Will historic US act help Duke's green sale?

On Sunday, the Senate passed the Inflation Reduction Act. This sets goals to tackle US inflation by investing $300bn in deficit reduction; to invest $369bn in accelerating growth in low-carbon energy sources, including renewables, that should boost energy security; and reduce the price of prescription drugs.

In short, it is one of the most significant pieces of climate law in US history.

The American Clean Power Association has been effusive in its praise. ACP said the Act would deliver $600bn of capital investment in renewables; unlock 550GW of new clean power capacity, including onshore and offshore wind; and create 550,000 jobs in the renewables sector.

Key measures include the extension of vital tax credits for wind and solar until 2024 and the transition to a technology-neutral tax credit until 2032.

This could result in a more-than-threefold increase in annual US renewables installations from 28GW in 2022 to 97GW in 2030. The Act is promising a 40% reduction in US carbon emissions by 2030, and cost reductions that lower consumer energy bills. It has to get through the House of Representatives, but that could happen as early as tomorrow.

After a long fight for pro-renewables legislation, the Act appears to have given President Biden and Democrats a climate victory that had looked unlikely.

Duke decisions

But with major growth in prospect for US wind and solar, we wanted to take a look at the prospects for a utility that has been in the news this week: Duke Energy, which is mulling a sale of its 5GW renewables arm for $4bn.

Duke Energy CEO Lynn Good made the announcement on 4th August in the utility’s second-quarter results presentation. She said Duke was carrying out a review of the future of Duke Energy Renewables (DER) and promised further information on the future of DER in early 2023.

Formed in 2007, DER has grown a 5GW portfolio of wind, solar and battery projects in states including California, New York and Texas. The company is now one of the ten largest renewables operators in the US. So, why is Duke mulling an exit?

The key is understanding that some US states have regulated energy markets while others are deregulated. Historically, Duke has been active in both: DER has built its portfolio in deregulated markets, which allow for competition, while its parent Duke Energy also operates in seven of the country's regulated states, which limit competition. They are Florida, Indiana, Kentucky, North Carolina, Ohio, South Carolina and Tennessee.

Selling DER does not mean Duke is quitting renewables. Rather, it is selling its operations in states where it faces most competition, and focusing on growth in markets where it is more dominant – and can, therefore, grow more quickly. It is also worth noting that DER only represents 5% of Duke’s total earnings; and that its portfolio will be attractive to other US renewables players.

Good tackled this topic on the utility’s second-quarter earnings call. She said there will be a “robust market” for DER because of its operational and development-stage assets, as well as the development expertise.

She said the Act opened new opportunities for Duke in regulated markets, including expanding nuclear with both advanced and small modular projects.

She said: “We see meaningful benefits to customers from the renewable tax credits, the recognition of nuclear, the incentives around critical infrastructure. We will be impacted by the corporate minimum tax but we will also benefit from the credits which we will pass to our customers.”

Selling DER would also enable the utility to raise $4bn to repay debts and weather the macroeconomic headwinds that the firm is facing as a result of inflation. Good said Duke’s carbon reduction targets would be unaffected, and that its commitment to the clean energy transition is “unchanged”.

Disposing of DER does not represent an exit from renewables, but rather a refocusing of Duke’s operations on the markets where it is insulated from competition. It’s a smart move.

Moreover, if the Act gives US renewables the extra injection of enthusiasm we expect, then the DER portfolio could be a prized asset for rivals next year.