How America's largest power company plans to become a leading renewables developer
As Duke Energy Renewables grows, the company must learn to balance the interests of its utilities with those of its unregulated subsidiaries
Editor's Note: The following piece is the second in a two-part series on the renewable energy strategy of the nation's largest power company, Duke Energy. This week, we turn our attention to Duke Energy Renewables, the company's unregulated renewable energy developer. For a look at the clean energy plans on Duke's regulated side, check out part one of the series.
Duke Energy is a power company in transition.
Last week we brought you the story of how the nation’s largest utility holding company — and historically one of the industry's biggest coal consumers — is pivoting away from the dirtiest carbon-based fuel and focusing more on renewable generation at its regulated utilities.
That evolution began in early 2008 when North Carolina enacted its first renewable energy portfolio standard, Robert Caldwell, head of distributed energy for Duke’s regulated utilities, told Utility Dive. Combined with existing federal incentives, the law made renewable energy economically attractive for Duke.
But the shift toward cleaner sources isn’t confined to the utility’s regulated businesses. Around the same time, the company began to sense a growing opportunity on the unregulated side to develop renewables across the country, according to Greg Wolf, president of Duke Energy Renewables.
“Back in 2006 and 2007, we launched this business, really got to some early scale in 2008 and 2009, and then I took over as we merged a solar effort and a wind effort that was independent and put them together to create Duke Energy Renewables,” Wolf told Utility Dive in an exclusive interview this spring.
Since that time, Duke Energy Renewables has grown steadily into a national developer with a portfolio of more than 2000 MW. To date, the vast majority of that growth has been in wind, although the company is increasingly looking at the solar markets to drive growth as well. But while the developer offers new revenue streams and market expertise to its larger parent company, Duke Renewables’ ascension poses unique challenges as the company's leadership tries to balance the policy interests of a national renewables developer with those of its regulated utilities.
Duke Renewables' recent growth
Lately, business for Duke Energy Renewables has been — for lack of a better word — good. In May, the company announced the completion of the 200 MW Los Vientos wind farm in southern Texas, a project that boosted the total capacity of its portfolio to more than 2,000 MW. Austin Energy holds the contract to purchase power from the farm, bringing the amount of electricity it buys from Duke Renewables to more than 500 MW.
Wolf acknowledges that a 2,000 MW portfolio isn’t yet at the level of some of its biggest competitors, but it’s no small feat for a company that’s been around less than a decade.
“We think [2,000 MW] is a nice scale number and we’re starting to contribute in a meaningful way financially for the company and otherwise,” Wolf said. “But I always recognize that scale is always a competitive dynamic, so when ... you’ve got somebody like NextEra, the market leader, in our peer group ... that’s a different level of scale.” (NextEra Energy Resources, the company's independent power producer, currently owns 19,777 MW of capacity, according to its website.)
Wolf said that Duke’s growth has been fueled by market fundamentals. The company looks to develop in places with good solar coverage or wind resources, combined with a customer base that has shown interest in cleaner fuels.
“For us, it really starts and stops with customers, because our model is really around a contracted revenue kind of profile.” Wolf said. “So, getting the utility or a commercial customer to say yes to a PPA, even though a lot of work happens before that point, that’s when we really lock in and get going on a product.”
“I think we’ve found that our customers are generally are ones for whom [renewable energy] is part of their strategy,” he added. “They’re on that proactive part of the spectrum, so they also want to make sure they’re talking about these projects and how it’s important for them as well.”
New areas for growth
As Duke moves toward its next 1,000 MW generation milestone, Wolf said that much of the same calculus for deciding how to invest will apply. Planners will still prioritize areas with good renewables potential, overlapping with high customer interest. Texas, Wolf said, will be a focus, as more than half of Duke Renewables’ business is currently made up of assets in the Lone Star State, like Los Vientos.
