Will Dominion be next big US utility to head for competitive renewables exit?

Dominion Energy may be the next major US utility to exit competitive renewable energy markets to focus on regulated investments that can produce higher financial returns.

The company last week announced it will no longer invest in unregulated solar projects to generate federal investment tax credits (ITCs), and it could join the likes of Con Edison, AEP and Duke Energy in easing out of competitive markets and favouring the more predictable environment of assets operating in rate-regulated scenarios.

In the fourth quarter last year Dominion took a $1.5bn non-cash impairment charge to better reflect the fair market value of its 29-project, 1GW portfolio in five states.

CEO Bob Blue said an ongoing “top-to-bottom” review of Dominion’s operations across the company will inform any potential sale of the portfolio but “no decisions have been made”. There is no firm date to conclude the review and then act on its findings.

The assessment is looking at capital allocation, regulatory options, and strategic actions. It was prompted by the company’s “disappointing share price performance” over the last several years and challenging macroeconomic factors such as 40-year high inflation that were impacting customer rates and balance sheet strength.

Blue also mentioned supply chain limitations more broadly as a negative headwind, which for solar centres around imported raw materials, components and finished modules.

The US industry is heavily dependent on China and Southeast Asia for these items, a situation that will likely continue this decade, adding costs and keeping project development margins under pressure.

This panorama is particularly troublesome for smaller independent renewable energy producers such as Dominion who lack economies of scale larger competitors leverage to better control costs.

In November, Blue told analysts that Dominion’s strategy remains anchored on a “pure-play, state regulated utility operating profile” in a limited number of so-called premier states.

These are states sharing the philosophy of a “common-sense approach” to energy policy and regulation that gives priority to safety, reliability, affordability and increasingly, sustainability. He added such states also strive to create environments that “promote sensible economic growth, which, like the rising tide, lifts all boats”.

The company now operates as an electric utility in North Carolina, South Carolina and Virginia, where it is based.

Dominion began and grew its unregulated solar portfolio for two primary purposes. The first was to gain expertise in developing solar so it could employ that know-how credibly across its regulated footprint, according to CFO Steven Ridge.

“In effect, that task has been completed,” he said on a recent call. The second was to generate ITCs whose value have fluctuated over the last decade. The credit is now worth 30% of a project’s capital expenditure.

Ridge said given attractiveness of Dominion’s decarbonisation and resiliency capital opportunity, the capital used in the past to generate credits can be employed elsewhere to greater long-term shareholder benefit.

Flight from unregulated renewables

The last several years have seen an exodus by regulated utilities from unregulated renewable energy markets. Con Edison sold its clean energy business to Germany’s RWE, including 3GW of operating assets, while AEP announced on Thursday an agreement to sell 1.37GW of solar and wind projects for $1.5bn to a partnership that includes Invenergy.

“We expect that these divestitures are part of utilities’ strategy to put returns towards their core business and future growth by focusing on regulated assets including transmission and distribution and other non-wires investments that can be rate-based,” said LevelTen Energy in a report on the Q4 2022 renewable asset merger and acquisition market in North America.

LevelTen operates marketplace platforms for global buyers and sellers of renewable energy and assets.

“While we may see a transition of renewable energy asset ownership away from integrated utilities, there are [still] a large number of investors willing to take on the risk and rewards of privately owned renewable energy projects,” said the report.

These include certain Asian, Canadian, European, and US banks, infrastructure and pension funds, and large independent owners of renewable assets with deep experience operating them.