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NextEra sees batteries displacing gas-fired peakers, otherwise bullish on gas

As part of NextEra Energy Inc.'s continued embrace of disruption in the utility sector, executives during the company's investor day laid out a bullish view on pricing and demand for renewable power paired with storage through 2022.

The Florida-headquartered company estimates it will install between 20,000 MW and 23,000 MW of wind capacity and 9,000 MW and 13,000 MW of solar capacity by 2022, including assets owned and operated by competitive generation division NextEra Energy Resources LLC. Executives expect NextEra will have up to 2,000 MW of storage deployed by then as well.

"There is enormous change coming in this industry. I don't think the industry really has come to grips with it," NextEra Energy Chairman, President and CEO Jim Robo said June 20. "And we're at the leading edge, and it is going to help drive tremendous growth to this company over the next decade."

According to Robo, the rapid growth of wind and solar in the market has been among the industry's biggest game-changers, and one that almost everyone failed to recognize early on. While renewable tax credits might be extended, NextEra executives are betting wind and solar plus storage will be cheaper than existing coal and most existing nuclear after the early 2020s, when current federal subsidies are gone.

NextEra's decarbonization strategy includes natural gas pipelines and gas-fired plants, including the Mountain Valley Pipeline LLC in which the company owns a stake, and Florida Power & Light Co.'s FPL Dania Beach Clean Energy Center. NextEra plans to deploy between $6.3 billion and $6.9 billion for gas pipelines by 2022. Robo said the opposition to gas is surprising, because gas pipelines have enabled coal plant shutdowns and large emission reductions.

"Natural gas is going to be an important part of the equation for a long time," he said. "This country has literally hundreds and hundreds and hundreds of years of natural gas."

However, the company takes a more bearish view on gas-fired peakers; NextEra Energy Resources President and CEO John Ketchum said management sees peakers being "cannibalized" by renewables, especially as battery storage's manufacturing becomes more efficient and costs decline.

"On the battery side, you can see the adders being right around $4 to $9. Guess what, at $4 to $9, that's going to displace a lot of the gas-fired peakers in this country, right?" Ketchum said. "We've got a lot of old gas-fired peakers, low-capacity factors, high heat rates, expensive to run. Batteries are going to start taking them out."

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NextEra's clean energy ambitions have captured analysts' attention, especially as the company pushes for pairing wind and solar with storage. CreditSights Senior Analyst Andrew DeVries noted in a June 21 report the company signed 10 GW of renewables in the past two years alone with 40% of these contracts including a storage component, compared to the 10 GW of renewables the company developed over the first 15 years.

While DeVries agrees with NextEra's general concept on storage, he wrote "we still have small concerns that the [power purchase agreement] terms don't match the battery warranty terms and there could be exposure to battery degradation. [NextEra Energy Partners] told us at a Yieldco conference last month in Vegas that wasn't the case and we don't doubt them but it is hard to get details here around numbers of cycling and life of the battery."

NextEra's embrace of industry upheaval is "not a message that you really hear from most regulated utilities," said Paul Patterson, an analyst with Glenrock Associates, particularly the view that renewable power represents the future, rather than merely a way to add to rate base or incremental earnings.

"It's better to embrace that disruption, even if it means disrupting your own plans. I think that's why I would say it's one of the more interesting approaches that they seem to have," Patterson said in an interview. "They see renewables as a game-changer."

'Everything we have at NextEra Energy is for sale'

Robo and other NextEra executives were very candid about the company's desire to recycle capital and examine any possible M&A activity.

"Everything we have at NextEra Energy is for sale. I am not wedded to any asset," Robo said in his opening remarks. "If someone offers us a price for an asset that is more than what we think the whole value of that asset is for us, we will sell it and we will recycle the capital. That is absolutely a big part of our culture, that financial discipline around capital allocation."

NextEra's recent playbook has been mainly that of an aggressive buyer. In 2018, NextEra purchased Gulf Power Co., natural gas distribution utility Florida City Gas and two gas plants from Southern Co. for about $6.48 billion, including the assumption of about $1.4 billion in debt. The company aims to have $120 billion of assets at the end of 2019 from its yieldco and third-party acquisitions, Robo said, and since 2017, NextEra Energy Resources has completed $5.5 billion of capital recycling.

"Whatever we do, number one, we'll be opportunistic," Robo said. "Number two, always has to be accretive."

Patterson said the frank attitude on buying and selling assets fits with NextEra's strategy. DeVries, however, observed that the omission of an investor slide on "excess balance sheet capacity" suggests might no longer have an appetite for large, debt-funded acquisitions. CreditSights also noted NextEra has sold combined-cycle gas plants in Texas, but is rarely on the other end of the deal. S&P Global Ratings recently gave positive marks to NextEra's environmental, social and governance profile. While the evaluation is not a credit rating, it may influence how NextEra operates.

"We wonder if they aren't getting feedback on the ESG front that ESG funds can't buy [NextEra Energy Partners] owing to the gas pipelines," DeVries wrote in a note. "This view combined with strong multiples for pipeline assets make us speculate they could be sellers of NEP's pipeline assets and then recycle that capital into more renewables."

Though NextEra's ramp-up in renewables helps its ESG ranking, the company is still commercially focused, Patterson said. It makes sense to highlight renewable achievements, but NextEra executives are still looking at the bottom line.

"This is about engaging in the activity enough in a profitable way," he said.