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Americas Energy CEO Series: Lynn Good, Duke Energy

Having recently launched a substantial 10-year capital expenditure program, Duke Energy is looking toward a significant effort to modernize its transmission system and to expand the renewables portion of its 52,000 MW generation portfolio.

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What Duke is not aiming at doing, however, is following fellow utility Southern Company down the road of expanding its already sizeable nuclear fleet.

Indeed, Duke Chairman and CEO Lynn Good, now in her fifth year at the helm of one of the country's largest utilities, believes the electricity industry is undergoing a transformation that involves different customer expectations, rapidly changing technology and new public policy requirements, she said in an interview this week.

Duke announced in February a $37 billion, five-year growth capital expenditure plan that it updates every year. It has also announced a $25 billion grid investment plan for the next 10 years, with $13 billion to be invested in North Carolina and $3 billion in South Carolina. The company has yet to offer details on the remaining $9 billion that will presumably be divided between its Florida, Ohio, Kentucky and Indiana operations.

The CEO, with a strong finance background, has told analysts that Duke's growth is "driven by very low-risk, regulated investments, that are supported by our strong balance sheet," and that through rate case filings she is looking for early recovery of the North and South Carolina investments.

She told the analysts the investments in South Carolina could mean 3,300 jobs supported per year, representing "almost $200 million in salaries and wages annually, and more than $100 million in new tax revenue for the state."

Good, who prior to joining Cincinnati-based Cinergy in 2003 worked at several accounting firms, including Arthur Anderson, is accustomed to looking at the capital structure of a utility, how to invest and take into consideration risk and liquidity, and how to keep an eye on tax policies.

She joined Duke after it acquired Cinergy in early 2006. In the several years that followed she held the position of CFO for Duke's utility affiliates in the Carolinas, Ohio and Indiana, until she was named Duke Energy's CEO in June 2013, replacing Jim Rogers.

Asked her views on the tax plan currently wending its way through Congress, Good said in the interview that she is "encouraged to see that the House and Senate versions include provisions to retain interest deductibility for regulated utilities."

"Congress recognizes the fact that our industry spends billions in capital and that deducting interest expense is important to helping keep bills low for our customers," she said. "Transforming the tax code can enable us to continue providing affordable and reliable service."

DOE AND ITS EXTENDED RESILIENCY EFFORTS

Duke has a regulated US generation portfolio of 49,300 MW owned by its five utilities in the Carolinas, the Midwest and Florida, which serve 7.5 million electric customers in six states.

Although she noted that Duke will not feel a direct impact from the Department of Energy's request that the US Federal Energy Regulatory Commission put in place subsidies that reward coal and nuclear plants for making the grid more resilient, Good said she does "appreciate the focus of both DOE and FERC on the important issue of resiliency."

"Resiliency is a hallmark of the bulk power system. We believe that a reliable and resilient electric grid is extraordinarily important but often underappreciated until critical weather events occur," she said.

FERC last week asked the DOE for an extension of the December 11 deadline for putting a proposal in place that would reward coal and nuclear facilities for keeping 90-day fuel supplies on site. An extension to January 18, 2018, was approved.

"We are advocating for the commission to take the time needed to evaluate this complex issue, establish a clear and common definition of resiliency, ensure a rule that recognizes the differences between electricity markets, and keep electric power rates affordable for customers," said Good.

DUKE OWNS 10,700 MW OF NUCLEAR CAPACITY

Almost all of Duke's Midwest generation comes from coal, natural gas, or oil, while half of its Carolinas generation comes from its nuclear power plants. Duke owns six nuclear facilities -- three each in North and South Carolina -- with a combined capacity of roughly 10,700 MW.

On August 25, Duke Energy Carolinas proposed canceling its planned Lee Nuclear Station and in October Duke Energy Florida officially dropped its idea to build the Levy nuclear facility.

"Despite the difficult decisions we made on our two new nuclear projects, nuclear energy is and will remain a vital part of Duke Energy's generation portfolio. Its clean and reliable, two attributes that are important to our customers," she said.

"If, as a country, we're serious about reducing carbon, I believe nuclear has to be a part of the conversation," she said. "However, the risks and uncertainties in building new nuclear in today's environment led to our decisions."

Duke wants to operate its nuclear units "as long as we safely can," Good said, and believes its plants are good candidates for second license renewal.

"We're currently evaluating license extensions for an additional 20 years, which would give us the ability to operate for up to 80 years," she said.

DUKE HAS GAS PLATFORM WITH PIEDMONT NATURAL GAS

In October 2016, Duke closed on the $4.9 billion acquisition of Piedmont Natural Gas. Good has called the integration of Piedmont "textbook," and said it has helped Duke position itself for the future.

"We now operate a five-state natural gas local distribution company, and our use of natural gas across our LDC and electric businesses ranks second in the US." The company's natural gas customers tripled -- from 525,000 customers in Ohio and Kentucky -- to approximately 1.6 million.

She said the intention is to expand its natural gas platform with additional infrastructure. "We will also see growth through investing in interstate natural gas pipelines like Atlantic Coast and Sabal Trail."

BIG UTILITY GOES DOWN THE RENEWABLES ROAD

Like many other utilities in the US, Duke has become increasingly focused on renewable power generation.

Its affiliate Duke Energy Renewables has a portfolio made up of 2,900 MW of wind and solar generation. The company has said that over the next five years it plans to invest $1 billion in commercial renewables on top of $1.3 billion invested in carbon-free generation in its regulated utility business.

"Commercial renewable development is an important part of our long-term growth strategy as renewables and distributed technology are rapidly becoming more competitive -- even without tax incentives -- with traditional generation," Good said.

"We also see several opportunities in our regulated business over the next few years. In North Carolina, the recent passage of solar bill H.B. 589 was clearly a positive move. It will allow for approximately 2,600 MW of utility-scale renewable energy projects to be procured via a competitive bidding process over 45 months," she said.

Duke also believes Florida is "ripe" for higher solar penetration and recently announced plans to build 700 MW of solar in that state. Construction is underway on three solar projects in Kentucky, "our first in the state," Good said.

On December 6, Duke acquired the remaining stake in California-based REC Solar, giving it full ownership. Good said REC Solar provides Duke with renewable energy solutions for commercial customers in the US.

"We made an investment in that business several years ago to primarily learn more about the economics of commercial rooftop solar, the strategies around customer acquisition and what customer expectations were around rooftop solar," she said.

"It is an important part of the solar industry that we need to understand deeply since it is impacting our jurisdictions, and California is a place where it is advancing more rapidly," she said.

INDUSTRY IS UNDERGOING A TRANSFORMATION

Good speaks often about the fact that the electricity industry is undergoing a transformation.

"This transformation has been occurring for several years," she said. "Mobile technology has increased customer expectations for control, convenience and options. We're all competing with companies like Uber, Starbucks and Amazon to provide an amazing customer experience."

Customers, she said, "want to do business with us on their own terms and they want more smart home technologies that enable them to better manage their energy usage from devices such as smartphones."

At the same time, she said, "the shale gas boom has revolutionized the industry."

Once a "tiny fraction" of the gas supply, shale sources now account for over half of US gas production. "Natural gas has lowered prices for customers and been a catalyst for coal and nuclear retirements across the country. It also offers flexibility to perfectly complement renewables."

Good said that new public policies at the federal and state level could potentially change the traditional regulatory model. "New entrants will be attracted to our business but may not assume the same obligation to serve all customers."

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