Will These Utilities Profit From the Push Into Renewables?

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Editors note: A previous version of this article stated Duke Energy was actively selling Midwestern power assets, but the company is only considering selling the assets, according to Bloomberg. The Fool regrets the error. 

In the energy world, renewables are all the rage these days. Many of the nation's biggest utilities, including Southern Company (NYSE: SO  ) , Duke Energy (NYSE: DUK  ) , and American Electric Power (NYSE: AEP  ) are plowing vast resources into renewable assets.

Generating steady profits and pumping out reliable dividends to shareholders are what utility investors care about the most. To those ends, will the push toward renewable energy provide years of sustainable profits down the road?

Using all the arrows in the quiver
Southern Company Chairman, President, and CEO Tom Fanning described his company's energy portfolio as holding "all the arrows in the quiver." In his estimation, Southern Company's growth outlook is driven by the usage of a variety of energy sources. This will include traditional sources such as coal and natural gas, but also nuclear as well as renewables such as biofuels.

The massive investment Southern Company has made to diversify its energy portfolio is truly impressive. In all, Southern has invested over $20 billion into diversifying its energy sources, and going forward, will spend about $5.5 billion in capital expenditures every year to ensure the optimal use of all available sources of energy.

Meanwhile, Duke Energy isn't falling behind in the push to develop renewable forms of energy. Duke Energy Renewables, a segment operating under Duke's Commercial Businesses, holds a diversified portfolio. Its commercial renewable assets include 15 wind farms and 17 solar farms in 12 states. And, Duke Energy plans even greater investment in renewables going forward. Duke Energy Renewables has initiated construction of three more solar power projects in North Carolina.

At the same time, Duke is working on plans to selling off older assets that predominantly utilize coal and natural gas. The company may sell more than a dozen Midwestern power plants, half of which use coal with the other half utilizing natural gas. Proceeds could amount to close to $2 billion, which would provide additional resources to allocate to renewables should the company decide to go in that direction. As a result, Duke's turnover of its asset portfolio makes it clear the company is serious about charting a new path in the years ahead.

Likewise, American Electric Power holds an impressive portfolio of renewable assets. American Electric Power has had an active wind development program since the mid-1990s. Its six regulated utility operating companies have agreements to purchase nearly 2,000 megawatts from wind power facilities across seven states in the United States.

In addition, American Electric Power operates considerable hydroelectric and solar assets. The company has 17 hydro-electric facilities in Virginia, West Virginia, Ohio, Indiana, and Michigan, which together generate more than 800 megawatts of electricity. Furthermore, American Electric Power's Ohio business signed a 20-year power purchase agreement for solar energy. And, the company uses biodiesel for unit start-up and flame stabilization at several power plants.

Will diversifying into renewables pay off?
There is a considerable level of political pressure to avoid forms of energy seen as harmful to society and the environment. In recent years, though, the nation's largest utilities have proven they're taking this commitment seriously. Coal usage is dropping, and while it's likely coal will remain a significant part of the energy mix in the United States, alternative energy is gaining serious traction.

In particular, solar, wind, and biofuels are building momentum and may actually secure a meaningful place in the nation's energy picture. Utility giants Southern Company, Duke Energy, and American Electric Power are devoting billions in investments into developing renewables. While it's no guarantee that their efforts will pay off, management of each company is optimistic about the future for renewable forms of energy. Needless to say, investors will want to keep a close eye on their progress in this regard going forward.

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Bob Ciura

Bob Ciura, MBA, has written for The Motley Fool since 2012. I focus on energy, consumer goods, and technology. I look for growth at a reasonable price, with a particular fondness for market-beating dividend yields.

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