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Renewables juggernaut NextEra boosts project development pipeline

Q2: U.S. Solar and Wind Power by the Numbers

Essential Energy Insights - September 17, 2020

Essential Energy Insights September 2020

Rate case activity slips, COVID-19 proceedings remain at the forefront in August


Renewables juggernaut NextEra boosts project development pipeline

Withthe extension of tax creditsfor renewable energy development, and confident that regulations on carbon emissionswill only tighten, NextEra EnergyInc. management on April 28 said the company continues to outpace previousguidance it has set on the scale of its renewable development pipeline.

In 2015,NextEra Energy Resources LLCsigned contracts for roughly 2,100 MW of new renewable projects, putting its developmentprogram for 2015 and 2016 at more than 4,000 MW. That is 500 MW above the midpointof the range NextEra management laid out at its investor conference in March, andmakes 2015 and 2016 the most successful two-year period for renewables developmentin NextEra's history, Executive Vice President and CFO John Ketchum said on thecompany's first-quarter earningscall April 28.

The extensionand phase-down of production tax credits for wind generation and investment taxcredits for solar will provide renewable generation the breathing room for coststo come down, in NextEra's view, to eventually compete with gas-fired generationwhen the incentives expire.

"Bothwind and solar are well positioned to compete head-to-head with gas-fired generationtechnologies, now and as we head into the next decade. Lower natural gas pricesand the environmental regulation are expected to continue to pressure existing coalfacilities, and renewables are well situated as a shift away from coal continues,"Ketchum said. "We expect resource planning activities for increasingly stringentenvironmental rules and potential carbon emissions regulations, whether at the stateor federal level, will help further support demand."

In 2017and 2018, NextEra expects to bring into service 2,400 MW to 3,800 MW of new U.S.wind projects, which Ketchum said was three times what management set as expectationsat its 2015 investor day event. With the 30% ITC credit for solar in place through2019, however, some customers may wait to sign contracts, so NextEra forecasts bringinginto service 400 MW to 1,300 MW of solar for 2017 and 2018. In 2015 and 2016, NextEra'ssolar development program stands at 1,300 MW. "However, we believe thatsome of this recent success may reflect the pulling forward of demand for futureyears," Ketchum said. "Overall, we expect a greater portion of new demand,particularly for solar to be for projects delivered in 2018 and beyond."

To supportthese plans, NextEra Energy Resources expects capital expenditures of $7 billionto $9 billion over the 2017-2018 period, based on developing 4,100 MW, roughly equivalentto what it invested over 2015 and 2016. NextEra expects the brunt of new projectdemand and new investment opportunities to occur in 2018. Nor does NextEra planto issue equity in 2016 to support the plan.

"Although we are optimistic about the prospects for newrenewables growth, it is important to remember that forecasting 2017 and 2018 originationexpectations, while only a quarter of the way through 2016, is subject to a numberof uncertainties, including most importantly, the tenor of IRS start-of-constructionguidance and its related impact on the timing of customer demand," Ketchumsaid. "We continue to expect our renewables development program to supportthose expectations in our longer term growth prospects. It is important to keepin mind that the greatest potential contribution to earnings and cash flow growthfrom these 2017 and 2018 development projects are for 2019 and beyond."

In asign of a potential thawingin the capital markets for certain yieldcos with strong parent sponsors, an equity offeringto fund roughly 300 MW of wind capacity dropdowns from NextEra Energy Resources.Ketchum said NextEra Energy Partners was able to raise approximately $287 million,giving the yieldco greater liquidity and debt capacity.

"We continue to evaluate the optimal long-term capital structurefor NEP, and our current thinking is that the portfolio can support a holdco leverageratio of approximately 3.5x project distributions after debt service," Ketchumsaid. "Based on this metric, we expect our current incremental holdco debtcapacity to be roughly $300 million to $400 million. As a result, we have flexibilityas to how we finance our next acquisition and can be opportunistic regarding ourapproach to further growth opportunities for the balance of the year."

As forwhere this project development is likely to occur, NextEra management suggestedthat it is looking at Texas for new solar, but potentially not wind given currentlevels of wind capacity there already. NextEra Energy Resources President and CEOArmando Pimentel said "concern over the long-term economics of ERCOT"was one of the reasons NextEra recentlysold a roughly 3,000-MW portfolio of combined-cycle plants in Texasto Luminant Generation Co. LLC,a subsidiary of Energy Future HoldingsCorp.

"Thereappears to be an early wave of solar in Texas at prices that appear very attractive.And so it's not just wind. I think Texas is also going to be a market that is goingto be very favorable for construction of other renewables including solar,"Pimentel said. "We continue to be interested in development in Texas. But it'snot going to be, in my view, as significant a part of our future investment as itwas during the 2006 and 2008 time frame."