Over the last six months, two major US utilities – American Electric Power (AEP) and Duke Energy – have sold off all or part of their commercial solar PV assets to private investment groups and consolidated their operations. According to Syliva Levya Martinez, principal analyst of North American utility-scale solar at Wood Mackenzie: “These are not the last of these types of transactions we’re going to see”.
Duke sold its commercial utility-scale renewables wing to Canadian asset owner Brookfield Renewables for US$2.8 billion last year, and then sold its commercial distributed renewables generation arm to investment firm Arclight Capital.
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AEP, for its part, sold its entire New Mexico commercial solar PV portfolio earlier this month for US$230 million to another private investment firm, Exus Asset Holdings.
Both Duke and AEP explicitly said that divesting their commercial solar assets – which operate in competitive markets subject to trade policies, supply shifts and volatile energy prices – was a move to shift capital towards investment into transmission and their own regulated markets. Regulated markets in the US are those where a utility controls the generation, transmission and distribution of power, effectively in a natural monopoly.
De-risking it all
“Regulated assets have less risk than deregulated ones because there is less exposure to the market,” Martinez tells PV Tech Premium. Whilst the US is in something of a solar boom at the moment and its installation figures for 2023 were its highest ever – around 33GW according to Woodmac – it isn’t without its troubles. Supply chain issues have plagued the market for the last year and only recently begun to ease, and the ongoing antidumping and countervailing duty (AD/CVD) tariff dispute has the potential to cause significant industry disruptions, to name just one possible hurdle.
US utilities are predictable, Martinez says, and encouraged to be risk-averse by both stakeholders and investors. They also have monopoly regional markets where they can concentrate and control operations.
These regulated assets offer greater stability and lower risk for utilities, which in turn can make them a more attractive proposition for investors, she says:
“Investors tend to valuate a company higher if they have concentrated activity – a single activity or just a few of them. So I’m not surprised with AEP, for example, trying to focus on regulated activities and specific markets. I would think it would increase their valuation or their view as per investors.”
She points out that NextEra Energy, another large US utility headquartered in Florida, executed a similar move in announcing its commitment to consolidate its operations entirely on renewable energy and abandon coal and gas generation. This ‘real zero’ strategy includes a target to eliminate all scope 1 and scope 2 emissions from its operations by 2045 without the use of carbon offsets.
Martinez suggests that this consolidation is a more attractive proposition to investors. Indeed, according to the website Statista, NextEra is the largest US – and world – utility according to market value. Duke Energy was third and AEP fifth on the same site.
Selling solar now makes sense
Solar assets – renewable energy assets in general – are very valuable properties at the moment: “There is very high interest from the private and public sector, which is helping to valuate [renewable energy] assets at very, very high levels.”
This high market value for solar in the US is predominantly due to the Inflation Reduction Act (IRA) and its incentives, and the buyers of these utilities’ assets – Brookfield in the case of Duke Energy, Blackstone in the case of NextEra – represent established, very wealthy investment firms that have spent a lot of time and money in renewables and know the value they represent. In August, for example, Brookfield announced plans to commission 18GW worth of renewables in the next three years.
Selling commercial solar assets now gives utilities the cash they need to build regulated projects. This is particularly pertinent at the moment, when high inflation means that utilities can benefit from divesting high-value solar assets and self-financing new projects, rather than relying on debt financing.
According to Martinez, it’s “a combination of highly valuable assets that are highly demanded in the market and very ambitious plans with high levels of capital expenditure.”
Transmission
Those “very ambitious plans” are mostly the shift towards developing transmission infrastructure. “Utilities have not only the capital, but also the patience” to develop long-term transmission infrastructure, Martinez says, made easier by the boosted investor confidence from their regulated markets coupled with cash from selling their commercial renewables.
Grid infrastructure and expansion is sorely needed in the US; a November report from law firm Troutman Pepper looking into US transmission upgrades claimed that there was over 2TW worth of electricity generation and storage in interconnection queues as of April 2023.
Another report from Norwegian energy consultancy DNV said that the US and Canada would need to spend around US$5 trillion on transmission and grid infrastructure through 2050 if they’re going to meet their decarbonisation targets. The majority of that expenditure will be in the US. The rate of growth that solar PV alone is projected to hit in the US, partially as a result of the stimuli included in the IRA, will call on the US grid to more than double in capacity by 2050, DNV said. Both high-voltage, long-distance transmission lines and smaller distribution grids are going to need to be built at significant cost.
So utilities are shifting to transmission partly because the US needs it, and because of the future market opportunity in the of the energy transition through 2050. “Demand for renewables is going to be there, and investing in transmission is further acceptance of this trend…not generating directly, but providing the tools that are needed to get more renewables on the ground,” Martinez says.
Transmission infrastructure also ticks the ‘de-risk’ box for utilities as it isn’t subject to market fluctuations that can impact revenues for renewable energy generation. Big investments into long-term transmission infrastructure give utilities the security that Martinez says they want, and can help consolidate their regulated markets further, driving up investor confidence.
The upshot for the US solar market is that observers can expect to see more commercial assets sold by utilities and more acquisitions on the part of big investors, she says. “Renewables is an extremely attractive investment; investors [like Brookfield] are aware of that and have the capital to do it. And while this environment of high inflation, high interest rates remains – along with high valuation of renewable assets – then it’s is a perfect combination for utilities to be motivated to do these types of transactions.”