NextEra Energy (“NextEra”) is one of the largest renewable energy utilities in the U.S. – the largest when it comes to wind and solar. Its entire business model is based upon providing clean energy at low cost, and hence it is not unsurprising that climate change presents great opportunities for this company. However, the boon of climate change also presents some challenges to its existing business in the form of uncertain generation resources.
The first and most obvious benefit of climate change is increased demand for renewable energy. In the U.S., a large driver of this growth with be from companies that contract for renewable energy capacity directly through Corporate Renewable Portfolio Standards (“CRPS”) schemes. Currently only 3% of Fortune 500 companies have CRPS, as compared to 45% who have sustainability goals, indicating significant opportunities for growth. Companies are motivated to engages in CRPS for financial and non-financial reasons, key among which are for energy price certainty (fixing prices paid for electricity), tax benefits (30% of the cost of producing renewable energy), and marketing. These reasons have led companies such as Google, Amazon, and Walmart to contract for renewable energy.
NextEra’s management has been successful in securing demand from corporations. It is the market leader in providing CRPS power generation capacity with an 11% share, and has done this through being a first-mover into renewable energy and being strategic with its growth. Firstly, it discarded its non-power businesses (limestone quarries, telecommunications, and water utilities) in 1950 to become a dedicated power company, then became an early-adopter of wind energy in 1999, and then solar power in 2009, and eventually secured a deal with Google in 2010. These show that NextEra’s management has been effective in moving into new technologies and securing clients.
Increasing demand for renewable energy is also an international phenomenon, but NextEra’s management has not entered the global market. Going international has the benefits of diversifying risks (further discussed below), and gives NextEra the opportunity to gain returns above those seen in the U.S. Financial returns on renewable energy investments in the U.S. have declined over time as competition has increased and revenues increasingly regulated. A typical wind or solar project in the U.S. yields levered project returns of ~10%, whereas projects in international markets such as China and India (chosen specifically because these are the two largest carbon-emitting countries aside from the U.S.), can give higher levered returns due to improving regulation, market fragmentation, and availability of financing. Entering these markets does not come without additional risks, such as foreign exchange risks, regulatory risks, and other business risks, but I would argue that many of these risks can be mitigated if NextEra focused its growth on partnering with international companies that operate in these countries. For example, an international partner who is interested in adding solar panels to its manufacturing facilities in China would reduce land procurement risks and off-taker risk for NextEra. Hence, in my view, NextEra’s management has not been effective in exploring international ventures, and is missing out on a significant growth opportunity.
Climate change creates risk for NextEra as it depends on favorable weather conditions in a specific area to produce power. Furthermore, Florida, where NextEra has significant exposure to, is in significant risk of flooding. In addition, a large part of its portfolio is based on wind energy which is highly variable. This large exposure to wind energy becomes increasingly risky as climate change takes hold. To manage this risk, NextEra should diversify its energy sources to include other less variable sources, such as gas or nuclear power or expand internationally. International expansion has the benefit of diversifying weather risks, as climate change impacts different regions of the world differently. If we consider these two risk mitigation strategies, management has not been effective. Firstly, NextEra has not expanded overseas. Secondly, management has not maintained a highly diversified portfolio of renewable sources. Between 2010 and 2015, NextEra has increased its concentration in wind from 19% to 59%, with the share of nuclear and gas power decreasing from 66% to 32%. While there were probably sound profitability reasons for increasing wind exposure, the risks from climate change have increased.
In conclusion, I believe that NextEra is well placed to capitalize on the opportunities presented by climate change, and management could use these to continue growing while reducing risk to itself over the longer term.
 Jon Windham, Barclays Research, October 26, 2016
 Julien Dumoulin-Smith, UBS Securities, April 15, 2016
 Kate Gordon, “Risky Business: The Economic Risks of Climate Change in the United States,” The Risky Business Project, June 2014, p. 26, http://riskybusiness.org/site/assets/uploads/2015/09/RiskyBusiness_Report_WEB_09_08_14.pdf, accessed June 2016
 Jackie Jones, “Balancing Act: How Can We Deal with Variability”, November 10, 2011, http://www.renewableenergyworld.com/articles/print/volume-14/issue-6/solar-energy/balancing-act.html
 David Wheeler, Quantifying Vulnerability to Climate Change: Implications for Adaptation Assistance, Center for Global Development, January 24, 2011, http://www.cgdev.org/publication/quantifying-vulnerability-climate-change-implications-adaptation-assistance-working
 NextEra Energy 2015 Annual Report p.16
 NextEra Energy 2010 Annual Report p.4