Within the last two years, the U.S. has arguably adopted the most extensive lineup ever of legislation favorable to the advancement of renewable energy. This includes the Energy Act of 2020, the Infrastructure Investment and Jobs Act of 2021, and the 2022 Inflation Reduction Act. Yet, there are numerous recent reports of major utility companies, particularly early adopters in the renewables sector, selling or preparing to sell their portfolios of unregulated renewable assets. As one might expect, there does appear to be willing buyers for these portfolios, but not other regulated U.S. utilities. Borrowing lyrics from the 1980’s rock band Clash, are utility executives asking themselves “should I stay, or should I go” away from the renewables sector? With seemingly tremendous tailwinds for renewables, what is going on with companies cashing out?
Reviewing several examples may shed some light on this trend. Consolidated Edison Inc. announced in October 2022 that it signed an agreement to sell its renewable energy portfolio consisting of over 3 GW of operating renewables and a 7 GW development pipeline to international energy holding company RWE AG for $6.8 Billion. The deal is expected to close in the first half of the year. ConEd has indicated it expects to continue investing in clean energy, including electrification, energy efficiency, electric vehicle infrastructure and battery storage.
American Electric Power informed investors it expects to sell 1.6 GW of unregulated wind and solar assets with the main portfolio expected to close in the second quarter. Executives indicated they plan to invest the proceeds in the transmission sector of the business. Duke Energy announced in August and confirmed in November of 2022 that it intends to sell its commercial renewables group consisting of 5.1 GW of unregulated wind and solar projects as well as a development pipeline of 1,000 MW. Sale proceeds estimated at $4 Billion will be invested in the regulated portion of the business. Finally, Eversource Energy has floated a tease that it may sell its offshore wind assets consisting of a 50% stake in a joint venture with Ørsted A/S. The JV has three contracted development projects with a capacity of 1,758 MW which are expected to go into service by the end of 2025. Proceeds from a sale are expected to be used to fund the company’s regulated energy and water delivery networks.
An interesting phenomenon occurred when electric deregulation spurred many utilities to sell their generation assets. The $/MW sale price for generation portfolios vs. time appeared graphically as a bell curve with early divestitures earning lower returns. Prices peaked over several years and then declined again. Could there be a sweet spot for the sale of renewable portfolios as well and why are the sales happening in the first place? Most utilities planning to sell have indicated they want to plow the returns into the core business. They may expect the renewables market to get overrun due to the new incentives and that investment returns will decline, the returns will not match the risks or simply, utility planners believe their investors want the certainty and predictability in today’s volatile markets of a total commitment to regulated assets.
While all the utilities cited above appear focused on exchanging their unregulated investments for regulated utility assets, there is a host of players willing to take on the risks and potential rewards of privately owned renewable portfolios. ConEd’s suitor, RWE AG, is one example. Also, Engie North America, part of another global energy company, recently purchased a 6-GW portfolio of solar and battery storage projects being developed by Belltown Power U.S. The North American Electric Reliability Corp. (NERC) recently published a strategy for managing as much as 30,000 MW of just one type of DER, distributed solar capacity, it expects to come online between 2022 and 2031. With large blocks of DERs potentially being controlled by aggregators, cybersecurity and bulk power system reliability, resiliency and flexibility are among the topics NERC will follow.
Reliance on traditional functions within the wheelhouse of every utility, including conservation, bulk power transfers, energy efficiency and demand response was cited by grid operators and utilities that survived the September 2022 extreme heatwave in California as well as those planning for potential fuel shortages in the Northeast during the winter of 2022-2023. No one believes renewables can address every emergency, particularly in the short term. That said, neither is anyone doubting a potential renewables tsunami. The question remains who will own and operate those resources?
The great renewables transition may have a dual meaning: a transition to higher reliance on renewable resources and a transition of renewables ownership, particularly generation, out of the regulated utility sector. In the end, however, markets have a way of instilling balance. So, we shall see what happens.