One change on the horizon may be the developer's approach to solar. Only about 100 MW of Duke Renewables’ current portfolio is solar energy. To build on that foundation, the company is increasingly looking at the middle of the market.
“We’re building more wind on a large utility-scale piece, we’re continuing to add more solar on the utility side,” Wolf said, “but also expand out into the commercial segment as another growth area.”
Up to this point, most of Duke Renewables’ solar has come from big utility-scale arrays, suitable for PPA agreements with power companies. But growing interest in solar from tech giants like Apple and Google, big retailers like WalMart and Costco, and even smaller, local and regional companies has led the company to rethink its approach.
“[Commercial solar] is gonna be a big chunk of the [solar market]— depending on which forecast you look at, somewhere between 25% and [33.3%] of the market going forward,” Wolf said. “So we wanted to make sure we had a position in that market.”
The desire to get into the commercial space fueled the motivation behind Duke’s February purchase of a majority stake in REC Solar, a commercial and industrial solar developer based in California.
At its core, Wolf said, REC is an an engineering, procurement and construction (EPC) firm for solar projects, but they began to market those services to customers like Costco and Ikea, which were “great customer references when we looked at them.” REC, the Duke team concluded, had “some good traction” in the markets they wanted to enter, and had developed a business model that they found enticing.
“We are going to acquire controlling interest in REC Solar and we are going to rely on their business plans,” Duke Energy Vice President and Commercial Portfolio President Marc Manly told Utility Dive the week of the REC buy. “They know what they are doing. And they have targeted markets where the retail rates make it economic for customers, where customers want it, and where the regulatory rules are appropriate.”
Wolf reiterated Duke's support of REC’s existing business plans and explained that the REC buy allows them to serve customers better through different solar offerings. Duke Renewables can be the owner of a solar project if a customer wants to buy in on a PPA-type contract, whereas REC was previously mostly selling entire solar arrays to businesses that would put the entire purchase on their balance sheet. The ability for Duke to own such projects opens up new financing options for commercial customers going into solar, he said.
“It gives [REC] a broader offering and gives us a broader channel to have a more concerted effort in that segment,” Wolf said. “That’s the main piece, and again [the commercial sector] is going to be, I think, thousands of megawatts a year kind of market size, so that’s going to be worth chasing.”
Wolf explained that Duke Renewables has a three-pronged approach to commercial solar markets. The first is to continue the expansion of its large commercial solar business, involving direct PPA deals with big customers like Apple or Google.
“We’re going to continue to do that, where [customers are] buying almost on a utility scale or wholesale basis, but it’s still a contract between us and that customer. That’s going to be a big focus for our business more holistically,” Wolf said. “The deal that we announced last year with George Washington University and American university, even though that's more of an institutional segment, it’s that kind of deal.”
The second commercial segment has to do with slightly smaller companies and institutions that have more modest electricity demands than a data center or college campus. For big box stores like Costco or Ikea that want solar panels on site, Wolf said Duke will leverage REC’s expertise.
“Then there will be the midmarket commercial segment, and for those national accounts, things that maybe through REC will get done are on-premises projects like on the roof of a Costco store, Ikea or something similar,” Wolf said.
Finally, the third commercial market segment Duke is chasing is even smaller — local and regional accounts with solar demands as small as 100 kW. The key to making money in that market will be volume, Wolf said, and while Duke Renewables doesn’t plan to enter the residential market like its regulated sister company, Wolf expects the market expertise and reputation of Duke’s regulated utilities to help it ramp up commercial solar volume.
“That’s an area that I think is less plowed field in the market today,” Wolf said. “It will somewhat follow or track what residential has done to some extent, so that’s an area that we're working hard on and I think will be an area for us to add our experience with those customers.”
The first decade of Duke Renewables’ existence may have been marked by steady growth, but the clean energy landscape is changing fast. A number of states, including Duke’s home base of North Carolina, are considering repealing their renewable portfolio standards or cutting back on state tax credits, while federal tax incentives for wind and solar are set to expire in the coming years as well.
