More companies are starting to invest in renewables due to increasing climate change worries. However, for NextEra Energy ( NEE 2.02% ), renewables have long been a source of profitable growth. The company's early focus on renewables has enabled it to expand its earnings at nearly triple the rate of its peers, which has helped it consistently generate market-beating returns.
That growth potential from investing in renewables could be just as good if not better in the coming years, according to the company. That's why it continues to bet big by being one of the largest investors in the space, which it believes will keep paying dividends for its investors.
A "massively disruptive" force
One of the initial catalysts driving investment in the renewables sector has been government incentives, which help boost returns to more appealing levels. While those subsidies are winding down, it won't be much of a growth headwind for the sector over the long term. That's because of how much costs have fallen over the years, which should continue in the future.
NextEra Energy's CEO James Robo quantified this impact on the company's recent fourth-quarter conference call. He said:
With continued technology improvements and cost declines, we expect that without incentives, wind is going to be a $0.02 to $0.025 per kilowatt hour product, and solar is going to be a $0.025 to $0.03 per kilowatt hour product early in the next decade. Combining these extremely low costs with a $0.005 to $0.0075 adder for a 4-hour storage system will create a nearly firm renewable generation resource that is cheaper than the operating cost of coal, nuclear, and less fuel-efficient oil and gas-fired generation units. We continue to believe that this will be massively disruptive to the nation's generation fleet and create significant opportunities for renewable growth well into the next decade.
As Robo points out, within the next few years, the cost of wind and solar, even when factoring in the added costs of energy storage, will have fallen to the point that they are cheaper than coal, nuclear, and less-fuel-efficient oil- and gas-powered generating plants. That leads him to believe that there will be a huge wave of investment opportunities in renewables over the coming years.
High-powered growth ahead
NextEra Energy has already built the largest portfolio of wind- and solar-power assets in the world. However, the company intends to continue to expand this business at a brisk pace over the next few years to help drive above-average earnings growth.
The company made excellent progress on this initiative last year, adding another 6,500 megawatts (MW) of new projects to its backlog, which was double its record from 2017. As a result, it now expects to build between 10,100 and 16,500 MW of renewable generating capacity by 2020, which is enough to power 6.6 million to 10.7 million homes. Overall, the company plans to invest $40 billion in expanding its renewable portfolio as well as on other clean-energy projects through 2020, which leads Robo to believe that his company can grow earnings at or above a range of 6% to 8% annually through 2021.
In addition to those secured projects in its energy resources division, the company is also making a big bet on solar in its home state of Florida. Robo noted on the call that its utility Florida Power & Light recently unveiled its "groundbreaking 30-by-30 plan to install more than 30 million solar panels by 2030, resulting in an incremental 10,000 megawatts of solar projects versus what is in operation at FPL today." Those investments, along with others it has in development, "are mostly expected to help maintain our long-term adjusted EPS compound annual growth rate beyond 2021." Considering the company's size, which is already the largest in the sector, its ability to continue delivering above-average earnings growth for the next several years is impressive.
With the wind at its back, this utility has a bright future
NextEra Energy has invested billions of dollars in the renewable-energy sector over the years because it has been able to generate strong returns as well as above-average earnings growth. While subsidies helped power those returns initially, falling costs will soon make renewables cheaper than nearly all other forms of electricity, which is why the company intends to continue to pour money into the sector. Those investments should enable NextEra to maintain its above-average earnings growth rate, which, when combined with its rising dividend, should help the company continue delivering market-beating returns for its investors.