FPL Grabs the Lead in Renewable Power

The utility, now the largest wind-power generator in the U.S., is also making a big push into solar with new operations in the Mojave and in Florida

by Vaughan Scully From Standard & Poor's Equity Research

Record high oil prices and intensifying public concern regarding climate change have focused attention on the U.S. electric power generation industry like never before. Public pressure on electric utilities to develop more renewable energy is growing every day, with 25 states now setting deadlines for electric utilities to get at least some portion of their power from renewable sources.

While responses to the issues of high energy prices and global warming have varied from company to company, FPL Group (FPL), owner of Florida Power & Light, has taken the early lead in developing renewable power. It's the largest U.S. wind-power generator with a fleet of 48 wind farms across 16 states. Wind power provides about 30% of the company's independent power generation subsidiary's total output. Moreover, in February FPL announced plans for a massive $20 billion expansion that will triple its wind capacity.

FPL's Positive Outlook from Analysts

FPL's foray into wind power has been highly successful, the company says, with its $6 billion wind investment earning a return on equity in the "high teens" percentage range and increasing its earnings per share during the first full year of operation. Now FPL hopes to extend that success to solar power, which utilities have yet to embrace. In doing so, it should gain valuable experience in renewable power development and an important advantage over rivals when bidding for future projects.

"FPL has done really well with wind, and solar is part of the overall picture, too," says Justin McCann, Standard & Poor's equity analyst covering electric utility stocks. He has a "hold" recommendation on FPL shares, which are trading near a record high set in May, 2007. McCann expects FPL will be able to raise its profits by as much as 12% annually through 2012, faster than most other power utilities, with much of that growth coming from renewable power. "It's not something we think is going to lose money," he says of the new investment in solar power.

In September, FPL said it will invest $1.5 billion to expand its solar power operations, which now comprise interests in seven facilities in the Mojave desert with a combined capacity of about 300 megawatts (FPL's owned share is about 150 MW). The $1.5 billion will be used to expand the California operations by another 200 MW and to build a 10 MW pilot facility in Florida, which could be expanded to 300 MW if it proves successful. In addition, FPL says it has identified or already controls sites that could house another 1,100 MW of solar power capacity and has started the full permitting process for 600 MW of new solar generation.

Improved Conversion Process

Given all the hype about renewable energy lately, it should hardly come as a surprise that a major utility is investing in more renewable power. Yet at the utility level, the activity in renewable energy has so far focused on wind power—which is cheaper to build and enjoys more generous tax credits. As of 2005, there was only 411 MW of solar power capacity connected to the U.S. power grid, compared with 8,706 MW of wind power. Just 13 facilities produce utility-scale solar power, 11 in California and two in Arizona. Net solar power generation from utility-scale facilities—more than 1 MW of capacity—accounted for just 0.01% of all renewable energy in 2006, according to Energy Dept. statistics, and solar power output actually fell in both 2006 and 2005.