MGE Energy: This Utility Has Too Much Uncertainty And Not Enough Growth Catalysts

MGE Energy: This Utility Has Too Much Uncertainty And Not Enough Growth Catalysts

Wisconsin electric and natural gas utility MGE Energy (NASDAQ:MGEE) reported Q4 earnings late last month that missed expectations as near-record warm temperatures prevailed across its service area during the quarter. The earnings miss, combined with similarly warm weather in Q1, caused the company to report its first YoY annual earnings decline in at least five years.

MGE Energy’s long-term operating outlook was complicated by the December release of its Framework 2030 Plan. The framework, which in part represents the company’s contribution to Wisconsin’s obligations under the U.S. Environmental Protection Agency’s Clean Power Plan (CPP), commits the company to generating 30% of its electricity from renewable sources by 2030. The framework also commits to reducing the company’s greenhouse gas emissions by 40% compared to its 2005 baseline by 2030. Finally, the company pledged not to seek an increase to its fixed rate in 2016 while simultaneously modernizing its electric grid.

The framework is ambitious given the company’s current reliance on coal. In 2014, it generated only 13% of its electricity from renewables versus 48% from coal (the latter number increases to 70% if PPAs are included). Much of this coal-fired capacity has recently undergone expensive upgrades, causing many stakeholders to openly question the economic feasibility of the 2030 targets since this makes it less likely that the emission reductions will be achieved by replacing aging coal-fired capacity with new natural gas-fired capacity, as many utilities are doing.

Many members of the Madison community that the company’s service area encompasses are hopeful that rooftop solar PV will play a major role of the future energy mix in the area and pushed for the fixed rate increase moratorium as a result. Fixed rates are increasingly seen in the Midwest as a controversial tool for either ensuring that ratepayers with their own generating capacity pay their “fair share” of connection costs (the utilities’ view), or disincentivizing the installation of generating capacity by ratepayers and thereby maintaining the utility monopoly (the consumer activists’ view).

Many utilities worry that, absent higher fixed rates, rooftop PV could prompt a so-called death spiral in which ratepayers owning their own capacity get a free ride for effectively using the grid as a backup battery, forcing a utility to increase its rates for the remaining ratepayers and thereby increasing the incentive of owning rooftop PV. While this is certainly a concern in sun-drenched states such as California and Nevada, two recent battlefields over fixed rates, Wisconsin is far from an optimal location for solar PV. The state ranks 29th in the country for solar PV installations despite being in the top 20 in terms of population. Wisconsin’s northern location and proximity to the Great Lakes mean that its solar PV potential is among the lowest in the country. Unlike other states with similarly low potential capacity that have seen recent investments, such as New York, Wisconsin’s residential electricity rates are only slightly higher than the national average, increasing rooftop PV’s payback period.

Read the full story here from Seeking Alpha, March 14, 2016