On the state side, Wolf said his team isn’t troubled much by the threats of RPS repeals.
“I think ultimately the RPS’s are still driving some behavior, but I think the reality is that the costs have now come down to the point that if they're not buying it, [they’re not going to],” Wolf said. “I’m seeing more customers – utilities and commercial customers – that are really making it as a commercial decision combined with a little bit of sustainability goals much more than a compliance obligation … So I think the compliance has done its job. It’s sort of helped ramp it up, but it’s not probably as critical as we move forward.”
What may be more consequential for Duke’s business is the planned sunsetting of federal tax incentives aimed at wind and solar. Wind tax credits expired at the end of last year, and the solar investment tax credit is slated to expire at the end of 2016.
Wolf said the wind tax credit expiration has already created some disruption in the industry. In years past, when the wind incentives were allowed to lapse, growth rates for the resource tumbled.
“Clearly I think on the wind front there’s not a perfect glide path from today’s cost and efficiency, and therefore net pricing with the PTC, to a same dynamic without the PTC,” Wolf said. “So, with the current projects that have been qualified under the new start-of-construction safe harbor provision, those are certainly able to be offered to customers at an attractive price and therefore help volume of projects getting done.”
But for newer projects not in construction by the end of last year, and therefore not qualified for the now-expired wind tax credits, the price will go up.
“If it goes away as currently planned, that’s just one we’re going to have to work through and there's probably some transition time there, “ Wolf said. “Customers are going to have to be willing to pay a little bit more, or the manufacturers will, or the EPC guys, or us, or investors and developers will either take less on this side, or get less on the other.”
But in the long run, Wolf said the prognosis for wind energy is good, with or without tax credits.
“Certain projects and segments will be slowed down, I think for a transitional period, but long term we still believe what most of the market estimates and industry experts say that there’s still gonna be a ton of wind built over the next decade,” Wolf said. “When you look at the EPA current guidelines and plans, there’s still a lot of wind being built, and a lot of solar being built.”
“Bottom line,” he said, “I’d say on wind I think there could be a transitional year or two as costs catch up and allow things to still be very attractive to the end customer. On solar, same thing.”
The 30% federal investment tax credit for solar is slated to expire at the end of next year, and while the solar industry has said it will lobby heavily for its extension, Wolf is more optimistic that a similar “safe harbor” provision to the solar compromise can be written, so that there isn't “a bright line that says you can’t qualify after 12/31/2016."
While Duke Renewables would like to see certain tax policies from states and the federal government — like some sort of solar ITC extension — Wolf told Utility Dive that his company isn’t pressing legislators in state capitols or Washington, DC, to get its way. As a subsidiary of the largest utility company in the nation, the interests of Duke’s renewables developer must be balanced with those of the company’s other enterprises.
“There’s still some issues around all the solar dynamics that they need to make sure are a part of a holistic package, I’d say is probably the company position. So, we’re not out there necessarily leading the parade and banging on tables that it should be extended,” Wolf said, when asked if his company was lobbying for tax credit extensions at the federal or state-level. “Clearly for our business it could be helpful and for the enterprise I think we're still generally supportive but we’re not [lobbying], like I said, knowing that it’s a complex issue.”
Echoing the sentiments of Rob Caldwell, Duke’s head of distributed energy on the regulated side, Wolf called for a comprehensive discussion on solar incentives and not just a simple vote on a single or a few tax credits.
“It may not be as binary as extend [the federal ITC] or not in the grand scheme of things,” he said. “I think we’re trying to have a broader discussion on it before we jump behind an extension or any other kind of position.”
The ITC isn’t the only place where Duke Renewables’ interests and business model may put it in conflict with those of its regulated utilities. In particular, Duke Renewables has to balance its role as a potential disruptor of the regulated utility business model in some markets, while being part of a larger utility at home in North Carolina.
