|Duke Energy's 60-MW Monroe Solar Facility in Union County, N.C. The Charlotte, N.C.-headquartered company is seen by Morgan Stanley as one of the utilities best positioned to take advantage of a second wave of clean energy.
Source: S&P Global Market Intelligence
Morgan Stanley & Co. LLC sees a $64 billion spending opportunity on top of double-digit earnings accretion for more than a dozen utilities that decide to retire uneconomic coal plants and replace them with cheaper renewables by 2025.
"We compared the costs of operating each coal plant against our state-by-state forecasts of renewables costs across 13 stocks and identified [47,000 MW] of coal capacity that will become more expensive than renewables by 2024," Morgan Stanley analysts wrote in a recent research report. "We estimate this represents a capex opportunity of [$64 billion] and earnings accretion for the stocks we cover of up to 14% in 2025."
The report, "The Second Wave of Clean Energy — Part II: Who Can Ride the Wave?" follows a December 2019 report in which the research firm forecast that about 70,000 MW to as much as 190,000 MW of coal-fired generation is "economically at risk" from the deployment of a "second wave of renewables" in the U.S. The research firm said these projections exclude about 24,000 MW of coal generation already set to shut down.
"We think that the economics make sense that the utilities in general should be pursuing this just because it seems to benefit everybody," Morgan Stanley analyst Stephen Byrd said in a Feb. 11 phone interview. "It benefits shareholders, customers and the planet."
Ameren Corp., American Electric Power Co. Inc., Duke Energy Corp. and Pinnacle West Capital Corp. are seen as best positioned to take advantage of a second wave of clean energy.
The research firm said it has identified $2.9 billion in untapped renewables investment opportunity that could allow Ameren, which it upgraded to "overweight," to grow its earnings "at the high end" of the St. Louis-headquartered utility's 6% to 8% earnings growth target.
Morgan Stanley noted its capital expenditure opportunity forecast includes the customer savings created by replacing coal plants with cheaper renewable resources, "where each dollar of savings translates into [$7 to $8] of capex opportunity."
AEP has the "largest capex opportunity" at $17.2 billion with 14% earnings accretion in 2025, or $16 per share, the analysis shows.
While AEP owns 12,400 MW of regulated coal generation across 26 units, the Ohio utility is not expected to retire any additional capacity in the near to medium term. However, Morgan Stanley's estimates show AEP has 11,700 MW of coal that will be "uneconomic by 2024" given the economics of wind generation in Indiana, Ohio, Texas and West Virginia.
"We see an opportunity for the company to accelerate the transition away from coal given the utilities' service territory, which benefit from favorable renewable energy economics," analysts wrote in the Jan. 29 report.
Duke Energy has $16.8 billion in capex opportunity tied to the transition from coal to renewables, with 8% earnings accretion potential in 2025. The Charlotte, N.C.-headquartered utility owns 15,400 MW of coal capacity at 41 units with 13,000 MW seen as "at risk by 2024" because of wind economics in Indiana, North Carolina and Ohio.
Meanwhile, Pinnacle West has a $2.6 billion capex opportunity, representing 8% earnings accretion in 2025. Morgan Stanley estimates all of Pinnacle West's coal capacity "will become uneconomic by 2024" given solar economics in Arizona and New Mexico.
Pinnacle West subsidiary Arizona Public Service Co. plans to phase out coal-fired generation by 2031 as the utility moves to a larger fleet of solar-plus-storage arrays.
Morgan Stanley said Xcel Energy Inc. and NextEra Energy Inc. are "leaders in the transition away from coal," while Ameren, AEP and Dominion Energy Inc. are "in the early stages" of the cycle with large investments planned in onshore and offshore wind.
In addition, Morgan Stanley has raised doubts about Dominion's ability to complete the Atlantic Coast Pipeline LLC project given legal challenges tied to key permits for the 600-mile pipeline. "We believe this project will not move forward due to legal risks, and as a result [Dominion] will pursue additional renewables investments that will allow them to maintain their 5.5% EPS growth target," analysts wrote.
In a sign of its confidence in the pipeline, Dominion on Feb. 11 announced its plan to take on a greater share of the project through acquiring Southern Co.'s 5% equity stake.
"We continue to see significant risk in getting that project completed," Byrd said.
Morgan Stanley pointed out that it is likely utilities such as Ameren, Dominion, CenterPoint Energy Inc. and Pinnacle West will outline accelerated coal plant retirements and increased renewable investments when they file integrated resource plans with state regulators in the coming months.
Byrd, however, noted some "practical limitations" exist that utilities must address when adding renewables to their generation mix.
"It can sometimes take longer, be more expensive than what we've laid out if [there are] challenges in actually obtaining real estate, as an example," Byrd said. "Interconnecting your renewable project to the grid would be another example."
Utilities also must think about the impact of coal plant retirements on the communities where they are located, including job losses, the analyst added.
But Byrd noted it is "going to become increasingly difficult" for utilities not to take a serious look at adding renewable generation to their portfolio as the costs continue to drop.
"It's pretty clear where the trends for renewables costs are going," Byrd said. "We can debate around the edges sort of how much of a cost reduction, but I think it's hard to debate whether there will be significant cost reductions. That's quite exciting."
Dominion on Feb. 11 said it will continue to shut down coal plants and ramp up renewable investments to hit its new net-zero emissions target for both its power generation and natural gas operations.
The company also plans to develop the $8 billion, 2,640-MW Virginia Beach Offshore Wind Project to help meet its goals.
Other utilities also are investing heavily in offshore wind but outside of the regulatory construct that Dominion plans to rely on.
"The one issue we do have some concern with would be the permitting process," Byrd said. "I think there may be some sort of friction or risk of delay for some of the first movers. That said, we don't have much doubt in the ability to actually get these projects constructed."
While Morgan Stanley is "seeing a trend" of utilities pursuing net-zero emissions, Byrd pointed out these plans "can be quite challenging with the current technology we have."
As an example, Xcel Energy is one of the most aggressive companies pursuing carbon reduction but the utility still plans to rely on gas during cold winters when the wind is not blowing.
"They struggle with getting to complete elimination of fossil fuels," Byrd said.