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Sunday Strategist: NextEra's Winning Bet on Renewable Energy

Sunday Strategist
Bloomberg

NextEra Energy Inc. started becoming a green giant in 2002.

It had some gas turbines on order from General Electric and persuaded the company to swap them for a stack of its wind turbines, as our deep-dive details. It was an odd strategy for an almost-century old utility, based in Florida, no less, where gas is cheap.

At the time wind was still a more expensive way to generate electricity than coal, but not drastically so. NextEra had no doubt seen the cost dropping quickly and figured it would keep the same trajectory in the future. In short order, it put a similar strategy into a rash of solar plants.

It was betting, essentially, on Wright's Law, a theory of industrial production born, like the utility, in the 1920s. Wright was studying airplane makers and found that with each doubling of capacity, cost declined by a similar amount. Essentially: if you build it, you will save.

The Silicon Valley version of this dynamic is known as Moore's Law, though that rule applies mainly to circuit boards.

When capital expenses are viewed through Wright's lens, it entirely changes unit economics. The payoff on the $10 million solar plant built today comes from the third such plant down the line – at least much of it.

Little of this is powered by breakthroughs, mind you. The cost swoon comes from an accumulation of small forces: factories become more efficient, mining operations seeing similar gains in scaling up, more competition pushing the market further along, and with it more R&D that further iterates the product itself. An incremental gain in any link in the chain ripples through the length of the market machinery. The tricky thing is that it's all tough to see of a piece.

Price decreases drive demand, which drives production, which drives price decreases. Rinse, repeat.

With solar energy, the early, extremely expensive days were funded by deep pockets, specifically NASA and other space agencies that needed to power satellites. Those massive outlays in technology trickled down to the panels on our Walmart roofs.

By one measure, the price of electricity from solar has plunged 89% since 2010. And, depending on how one does the math, it's now cheaper than juice from coal and gas-fired plants.

All of this is dark arts for an executive, particularly one with multiple stakeholders like ratepayers and investors. It's hard enough to model capex decisions given fluctuations in commodity prices, interest rates, population growth, the wider economy, etc.  Baking in a dynamic and substantial decline in technology costs adds another layer of complexity – and one that requires a not insignificant amount of guts ... or faith.

Not considering it, however, is more dangerous. It's like doing a physics problem – say shooting a rocket to the moon – without accounting for wind resistance. The math may be correct, but it's still not going to work out well.

And there's no shortage of companies that don't have the gumption to buy into Wright's Law. Consider automakers that shunned electric vehicles for decades. As battery prices plummet, a day doesn't go by without news of a major manufacturer accelerating EV plans or announcing new models. They are racing to catch Mr. Musk, who is plenty familiar with the conjectures of Moore and Wright.

Not only did NextEra pencil Wright's cost curve correctly, but it leveraged government subsidies – often at the state level – to build plants before they would be profitable on their own. The savviest executives building charging stations for electric vehicles are doing the same thing at the moment.

These were handouts to prop up a struggling new industry; the strategic coup came in realizing that it wouldn't be struggling for long. 

NextEra's wind and solar farms, now scattered across about half the U.S., produce enough juice to power Greece. The company has plans to nearly double its renewable capacity – enough turbines and panels -- to power 11 million homes. That's about 10 percent of the country. From there, the next 10% should come far cheaper.

 

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