Late last year, Xcel Energy (NASDAQ:XEL) became the first utility to publicly and boldly commit to generating all of its electricity from 100% carbon-free sources by 2050. While individuals and groups who take environmental stewardship seriously cheered the news, individual investors and Wall Street analysts should be cheering, too.
Why? Publicly committing to such an ambitious long-term goal provides a good deal of certainty for the road ahead. That will benefit individual investors, especially considering few things are as detrimental to a stock as uncertainty. The advantage of mitigating future policy risks by going all-in on zero-carbon power, coupled with continually improving economics for renewable energy and an increased appetite for states to provide incentives for nuclear power, suggest other utilities will follow Xcel Energy.
Xcel Energy's path to 100% carbon-free electricity
Amid the doom and gloom coverage of climate change in the news media, there are plenty of reasons for optimism. While there's room for smart policy changes to expedite the transition away from coal-fired power plants and toward cleaner energy sources, innovation and market forces actually have the power sector in the United States on pace to meet its climate pledges. In fact, half of electric utilities are well ahead of even the most optimistic decarbonization projections. Xcel Energy has been a shining example.
In 2005, the utility, which serves three states in the Southwest as well as five upper Midwestern states, relied on coal power for 56% of its electricity generation. Wind and solar, categorized as "modern renewables," made up just 3% of its generation mix that year. By 2017, the utility cut the share of coal in its portfolio to 37% and increased modern renewables to 23%. The 35% drop in carbon emissions from the 2005 baseline in that span exceeds the Paris Accord commitment of reducing carbon emissions 27% by 2025, and it exceeds the Environmental Protection Agency (EPA) Clean Power Plan goal of a 32% decline by 2030.
Xcel Energy has no intention of easing up on its assault on more expensive and dirtier coal-fired power. The utility expects carbon emissions -- compared with 2005 -- to fall 45% by 2021, 80% by 2030, and 100% by 2050. The near-term targets aren't too surprising considering that the recently approved Colorado Energy Plan will shift the company's generation mix to just 19% coal and 46% modern renewables by 2027.
The longer-term targets are perhaps a little more surprising, as they suggest the utility will need to jettison natural-gas-fired power plants -- which will provide 21% of its electricity in 2027 -- from its portfolio. Current economics don't provide any easy ways to stop using the cleaner-burning fuel (natural gas emits half the carbon emissions as coal to generate an equal amount of electricity), although that could change in the coming decades if wind, solar, and energy storage continue to walk down the cost curve. And if Xcel Energy sees a path to zero natural gas, then so could some of its well-positioned peers.
Who's next for a zero-carbon electricity pledge?
Xcel Energy's ambitious power plan is part of its "Steel for Fuel" strategy. That is, modern renewables can be more economical to operate than coal-fired and natural-gas-fired power plants, since wind and solar farms don't require fuel purchases to operate. NextEra Energy (NYSE:NEE) has a similar strategy for its lone electric utility franchise, Florida Power & Light.
The utility is powering ahead with its "30 by 30" strategy -- a pledge to install 30 million solar panels in Florida by 2030. NextEra Energy says that would result in 10,000 megawatts of solar power capacity, up from the entire state's 2,159 megawatts in operation today. Investors who can remember back to 2017 will notice how quickly the plans have changed.
Way back then, Florida Power & Light had only committed to installing 10 million solar panels by 2023 and 2,100 megawatts of solar capacity by 2025. Improving economics have changed that overnight. NextEra recently said the four solar facilities coming online in Florida in 2019 cost one-third the price of facilities brought online just a few years ago. It has already sited an additional 100 facilities (yes, 100) for future expansion.
While the current 30-by-30 strategy is encouraging, Florida faces challenges on the path to 100% carbon-free electricity. The American Southeast has virtually no wind potential, which explains why Florida has no wind turbines operating today (it may be able to generate 15% of its electric needs from offshore wind power, though). And although it's called the Sunshine State, Florida has salty and humid air that corrodes solar panels and saps efficiency. The challenges are why Florida Power & Light leans on natural gas and nuclear power for 73% and 25%, respectively, of its electricity generation. Solar power is currently just 2% of the utility's portfolio, no better than the national average.
That said, three decades will pass between now and 2050, so forecasting market conditions, technology improvements, and societal changes is impossible. But NextEra Energy's increasingly ambitious plans for solar power in Florida are encouraging -- and might even hint at a way to ditch natural gas by midcentury.
A win-win for investors and the environment
Xcel Energy made a bold public commitment to 100% carbon-free electricity by 2050. It was already well on its way, thanks in large part to geography: The company's four electric utilities operate in regions with some of the best wind and solar opportunities on the planet. While that gives it an edge over most peers, the improving economics of wind and solar suggest other electric utilities might not be too far behind in their pledges.
NextEra Energy is an obvious bet for the next company to announce a zero-carbon electricity pledge, even if its Florida-based utility faces unique challenges. That would provide certainty for investors on the long-term trajectory of the business and help the $85 billion company make good on plans to grow earnings and its dividend at a healthy rate for years to come.