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Cashing in On Global Warming

January 31, 2020

Renewable energy isn’t just a fad, nor a political football game, regardless of which side of the global warming debate you reside. The economics of working with wind, solar, hydropower and other renewables continues to work for the bottom line and not just for show or for feel-good actions.

And the proof is in one of my more successful utilities inside Profitable Investing with NextEra Energy (NEE). Since being added to the portfolio in 2008, it has generated a total return of 588.55%, which is fantastic when compared to the S&P Utilities Index’s return of 197.32% over the same period. And it’s even more impressive when compared to the broader S&P 500 Index, which only managed to return 226.32% for the same time.

Renewables Power Up: NextEra Energy, S&P 500 Index and S&P Utilities Index Total Return—Source: Bloomberg Finance L.P.

NextEra Energy has its core operations in regulated power for its base market in Florida, but it has really grown in assets and revenues, thanks to its broad push around North America for wind and solar power in both its regulated market and more so in its unregulated markets. In doing so, it has become one of the world’s largest wind and solar companies. :

And it isn’t alone in this market. According to data compiled by the Center for Climate and Energy Solutions (C2ES), renewable energy is the fastest-expanding source for power in the US from 2000 through 2018—growing some 100%. And it continues to climb.

Yet, only 11% of the US energy demand was fueled by renewables in 2018, according to the Energy Information Administration (EIA). This means while gains have been impressive, there’s a lot of opportunity for further expansion.

For US electric power, renewables made up a bit more of the power pie; about 17.10% in 2018. That’s projected to increase to 24.00%, which is led primarily from wind and solar operations.

Now, a great deal of this development comes from tax incentives. Back in 1992, the Production Tax Credit (PTC) enabled utilities to claim credits for each kilowatt of power generated. This enabled a lot of projects to get green-lighted, and as a result, giving the initial push in this market.

But this is being phased out at the end of 2020. However, the Investment Tax Credit (ITC) provided the next leg-up for wind and solar. This enabled credits not just for power produced, but for investments in equipment and facilities.

This is what has been behind much of the economics of NextEra Energy, as it isn’t just about power production, but capabilities. So, even if wind isn’t blowing, or the sun isn’t always shining, NextEra Energy still gets its credit for its investment in facilities and capabilities. The ITC is phasing down in amounts but will continue well into the 2020s.

And individual states continue to provide credits for companies and individual homeowners, including from high-tax states such as California. This adds to the economics of renewable power projects.

Individual states also continue to expand mandates for regulated utilities to either generate or acquire power from renewables as part of their approvals by local public utility commissions (PUC). This means renewable power is not just about tax savings, but it’s also a requirement.

This is fueling major investments in renewables. So far, according to the EIA and C2ES, these investments amounted to $2.2 trillion in 2017 and $2.4 trillion for the full year in 2018. And the results for 2019 should show a further rise in investments in renewables.

US Electricity Annual Wind (White) & Solar (Gold) Generation—Source: US Department of Energy & Bloomberg Finance L.P.

Renewables include a variety of power sources with hydroelectric power among them. But the key drivers keep coming from wind and solar.

And NextEra Energy is the largest producer of wind and solar energy in the world.

The US Department of Energy (DOE) does an annual review of power generation by source and from 2000 through the last full year’s data. And for US solar power generation, the gains have been 12,836.47%. For wind power generation, the gains for the same years have climbed by 4,774.61%.

All of this comes as popular demand for wind and solar remains buoyant. And this is proven out in the state of Texas, the bastion for fossil fuels. The state has the largest production of wind power of any other state in the US and generates more than 25.00% of overall US energy from wind power. From ranches to even shale fields, wind turbines are a mainstay of the landscape of the Lone Star State. And of course, NextEra Energy is there.

The company just reported for the fourth quarter. Net income is up by 64.02%% as reported from the same quarter 2018. And with ample margins, NextEra Energy generates a return on shareholders’ equity of 10.60%.

And while the dividend is a bit low for a traditional utility at 1.86%, the distributions continue to rise, with the five-year average expanding 11.51% per year. But with the proven growth model of the company, it translates to stock price growth as well. It makes for a great addition for any income investor’s portfolio.

There’s no doubt that NextEra Energy is a great renewable energy-focused company. And in next week’s issue of Income Investor’s Digest, I’ll talk about another impressive company that is cashing in on this sector that has a very big dividend.

And since going public, this impressive company has seen its stock delivering an average annual equivalent return of 22.97%. Stay tuned for next week’s Income Investor’s Digest.

All My Best,

Neil George
Editor, Income Investor’s Digest & Profitable Investing
Author, Income for Life