Utilities Move On

The utility industry is moving quickly. There’s a phrase we don’t hear very often.

Nextera made a bid for Duke and DTE and Exelon might divest all non-utility assets. The reason behind both of these moves: renewable generation.

Marginal Costs

The marginal cost of generation for power plants that run on fossil fuels plants (coal, oil, gas) is dominated by fuel costs.

The marginal cost of generation for power plants that run on wind, hydro, and solar power is negligible. So, it’s easy to see the significant margin expansion opportunities for utilities.

Cost of Capital

Compared to regulated utilities, competitive generators have more experience with risk management and financial hedges while being subject to fewer regulations, thus a lower cost of capital.

On the other side, utilities with more renewable assets have lower costs of capital and higher-stock prices. See: Nextera

Stranded Assets

Someone will pay for assets that are no longer economical. That’s either the consumer in the form of higher rates, or the utility in the form of higher costs that can’t be passed down.

My bet is that utilities see the trends in regulation and have decided that the latter is more likely to happen.

It’s better to offload those assets now, instead of waiting until the last minute with no leverage.