NextEra comments on grid needs in Texas, possible IRS guidance on renewables

With solar project development expected in Texas, NextEra Energy Resources will not pursue a lot of wind projects in the state like it has in the past unless there are some transmission grid enhancements, John Ketchum, executive vice president and CFO of parent company NextEra Energy (NYSE:NEE) said April 28.

Responding to a question during NextEra Energy’s 1Q16 earnings call, Ketchum noted that NextEra Energy Resources has not been developing many new wind power projects in Texas during the last few years, and it recently sold two natural gas-fired power plants in Texas to Energy Future Holdings subsidiary Luminant.

Those activities reflect NextEra Energy’s concern about the long-term economics of the market in ERCOT, with the gas-fired Forney Power Plant and gas-fired Lamar Power Plant worth more to Luminant than they were to NextEra Energy, Ketchum said.

While Texas expanded its transmission grid and saw a renewable generation boom as a result years ago, penetration of new wind projects has dropped, he added.

“At some point in the future there is going to have to be another wave of significant transmission build in Texas in order to accommodate new wind,” Ketchum said.

A positive for generation project developers in Texas, however, is that there appears to be a wave of solar projects on the horizon as project costs have come down and solar facilities are better able to compete with other resource options on prices, Ketchum said.

He cautioned that his comments should not be taken to indicate that NextEra and its subsidiaries are not interested in the ERCOT market, noting that permitting and interconnection procedures are favorable for generation developers. But NextEra generation development activities in ERCOT will not be as significant as they were in the 2006 to 2008 period, Ketchum added.

NextEra Energy Resources originated more than 4,000 MW of new renewable power projects in 2015, and added a 100-MW wind project purchase in 1Q16 with the acquisition of the High Lonesome Mesa project in New Mexico, Ketchum said. The developments made 2015 and the early part of 2016 “the most successful two-year period for renewable development in our history,” he said.

Looking ahead to 2017 and 2018, NextEra Energy sees similar development potential, with a projection to add between 2,800 MW and 5,400 MW of wind and solar projects in the United States and Canada, according to the slide presentation for the earnings call. Those projections greatly exceed the forecast NextEra Energy provided to investors in March, when it expected between 1,250 MW and 1,450 MW in renewable development for 2017 and 2018, Ketchum said.

The investment tax credit for solar projects and the production tax credit (PTC) for wind projects were extended by Congress in December 2015, and NextEra Energy Resources expects the Internal Revenue Service (IRS) to provide guidance on the use of the tax credits, such as how long construction on a project can stretch into the future to still receive the credits, Armando Pimentel, president and CEO of NextEra Energy Resources, said during the call.

The IRS also may provide guidance on the use of tax credits for repowering or refurbishing equipment on existing renewable projects, where a company may enhance an older site with new turbines and receive the tax benefits for any new equipment, Pimentel said. Clarity from the IRS on such situations could present a “significant opportunity” or a “small opportunity” for NextEra Energy Resources to capitalize on as it considers renewable project development in the future, Pimentel said.

Earnings

In its April 28 earnings statement, NextEra Energy reported 1Q16 net income of $636m, or $1.37 per share, compared with $650m, or $1.45 per share, in 1Q15.

NextEra Energy utility Florida Power & Light (FPL) reported net income of $393m, or 85 cents per share, in 1Q16, compared with $359m, or 80 cents per share, in 1Q15.

FPL in March filed a base rate request with the Florida Public Service Commission (PSC) that would be phased in beginning in 2017 following hearings, testimony and procedures at the PSC, NextEra Energy officials noted during the call.

The proposal includes three adjustments to base revenue requirements, including an $866m increase in January 2017, a $262m increase in January 2018 and a $209m increase upon the commissioning of the Okeechobee Clean Energy Center in mid-2019, NextEra Energy said in the statement.

The Okeechobee Clean Energy Center is a natural gas-fired, combined-cycle power plant with a capacity of 1,633 MW being developed by FPL in Okeechobee County, Fla.