Utility Companies Sell Wind, Solar Farms to Shore Up U.S. Power Grid

Source: By Katherine Blunt and Jennifer Hiller, Wall Street Journal • Posted: Tuesday, July 4, 2023

The deals are expected to fund upgrades to electricity-delivery systems as green-energy competition rises

The renewable-energy business in the U.S. is becoming more challenging for utilities to navigate.PHOTO: MATTHEW BUSCH/BLOOMBERG NEWS

U.S. utility companies are selling off their wind and solar farms to free up money to make record investments in the power grid.

Duke Energy , American Electric Power  and Consolidated Edison  have each announced or finished deals in recent months to sell renewable-energy projects. Each has said it plans to use the billions of dollars in proceeds to modernize the power lines and other infrastructure that supply electricity for their utility businesses.

The moves highlight the mounting stress on the country’s aging power infrastructure, as well as how rising competition among renewable-energy developers is pushing margins lower.

Utilities are planning their biggest spending increases in decades to replace aging equipment, prepare for a surge in power demand driven by electric-vehicle adoption and strengthen their systems to withstand severe weather patterns linked to climate change. Edison Electric Institute, an industry trade group, expects that utilities will invest roughly $159 billion in 2023 and $155 billion in 2024, more than any year since 2000, when the group began tracking spending.

Utility spending is generally low-risk and lucrative because regulators allow the companies to earn set rates of return on investments in power lines, and, in some cases, power plants. That isn’t the case for spending on unregulated businesses, including portfolios of renewables or conventional power plants that operate in competitive power markets throughout the U.S.

Duke in June announced plans to sell about 3,400 megawatts of wind, solar and battery projects to Brookfield Renewable for $2.8 billion. Brian Savoy, Duke’s chief financial officer, said the sale would help the company finance its capital-spending plan, which proposes $145 billion in investments over the next decade.

Savoy said the company, which supplies electricity in the Carolinas, Florida, Ohio, Kentucky and Indiana, is working to assess what upgrades are needed to account for more electric vehicles and the prospect of more severe hurricanes, tornadoes and flooding.

“Our utility growth plans just continue to expand,” he said. “There’s a lot of work that needs to be done on the grid.”

The company is also building some renewable projects under its regulated businesses.

Utilities such as Duke Energy plan to raise spending to modernize power lines and other infrastructure. Photo: Dirk Shadd/ZUMA Press

AEP, which supplies power in parts of 11 states in the Midwest and South, earlier this year agreed to sell 1,365 megawatts of renewable-energy projects, mostly wind farms, to a consortium of infrastructure investors. The company said it expects to net $1.2 billion on the sale.

Chief Executive Julie Sloat said AEP plans to invest roughly $40 billion in its utility businesses in the next five years. The sale, she said, will help the company reduce financial risk and manage the extent to which customers have to foot the bill.

“How are we going to fund all of that, and keep rates as low as possible for our customers?” she said. “There are other companies that are probably better suited to own unregulated assets.”

The sales come as the competitive renewables sector becomes more challenging to navigate amid rising interest rates and an increase in the number of project developers seeking to supply power at the lowest cost. Supply-chain snarls and inflation have lately made projects more expensive to build.

“When competition picks up, margins start to erode,” said Guggenheim analyst Shahriar Pourreza. “The valuations of these businesses have deteriorated over time.”

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American Electric Power CEO Julie Sloat says the company plans to invest roughly $40 billion in its utility businesses in the next five years. Photo: Jordan Vonderhaar/Bloomberg News

Duke recorded nearly $1.5 billion in impairment charges in recent months as it wrote down the value of its renewables portfolio, which it once pegged at $4 billion.

Still, large developers see opportunity, in part because of a suite of tax credits available through the Inflation Reduction Act passed last year.

German energy company RWE this year bought ConEd’s renewables business for $6.8 billion. The acquisition nearly doubled its U.S. portfolio to more than 8 gigawatts of wind, solar and battery projects, with more than 24 gigawatts in the development pipeline. ConEd serves New York City, other parts of New York state and areas of New Jersey.

Mark Noyes, chief executive of RWE Clean Energy, said the company expects strong and consistent market conditions for the next 10 to 13 years because of the Inflation Reduction Act.

“We’re doing the opposite of utilities. We’re growing,” he said, adding that if utilities were to keep the unregulated renewables portfolios, it would require them to spend increasing amounts of capital outside of their core business.

The utilities want to replace aging infrastructure and strengthen their systems to withstand severe weather patterns linked to climate change. Photo: Mark Lennihan/Associated Press

Jehangir Vevaina, managing partner in Brookfield’s renewable power and transition group, said developers are better positioned for that. “It’s right in our wheelhouse,” he said, adding that Brookfield can retrofit and update existing plants, add battery storage to some projects and “optimize them on a commercial basis, but then also develop the assets in the pipeline and bring them to fruition,” he said.

Brookfield sees growing interest from commercial and industrial customers willing to sign power-purchase contracts that support the development of renewables. Many companies have set ambitious carbon-reduction targets that depend in part on buying clean power.

Vevaina said the companies are willing to pay more to account for the recent increase in development costs. The Duke deal, Brookfield’s latest in the U.S., included about 6 gigawatts of operating assets and slightly more than that of projects in development.

“These companies are trying to hit their net-zero targets,” Vevaina said. “There’s strong demand for good projects in the right locations.”

Write to Katherine Blunt at katherine.blunt@wsj.com and Jennifer Hiller at jennifer.hiller@wsj.com