Tuesday, December 9, 2014

Utility Business Models Evolve Around Renewable Energy

By Nick Lawton, Staff Attorney

Two recent business developments on opposite sides of the world confirm that electric utilities are shaking up their business models in response to the rapid rise of renewable energy. Hawaii’s electric utility, the Hawaiian Electric Industries, recently struck a deal, estimated at $4.3 billion, to merge with NextEra Energy, Inc., a prominent, Florida-based renewable energy developer. Half a world away, German utility E.ON recently announced that it was splitting in two, forming one company to focus on renewable energy and another to continue managing fossil-fuel assets (primarily lignite, the dirtiest form of coal). Despite great physical distance between the electric utilities, there are strong parallels between their business developments. Each company has touted its development as a clear victory for renewable energy and a blow against climate change, but the reality for both is cloudier.

Bold Benefits for Renewable Energy?

Coverage of the utility moves has played up potential benefits for renewable energy development and climate change mitigation. For example, E&E News quotes Jim Robo, NextEra’s CEO, as saying that its merger with the Hawaiian utility is “about two leaders in clean and renewable energy joining forces to build a more affordable clean energy future.” Meanwhile, Eric Wesoff at Greentech Media writes of the merger as a “brilliant idea” that could transform the Hawaiian utility into a “renewable energy powerhouse.”  As for E.ON’s split into fossil fuel and renewable energy companies, Stefan Nicola at Bloomberg News writes that it “marks a watershed moment in Germany’s renewables effort that will likely bolster the country’s already leading position in clean energy.”

There is likely some merit to these claims. NextEra is purchasing a Hawaiian utility just as the state is considering a very broad transition away from fossil fuels and toward renewable energy, as my colleague Nate Larsen has discussed on this blog. Meanwhile, E.ON’s split is set against the backdrop of the German Energiewende, that nation’s ambitious transition from nuclear power to renewable energy. Both NextEra and E.ON’s new renewable energy arm should bring some valuable expertise toward managing these transitions. For example, NextEra claims to be the nation’s largest owner and operator of wind energy facilities and one of the largest generators of solar power as well. Proven experience making renewable energy work as a viable business could indeed help both Hawaii and Germany make a sustainable, affordable transition to renewable energy.

Or Business as Usual?

However, it is important to remember that utilities are capitalists, not environmentalists. Both companies are likely making these moves because they benefit corporate bottom lines, not because they benefit the global climate. For example, E&E News quotes the president of a Hawaiian solar company as noting that “NextEra would be buying HEI with the idea of making money, not doing the right thing to make this state some kind of renewable energy paradise.” The fact that NextEra is also the parent company of Florida Power and Light, a utility that has recently and successfully opposed energy efficiency and distributed solar power in Florida, provides a solid foundation for that suspicion. NextEra is likely pursuing new options in Hawaii because the market for renewable energy there is quite competitive with the high cost of importing fossil fuels. In short, NextEra is likely moving into Hawaii because it stands to make money there.

Meanwhile, E.ON is struggling to adapt to the fact that the German Energiewende has hit that nation’s utilities hard, with the price of shares in E.ON having fallen by 75% since 2010 and the utility’s revenues from fossil fuels dropping by a third. As Damian Khaya at Greenpeace reports, E.ON’s split likely has more to do with minimizing risks to its renewable energy efforts while simultaneously continuing its fossil fuel business. In fact, Mr. Khaya reports that E.ON’s new renewable energy arm will carry all the debt from the utility’s prior fossil-fuel activities, essentially subsidizing the new fossil-fuel arm’s reach into new territories (including a plan to build a new coal-fired power plant in Turkey). In short, E.ON’s split is a way to adapt to Germany’s new regulations while still making money from fossil fuels.

Renewable Energy as Utility Business Model

Nevertheless, despite my cynical look at the financial engines under the utilities’ hoods, I find some cause for optimism in the news about NextEra and E.ON. The world of regulated electric utilities has been in an uproar about renewable energy for some time now. At least six legal challenges have been raised against renewable portfolio standards, and more are looming on the political front, and U.S. utilities have been fretting about rooftop solar power throwing them into a death spiral. However, the recent moves by NextEra and E.ON. demonstrate that some utilities are starting to look toward renewable energy as a viable business model. As the purely economic case for renewable energy continues to become stronger, we should expect more utilities to move in this direction as well. And that, for me, is reason to hope.

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