You probably didn't notice it, but one of the most significant acquisitions in the history of the utility sector took place this week. Hawaiian Electric Industries (NYSE:HE) agreed to sell its utility business to NextEra Energy (NYSE:NEE) for $4.3 billion.
The move is significant not because it creates an ever larger utility, but because one of the largest renewable energy asset owners in the world is acquiring a utility that is being overrun by renewable energy. Hawaiian Electric has been fighting an onslaught of rooftop solar energy that has transferred energy generating assets from its own control to customers. Regulators have even squashed an effort by the utility to slow the growth of solar.
If it chooses to, NextEra could build the next generation utility, one that embraces solar and wind energy while addressing the challenges that come from these energy sources.
Can NextEra Energy create the utility of the future?
Hawaii's first challenge is that it gets about 75% of its electricity from imported oil. This is incredibly expensive and is the reason Hawaiians paid an average of $0.34/kW-hr of electricity in September versus $0.10 nationwide (this includes all sectors).
This high cost electricity has made solar energy extremely attractive for consumers, who can save money by putting solar panels on their roof for a lease of around $0.15/kW-hr and $0 down. But distributed solar systems rely on net metering to send extra electricity during the day back to the grid and the high penetration of distributed solar has been a challenge for the utility. As a result, Hawaiian Electric has tried to slow solar growth by adding fees and limiting net metering for solar systems.
But regulators killed that plan and said Hawaiian Electric needed to embrace renewables. Given NextEra's large investment in wind and solar they may be able to do just that.
What the utility of the future may look like
To make renewables work on a large scale, two things will likely need to be put in place besides the renewable assets. Energy storage needs to be used to capture power during peak production times and save it for off-peak times and demand response needs to be used to adjust demand of electricity to match supply. If both of these are done, it could lower costs for everyone, create the next generation of utility, and even improve profits for NextEra Energy.
There could also be a series of microgrids, testing a concept that many think will be the future of the grid. In a microgrid, the utility's role would be to manage energy coming from a number of energy sources and match demand with demand of energy. If done correctly, this could increase distributed power generation and actually improve grid reliability.
NextEra has a lot of work to do
Thus far, it looks like NextEra is more willing than anyone to make renewable energy a big part of Hawaii's future. What exactly that future looks like is unknown.
CEO Jim Robo of NextEra Energy said, "We are proud that Hawaiian Electric has agreed to join our company in large part because of our shared vision to bring cleaner, renewable energy to Hawaii, while and the same time helping to reduce energy costs for Hawaiian Electric's customers." That's what regulators, customers, and shareholders want him to say. Now comes the hard part: Making the next generation of utilities a reality.
Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends SolarCity. The Motley Fool owns shares of SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.