Record high oil prices and intensifying public concern regarding climate change have focused attention on the U.S. electric power generation industry like never before. Public pressure on electric utilities to develop more renewable energy is growing every day, with 25 states now setting deadlines for electric utilities to get at least some portion of their power from renewable sources.
While responses to the issues of high energy prices and global warming have varied from company to company, FPL Group (FPL), owner of Florida Power & Light, has taken the early lead in developing renewable power. It's the largest U.S. wind-power generator with a fleet of 48 wind farms across 16 states. Wind power provides about 30% of the company's independent power generation subsidiary's total output. Moreover, in February FPL announced plans for a massive $20 billion expansion that will triple its wind capacity.
FPL's Positive Outlook from Analysts
FPL's foray into wind power has been highly successful, the company says, with its $6 billion wind investment earning a return on equity in the "high teens" percentage range and increasing its earnings per share during the first full year of operation. Now FPL hopes to extend that success to solar power, which utilities have yet to embrace. In doing so, it should gain valuable experience in renewable power development and an important advantage over rivals when bidding for future projects.
"FPL has done really well with wind, and solar is part of the overall picture, too," says Justin McCann, Standard & Poor's equity analyst covering electric utility stocks. He has a "hold" recommendation on FPL shares, which are trading near a record high set in May, 2007. McCann expects FPL will be able to raise its profits by as much as 12% annually through 2012, faster than most other power utilities, with much of that growth coming from renewable power. "It's not something we think is going to lose money," he says of the new investment in solar power.
In September, FPL said it will invest $1.5 billion to expand its solar power operations, which now comprise interests in seven facilities in the Mojave desert with a combined capacity of about 300 megawatts (FPL's owned share is about 150 MW). The $1.5 billion will be used to expand the California operations by another 200 MW and to build a 10 MW pilot facility in Florida, which could be expanded to 300 MW if it proves successful. In addition, FPL says it has identified or already controls sites that could house another 1,100 MW of solar power capacity and has started the full permitting process for 600 MW of new solar generation.
Improved Conversion Process
Given all the hype about renewable energy lately, it should hardly come as a surprise that a major utility is investing in more renewable power. Yet at the utility level, the activity in renewable energy has so far focused on wind power—which is cheaper to build and enjoys more generous tax credits. As of 2005, there was only 411 MW of solar power capacity connected to the U.S. power grid, compared with 8,706 MW of wind power. Just 13 facilities produce utility-scale solar power, 11 in California and two in Arizona. Net solar power generation from utility-scale facilities—more than 1 MW of capacity—accounted for just 0.01% of all renewable energy in 2006, according to Energy Dept. statistics, and solar power output actually fell in both 2006 and 2005.
FPL believes, however, that it can develop solar power profitably, even without the federal production tax credit that wind power enjoys but solar does not. FPL's solar plants do not use the photovoltaic cells that convert sunlight directly into electricity, which are expensive to build and offer no way to store power during nighttime or periods of low light. Instead, FPL's solar plants use "thermal" solar power, in which sunlight is reflected from a trough to heat a water pipe, creating steam that drives a traditional turbine.
Ausra, which will design and supply the equipment for FPL's new plants, says that its plants can even store solar energy in the form of hot water and release it at night or on cloudy days, making it more efficient. Ausra claims large-scale plants can produce power for eight ¢ per kilowatt hour—about the same as natural-gas-fired generation—and that with heat storage it can even compete with coal-based generation. Ausra's plants also include the ability to burn natural gas, meaning that the facility can still produce power at night or on cloudy days using the same turbine.
State Mandates Are Key
Much of the benefit FPL will likely gain from expanding its solar power capacity is the experience and relationships it forges with regulators and suppliers that should help it build other solar facilities, McCann says. FPL predicts solar generation capacity will expand to about 5,000 MW over the next 10 to 15 years, led by state mandates for renewable power.
Of the Sunbelt states where solar is most attractive, almost all of them have mandated renewable power targets, several of which include specific targets for solar or non-wind power. Colorado, for instance, will require 10% renewable power by 2015, 4% of which must come from solar. Minneapolis-based Xcel Energy (XEL; S&P investment rank, 4 STARS, buy), which sells electric power in the state, has already issued a public call seeking a developer that can supply its Colorado operation with 13,700 MW of solar power annually. Nevada requires 5% of its power be solar-generated by 2015, and Texas also mandates non-wind renewable power.
With its leadership position in renewable power, FPL stands a good chance of being able to develop and operate a large portion of that capacity, McCann said. "The company can use the fact that it is No. 1 in wind and solar to commercial advantage when it goes to develop new projects in other states," he says. And the opportunities should only increase in the future—a measure already passed by the House of Representatives would mandate 15% renewable power by 2020 across the entire country.