The issue comes into play most significantly in the commercial solar segment. When Duke Renewables signs a large solar PPA with a Costco or an Ikea, it’s reducing the amount of power the regulated utility in that area can sell to the business, reducing its revenues. That issue, on a smaller scale, is what fuels utility-solar debates on the residential side and keeps power company executives up at night worrying about the dreaded “death spiral.”
To minimize the installer-utility divergence, Wolf’s team has a crucial rule — they don’t install in any of Duke’s regulated territories.
“To date, we have made the decision that there’s enough opportunity elsewhere that we’re not targeting customers [in our own service areas],” Wolf said, “and there’s not that many utilities in our six states that we would have a ton of opportunity in.”
But even with that wall erected to protect Duke’s regulated service areas, Wolf acknowledges that there can be some divergence in interests between Duke Renewables and the regulated utility industry at large throughout the nation on issues like the value of solar energy and third party ownership.
“Some of the efforts that we’re pursuing could be viewed as maybe a different position than the regulated utilities are taking in certain states, so I think that is a difference as Rob and our whole franchise team sort of work through a ‘let’s get the rules right’ kind of approach on solar especially.”
In particular, things can get tricky when Duke is pursuing a solar deal with a national company, one that might have facilities in Duke’s regulated service areas.
“If we think about us in California or Texas or wherever, trying to pursue customers like a national account that has presence here in North Carolina, where those customers really don’t have as much choice because of the current regulatory framework, there’s definitely some potential incongruity there that they have to work through,” Wolf said.
But in the grand scheme of things, Wolf said, the potential for real conflict is small. Duke Energy Renewables is still working out how to handle possible conflicts with the regulated utilities, and in the meantime will simply look to develop elsewhere, and let the regulated utility handle renewables in its own footprint. Duke’s distributed energy division on the regulated side, he noted, will go out and work renewable energy PPAs for customers in its footprint, so there’s no reason for the unregulated division to pursue them.
“I don’t think it’s a major issue. I think we feel like we’ve got enough good opportunity in other states where there are good growth opportunities and investment without coming in and, to be candid, to go after North Carolina customers that might be part of Duke,” Wolf said. "But we’ve done a fair amount here in the state because we’ve got Dominion’s footprint in other areas. So, our view is, again back to the customer-first kind of mindset, is where we’ve got customers that want to do something, if we can meet their needs, great. If we think we’re not in a position to or can’t, and they might be a franchised customer … they are probably already having a dialogue [with the regulated utility] and we’ll let that work out.”
The benefits of having a regulated utility
While Wolf acknowledged that the relationship is “not all perfect,” there are a litany of advantages that come with having a regulated utility partner.
“I think that the fact that we start from the basis of real experience in the power industry and a certain level of credibility with our technical folks and otherwise [is an advantage],” Wolf said. “If we’re gonna meet with Austin Energy or CPS, two of our biggest customers in Texas, we can bring people who talk the same language that they have relative to interconnection issues, safety, and reliability, so that only helps us to make sure that were being customer-focused and we understand their issues.”
The simple size of Duke’s operations and its brand has helped the renewables business get off the ground in its first decade.
“We’ve got a big balance sheet and the ability and interest in investing. So, bringing that to our efforts has been helpful, including the fact that we for the most part use Duke’s own tax capacity to monetize the tax credits, which in this business has been important,” Wolf said. “Then, on a more overall level, as we think about growing a commercial business ... I think the Duke brand and efforts behind that have been helpful.”
At the end of the day, there’s no substitute for the exchange of ideas and expertise that can come from having a regulated utility in house.
“I think on supply chains, safety and reliability and what we’ve learned on building projects, especially on the solar front, we can have an open dialogue and we’ve had a few people from our team go over to [the regulated side] to help ramp up early on,” Wolf said. “We’ve had consultation on the technical front between groups, so I think that’s important for Duke’s bigger picture that we want to be in these businesses, and we want to be really good at it.”
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