Renewable energy could help power Duke Energy

The utility company will need to phase out some of its old coal-fired units and substitute them with renewable power or cleaner coal.

By Trefis Jun 13, 2012 1:15PM
TrefisThe U.S. energy landscape is gradually drifting away from coal power. This is not only forcing utility companies like Duke Energy (DUK) to reassess their energy assets, but is also putting a question mark on companies' ongoing coal businesses.

It is especially bothersome to Duke as its U.S. Franchised Electric & Gas gets 13k MW of power from coal-fired stations, implying almost 50% of its 27k MW total power generation capacity in the segment.

Duke would need to phase out some of its old coal-fired units and substitute them with renewable power or cleaner coal on a continual basis. Several steps are being considered to improve the investment attractiveness of the renewable power projects in the country. Let's look at how these measures could impact utility companies like Duke.

Duke Energy
The popularity of coal is diminishing as many coal-fired plants across the nation have shuttered over the last few months and many more will follow over the next few years. The primary reason for the closures is the environmentally unfriendly nature of coal plants.

Most of the plants don't comply to the carbon emission norms while others produce harmful chemicals that can be injurious to residents that live near the plans. For example, Duke's Catawba plant was found to discharge mercury in a nearby river. It is believed that a tax structure adjustment for renewable energy projects could help. U.S. Senator Chris Coons suggested that legislation to allow wind, solar and other renewable energy projects to operate under the master limited partnership (MLP) structure would boost the segment.


Presently, the MLP structure is available to only oil, coal and natural gas projects. MLPs typically help unlisted companies raise money through the stock market and avoid paying corporate income tax by distributing its profits. This could help improve the gloomy investment climate in renewable energy across the nation. Since Duke is already listed, it can still avail the tax benefit part of the legislation if it idles its renewable energy business into a separate MLP, if the legislation were enacted.


We believe this could help Duke in making up for the phasing out inefficient coal power plants and enjoy better margins in its largest division, the U.S. Franchised Electric & Gas.


Duke Energy US Franchised Electric & Gas EBITDA Margin
We have price estimate of $25 for Duke's stock, which is about 10% above the current market price.


More from Trefis

Tags: DUK
2Comments
Jun 13, 2012 3:50PM
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The carbon regs will be changed.  This whole global warming issue is a joke.  Very few of the regulations on carbon will do anything to end "global warming".  So, this worry is overstated.  How will your analysis change if the EPA was barred by Congress from regulating Carbon Dioxide?  You do not talk about the impact on reliability if various coal plants are shut down.  Reliability is as important to the health of people and the economy as pollution. 

 

Natural Gas is the big competitor.  Not because it is cleaner.  It is cheaper.

 

MLP structure is a no brainer.  But at the end of the day, the US Fed Government will move away from promotion of renewables and let the market decide where money should be invested. 

Jun 13, 2012 4:26PM
avatar
The EPA needs to go away! They are a bunch of nuts that are ruinning our economy. Close them down and take away the citizenship of any that works there. Bring charges against all the big wigs for Treason!
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