Alternative Energy: More Attractive, But No Quick Fix

Includes: DUK, FPL-OLD, SCG, SO, XEL
by: Research Recap

Soaring oil prices should give a boost to alternative energy sources, but it is likely to be several years before they develop a meaningful share of energy supplies, Standard & Poor’s concludes in a new report.

To meet U.S. electricity needs, alternative fuels will likely play a greater role in the years to come, either through mandates or increasingly competitive pricing, S &P says. “Nevertheless, more often than not, it is substantial federal financial support that makes these changes happen.”

"At the very least, it will be many years before alternative fuels provide a significant share of power generation."

The greening of the power business, or the move away from fossil fuels (coal at older plants and natural gas at newer ones), shows up in the increasing use of renewable portfolio standards [RPS]. These state regulatory standards call for a certain share of energy in each state to come from non-fossil fuels. California is requiring 20% of its electricity to come from renewable energy by 2010 and is considering 33% by 2020, New York has a 24% goal by 2013, and Illinois wants 25% by 2025.

One concern is that the costs of these mandates aren’t immediately clear. “That uncertainty could result in the chief credit risk for utilities–that consumers could rebel at higher rates needed to bring power from renewable resources online,” says credit analyst Anne Selting. That risk increases in states that already have high energy rates and have also imposed aggressive RPS.

The high price of natural gas, however, is making investments in renewable resources look better and better to utilities, even without RPS.

Wind power, for example, is a strong contender in many areas, for investor-owned utilities such as MidAmerican Energy Co. and Xcel Energy Inc. (NYSE:XEL), and for independent power producers such as FPL Energy (FPL-OLD), PPM Energy, and Invenergy. However, many people don’t like the look of big propeller turbines and some environmentalists have raised concerns about their effect on birds and other wildlife.

Moreover, wind resources suitable for generating large amounts of electricity are often located far from population centers, so transmission can be a costly issue. Wind is also still relatively expensive and much of its recent development has depended on federal production tax credits [PTC], whose future is uncertain.

Solar power, also still relatively expensive to produce, makes true economic sense mainly in areas where sunlight is not just abundant but also intense, such as parts of New Mexico and Arizona. A mix of both large and small utilities already use solar power, though as a share of total national power production it is still small. Industry growth also relies on the PTC, and some states mandate minimum solar power generation through the RPS.

Although hydropower can be an exceptional source of cheap, renewable energy, most of the opportunities for harnessing it have been tapped out in the U.S.

That leaves nuclear energy, by far the most controversial non-fossil fuel source of power. No nuclear power plants have been built for decades, but the rising demand for power is causing some utilities, such as Southern Co. (NYSE:SO),SCANA Corp. (NYSE:SCG), and Duke Energy Corp.(NYSE:DUK), to consider this option. It’s far from certain that these efforts will come to fruition, and if they do, 2016 or so looks to be the earliest any nuclear plant would come on line, assuming the many regulatory, financial and public opinion hurdles can be overcome.

The full report, Automakers And Utilities Are Finding Alternative Energy More Attractive–But Not So Accessible, also addresses automakers’ efforts to reduce their dependence on petroleum.

Disclosure: None

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