Duke Energy (NYSE: DUK ) is anything but a clean energy company. It owns 19 coal-fired power plants, 22 oil- or gas-fired plants, and seven nuclear plants (the cleanest of the bunch), and is building more coal and gas capacity right now. So, how did this company become a player in renewable energy almost overnight?
The utility and power plant owner followed Edison International (NYSE: EIX ) in making an equity investment in Clean Power Finance, a residential solar finance and service company. Clean Power Finance claims to generate the financing for 40% of the residential leases in the U.S. market – as a major player in this emerging market Duke is getting exposure to solar it sorely needs.
Earlier this week, President Obama outlined his plans to fight climate change; a big part of that plan is to reduce emissions of carbon dioxide, particularly from coal plants. That hits Duke Energy where its profit center is, as is evident by the company retiring the W.S. Lee plant, one of well over 100 coal plants to be shut down in recent years.
The effect on Duke Energy stock
Duke Energy isn't the only one facing a conundrum as environmental regulations hit and solar power becomes more cost effective. All utilities and power plant owners will have to decide how they're going to combat or adapt to the new market, and they're responding in different ways.
Duke's equity investment in Clean Power Finance means it will get upside as Clean Power Finance and the residential solar market grows, but don't be surprised to see the company invest in solar funds as well. Financially, that's likely to have the biggest effect on investors over the long term.
Clean Power Finance's solar funds allow for tax deductions through the solar investment tax credit and generate a nearly guaranteed rate of return for investors. Duke may own very little solar itself but this is a way for the company to play in the market without investing in building out an installer (a la NRG Energy) or investing billions in solar farms (a la MidAmerican Energy).
The transition of Duke Energy
Duke applauded President Obama's recent stance on climate change and appears to be one of the utilities preparing to accept and profit from solar rather than fighting it. I think that's the right move, particularly for a company who could be negatively affected by new regulations.
This is a long-term play by Duke Energy but I think it will pay off in spades for investors.
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