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Zacks Industry Outlook Highlights: American Electric Power, Duke Energy, Pinnacle West Capital, NextEra Energy and Southern Company

CHICAGO, Feb. 14, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the Utilities, including American Electric Power Inc. (NYSE:AEP-Free Report), Duke Energy Corp. (NYSE:DUK-Free Report), Pinnacle West Capital Corporation (NYSE:PNW-Free Report), NextEra Energy Inc. (NYSE:NEE-Free Report) and Southern Company (NYSE:SO-Free Report)

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Industry: Utilities

Link: http://www.zacks.com/commentary/31314/utility-industry-stock-outlook---feb-2014

The emergence of Microgrids for power generation could threaten the dominance of the age-old power distribution system in the U.S. Microgrids have evolved from simple power backup systems to small smart grids. The swift and cost effective installation of Micro grids could help distribute electricity among the masses. These rooftop solar systems meet the energy needs of the customers. In addition, the customers are allowed to sell excess power back to the utilities.

A report from American Society of Civil Engineers estimated that utilities need to spend $763 billion by 2040 to properly modernize and harden the existing grids against natural disasters. We believe that rather than going for a very costly maintenance, it will be economical to develop these Microgrids, which could lend support to the existing system.

Electric Utilities

The EIA reported that electricity consumption in the U.S. will increase from 3,826 billion kilowatt hours in 2012 to 4,954 billion kilowatt hours in 2040, implying an average annual rise of 0.9%. For the fuel type in energy generation, renewables and natural gas will play an increasing role while coal and nuclear power will gradually fall out of favor.

The new proposal from the EPA directs a new coal-based power plant to limit carbon emission to 1,100 pounds of CO2 per megawatt-hour. In addition, coal based power generators would have to meet a somewhat tighter limit if they opt for an average emission over multiple years. Going forward, we expect regulations to get more and more stringent for power generation from coal fired units.

In this context, we believe fresh investments in the power sector would go more to the development of natural gas based combined cycle power plants. An EIA report indicates that natural gas will become the largest fuel source for power production in the U.S. by 2040 thereby displacing coal.

EIA report indicates coal-fired power generation to drop from 310 gigawatts (GW) in 2012 to 262 GW in 2040. The decline is a function of greater dependence on natural gas, usage of alternate energy sources and stricter regulations.   The utility operators are implementing new technologies for the generation and distribution of power. The introduction of smart meters will benefit customers while the smart-grid technology is likely to increase efficiency.

The electric utilities which would play an important role in meeting this increased demand for power are American Electric Power Inc. (NYSE:AEP-Free Report), Duke Energy Corp. (NYSE:DUK-Free Report), Pinnacle West Capital Corporation (NYSE:PNW-Free Report), NextEra Energy Inc. (NYSE:NEE-Free Report) and Southern Company (NYSE:SO-Free Report), among others.

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