NextEra and the load growth upside

There is no shortage of worry over the negative consequences of the boom in data center power demand: utilities weighing whether to restart retired coal plants, already-long interconnection lines getting even longer, and tech company 24/7 clean power goals slipping.

But at least for the energy developer NextEra, the load growth emerging from data centers, manufacturing, and electrification has been a boon not for fossil fuels, but for renewables. In the second quarter of this year, the company added three gigawatts of new renewables and storage projects to its order backlog.

The company reported that its total renewables portfolio with tech and data center customers, backlog included, stands at seven gigawatts. On the company’s earnings call, CEO John Ketchum said that renewables are proving both quicker to develop and cheaper than gas. 

Ketchum added it was NextEra’s “second-best origination quarter ever,” even in the midst of widespread alarm over the surely negative impact that artificial intelligence would have on decarbonization. (Origination encompasses the early stages of developing energy projects: identifying the site, modeling the economics, determining prices and generally getting the whole operation ready for construction.)

“These results support our belief that the bulk of the growth in demand will be met by a combination of new renewables and battery storage,” he added, noting that NextEra anticipates that demand specifically for renewables will triple in the next seven years.

In the wake of the call, the company’s shares rose 5%.

Though this of course does not necessarily reflect the reality for every energy developer staring down AI load growth, it is at least comforting for those concerned that we are in for a wave of coal plant resuscitations. NextEra is one of the biggest renewables developers in the United States, especially when it comes to projects aimed at data centers. 

An agreement with Google to power its data centers as the company embraces AI amounted to 860 megawatts, or 28% of the new renewables on NextEra’s backlog. Asked by an analyst about the nature of the demand from NextEra’s customers, Rebecca Jones Kujawa, who is president and CEO of renewables developer subsidiary NextEra Energy Resources, said that “there is no escaping that these are very large numbers…numbers that I don’t think any utility across the industry has seen before.”

But Neil Kalton, an equity analyst at Wells Fargo who covers the energy space, said that it may be a little soon to assume that that demand will be met even close to wholly by renewables. His team’s own analysis anticipates that load growth will be met by a mix of gas and renewables — though the exact balance “remains to be seen.” 

“I think we're in that camp of closer to 50-50, but it could skew a little bit either direction,” Kalton said, citing the current impossibility of meeting 24/7 energy needs with renewables and storage that maxes out at four hours. “A healthy percentage is going to have to be served by natural gas plants, whether it's existing plants that are currently underutilized, or in some places, some new natural gas plants as well.”

AES, NextEra’s closest peer in the space, won’t be reporting its second quarter earnings for another week. But the developer’s June report said that AES sees a “clear and growing demand for U.S. renewables.” The company reported at the time that it had 5.9 GW of signed power purchase agreements with major technology companies; those customers make up more than 40% of AES’ backlog.

A central part of the appeal of renewables for developers, according to Kalton, is not just that they are cheap and quick to develop, but also that they come with relative cost certainty compared to fossil alternatives. 

“The thing about gas plants is [that] if I build a gas plant, I can't really hedge out my fuel,” he said. In 10 years, he added, it could cost $2 or $10. Given tax credits, in many regions solar is currently hovering around the same cost as gas. But the costs of solar are stable in a way that the costs of gas are not. 

“Renewables hold a lot of appeal, because you can build them quickly, they're pretty cost effective, and you have some future cost certainty,” he said. “You don't have production certainty, but you have cost certainty.”

And that certainty is gold for both the utilities and customers that only see energy demand projected to go up. According to a note on the energy analytics platform Orennia, NextEra’s results and Ketchum’s comments on the company’s outlook suggest that “the recent renewables surge is set to continue.”