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Duke and Progress

On Monday, Duke Energy and Progress Energy announced that they would merge in a stock deal worth a reported $13.7 billion. In the process, the two North Carolina-based utilities would create not only the largest electric utility in the country with territory in North and South Carolina, Indiana, Ohio, Florida and Kentucky, but also become a near monopoly in the North Carolina energy market.

Duke Energy already provides Duke University with all of its electrical power and is responsible for a whopping 52 percent of the University’s total campus greenhouse gas emissions, albeit indirectly. To quote from the University’s 2009 Climate Action Plan, “The carbon intensity of these emissions will be impacted by Duke Energy’s plans to reduce their GHG emissions over time.” The carbon intensity of such a large slice of the emissions pie will, by extension, significantly impact the University’s goal of reaching carbon neutrality, and that’s why Duke University cares about the impact of this merger.

At the outset, the deal will do little to improve the actual environmental impact of either company’s operations, promising to alleviate some redundancy in dispatching and transportation of fuel. However, since Progress Energy has a portfolio with lower carbon intensity than Duke Energy’s, the new company, which will be called Duke Energy, will benefit. Again, by extension, the interests of the University in seeing Duke Energy’s carbon intensity decline will be satisfied as well.

Duke Energy already maintains a healthy but improvable low carbon sector in its portfolio, with 15 percent of capacity coming from nuclear and 11 percent from hydro/wind sources. The newly-merged company will lose a few percentage points of non-emitting capacity, augmented instead to a more even, 42/35 percent split between coal and gas/oil capacity. Natural gas, now consumed by the newly renovated East Campus Steam Plant, has a lower direct carbon intensity than coal.

In the long term, while the utilities hedge their bets against regulation and consolidate, they are also preparing for investment to infrastructure, upgrades to the grid and new technology. Regulators generally allow utilities to pass infrastructure improvement costs on to rate-payers, so the resulting larger customer base will mean a smaller marginal increase in rates for consumers.

Cheap electricity is a foundation of the North Carolina economy, attracting the likes of Google, Facebook and Apple to build huge data centers in the state. Although maintaining low rates is likely to result in customer satisfaction, it provides little incentive for investments, especially by homeowners, in efficiency and renewable technology. Since the residential sector accounts for more than one-fifth of all electricity consumed in the United States and roughly half of all carbon emissions from buildings, this is a significant disincentive unlikely to be remedied during the approvals process.

Without consumer side incentives, the burden to lower GHG emissions defaults to the producers, and regulators who set targets and deadlines. Through this regulatory pressure to decrease overall emissions, utilities that are anticipating its implementation are making low-cost consolidation moves to prepare to better and more cheaply meet future requirements.

For Duke Energy, in addition to increasing its consumer base, “…scale becomes very important to attract capital and the combined companies will have a very strong balance sheet,” Duke Energy CEO James Rogers told The Wall Street Journal. Rogers is likely referring most notably to the ability of the combined company to pursue nuclear projects already in the works at both Progress and Duke Energy. Both have reportedly been looking for partners.

In the University’s own calculations, the introduction of non-emitting nuclear power makes up a huge drop, about 40 percent, in the carbon intensity of the electricity purchased from Duke Energy in the near term. Provided the projects are able to get off the ground as a result of this deal, the likelihood of that anticipated drop increases dramatically. Better yet, the time frame of the projected decrease becomes more likely, that is, by 2020, leaving a small buffer before the 2024 date for carbon neutrality for delays.

The deal between Duke Energy and Progress Energy is in no way done. The companies have given themselves until the end of the year to complete the proceedings. During that time, they will be seeking regulatory approval from the Federal Energy Regulatory Commission, the Nuclear Regulatory Commission, the North Carolina Utilities Commission and the South Carolina Public Service Commission, as well as shareholder approval and a federal antitrust review. The near monopoly in North Carolina may prove interesting in these proceedings.

In the mean time, suffice it to note that this is the biggest strategic move by Duke Energy, and a promising sign for Duke University, as both look forward to the changing energy landscape.

Liz Bloomhardt is a fourth-year graduate student in mechanical engineering. Her column runs every other Friday.


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