Duke Energy's Charlotte Project Highlights Smart Grid Potential

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Duke Energy ( DUK ) has entered into an agreement with Verizon ( VZ ) to use Verizon's 4G LTE network for improving energy efficiency in buildings. Duke Energy's project "Envision: Charlotte" aims to link 70 buildings from those of leading private companies to city buildings and is part of its larger Energy Savings Program. Cisco ( CSCO ) will provide the energy dashboards in the lobbies of the buildings. This initiative and others being rolled out around the nation are aimed at reducing energy use in large buildings to improve energy efficiency and smart grid technology.

Duke is one of the largest electric utilities in the U.S. along with American Electric Power Company ( AEP ), Exelon Energy Corp, Allegheny Energy (NYSE:AYE) and Progress Energy ( PGN ). Duke Energy has approximately 35,000 megawatts of electric generating capacity in the Carolinas and the Midwest, as well as natural gas distribution services in Ohio and Kentucky.

Even though the firm operates in international markets, the majority of the value for the company comes from the U.S. Franchised Electric & Gas segment. This segment alone contributes nearly 80% of our $19.38 stock value for Duke Energy , which stands roughly in line with market value.

Moving Toward a Smart Grid

The infrastructure used to link the buildings will include automation systems, smart meters, energy management software and dashboards. As a result of the linking, building owners would be able to save a significant amount of energy. It is expected that the Envision: Charlotte project will help buildings in Charlotte to reduce energy consumption by up to 20 percent.

It is estimated that the cost of purchasing and installing the energy efficiency mechanism will be around $5.3 million. This cost is expected to be split between Duke Energy and Cisco, with Duke bearing around 80%  and the rest 20% coming from Cisco. The companies believe that the energy saved will more than cover for their investments.

For its residential customers, Duke Energy has been distributing compact fluorescent lights free of cost  as these lights are much more energy efficient than incandescent bulbs. Duke Energy estimates that through this initiative, customers were able to save enough energy last year to power nearly 45,000 homes.

We estimate that the revenue per mwh increased from around $64 in 2005 to $73 in 2010, largely due to an increase in energy prices reflective of an increase in input costs. As energy demand picks up in the wake of the economic crisis, we anticipate the revenue per mwh to increase steadily over the Trefis forecast period, reaching around $90.

However, if Duke's energy savings programs workout favorably, it could translate into higher revenue per mwh for the company and result in an upside to our forecasts. If the revenue per mwh increases at a faster rate reaching around $100 by the end of our forecast period, it would mean an upside of around 20% to our current price estimate.

See our full analysis for Duke



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AEP , CSCO , DUK , PGN , VZ

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