forming yieldcos to finance their renewable-energy plans.

NextEra Energy (NYSE: NEE), the nation’s leading producer of wind and solar energy, demonstrated the appeal of this structure with the market’s reception of NextEra Energy Partners LP (NYSE: NEP).

For the same investment, utility-scale solar-power plants produce more than four times the electricity output by residential rooftop systems and twice as much as commercial distributed generation. Utilities’ existing customer relationships also give them a huge leg up in marketing rooftop solar-power systems.

These realities put money-losing SolarCity Corp (NSDQ: SCTY), Vivint Solar (NYSE: VSLR) and other would-be usurpers at a huge competitive disadvantage. But the growth opportunity in solar power is great news for a utility sector contending with slackening electricity demand and pushback on rate increases.

Read more about these risks and opportunities in my Special Report, Renewable Energy: How to Make Green and Avoid Red.