Duke Energy is shifting its investment strategy toward "low-cost, smaller-scale" projects such as solar and battery storage in the wake of a $1.6 billion loss in the second quarter of this year caused by the cancellation of the Atlantic Coast Pipeline (ACP).
The company announced plans to cancel the ACP in July alongside Dominion Energy, which led the project, due to expected delays and cost uncertainty. The utility is planning to focus more on its "emerging infrastructure needs" to satisfy its 5-year, $56 billion capital plan, Duke officials told analysts during the company's second quarter earnings call Monday.
"Although we cannot immediately replace the ACP earnings, we have identified the incremental capital projects across our businesses that will provide growth over the five-year period," including grid upgrades, renewables and battery storage, Duke Chairman, President and CEO Lynn Good said.
Utilities are less inclined to invest in large, cost-intensive projects as increased risks and lack of investor confidence pushes companies instead toward smaller projects such as solar and storage, say analysts.
"Many utilities have already started to focus their capital plans away from mega projects and more toward smaller, more modular projects," Scotiabank analyst Andrew Weisel said.
"You're not going to see many utility holding companies placing big investments … on large-scale midstream projects," Weisel added. "There are some exceptions and the need is very real, but I think several utilities have learned the hard way that it might not be as easy as it used to."
The Atlantic Coast Pipeline's costs rose from an estimated $4.5 billion to $8 billion following legal challenges to the project's planned route beneath the Appalachian Trail. As a result of the cancellation as well as COVID-19-related disruptions, Duke's earnings per share dropped $1.13 per share, with ACP making up $0.13 of that loss.
Approximately $2 billion was carved out for the ACP and the utility will provide updated guidance in February 2021 about how it will make up those earnings, said Good. Potential fillers could include additional Florida solar investments alongside its 750 MW Clean Energy Connection program, incremental investments in its gas portfolio and grid modernization.
"There's tons of opportunity for grid modernization," said Weisel. "Any way to add technology to the grid to make it more efficient and to optimize it and to reduce losses, you can get a similar [investment and return] benefit without needing concentrated multibillion dollar projects, which become lightning rods as far as controversy goes."'
ACP was proposed to provide additional gas capacity to the region, according to Duke and Dominion. To provide that additional capacity for its gas subsidiary Piedmont Natural Gas, the utility is still looking at "a range of options" that will be "the lowest-cost option for customers," said Good. For its electric side, replacing gas will start with the utility's integrated resource plan, expected to be filed in September.
Duke plans to reach 100% carbon-free power by 2050, which will take significant investments over the next several decades, noted Good.
"I think it will take a little bit of time to feed those ideas and turn that into a more definitive policy," Good said. "And we'll take a stab at it in February, but continue to build on that because what we're really talking about is a decade of investment through 2030 and then beyond."
Dominion, too, plans to shift toward clean energy investments, the utility's CEO announced during earnings last week. The company took a $2.8 billion loss related to the ACP's cancellation.