Buried deep within Clearway Energy's Q1 2024 earnings call lies a potential catalyst that could propel the company to double-digit dividend growth – a prospect seemingly overlooked by analysts fixated on the 2026 CAFD goal. This catalyst lies not in new asset acquisitions or ambitious development projects, but in the humble resource adequacy (RA) contracts for their California gas fleet. While management understandably remains tight-lipped about specific figures amidst ongoing procurement processes, the language used and the strategic shift it reveals tell a compelling story.

Clearway’s narrative for the past several quarters has revolved around achieving a $2.15 CAFD per share target by 2026, primarily through the deployment of proceeds from the sale of their thermal business. This focus, while sensible, has inadvertently overshadowed the potential of their California gas fleet. However, the Q1 call marked a subtle yet significant change in tone. The RA contracts for Marsh Landing and Walnut Creek, totaling 200 MW, weren't simply touted as progress towards maintaining dividend growth – they were highlighted for delivering "higher CAFD than run rate expectations."

This seemingly innocuous phrase carries immense weight. It signals a shift from viewing these contracts as mere safeguards for baseload generation to recognizing their potential as powerful drivers of organic CAFD growth. This shift is further emphasized by the statement that if the remaining 875 MW of open capacity for 2027 were contracted at similar pricing, it could fuel low-end 5% to 8% CAFD per share growth – *without* additional capital investment.

What if RA Contract Pricing Exceeds Expectations?

But what if the pricing secured for future RA contracts *exceeds* that of the recent agreements? This possibility, while not explicitly addressed, hangs tantalizingly in the air. Several factors point towards this being more than a mere optimistic hope.

Tight Capacity Conditions: The tight capacity conditions in the Western US persist, fueled by robust data center demand. This dynamic puts Clearway in a strong negotiating position, particularly given the strategic location and modern, clean profile of their gas assets.Strategic Contracting Approach: The company's deliberate approach to RA contracting, balancing long-term visibility with maximizing value capture, suggests confidence in securing favorable pricing. Their strategy of incrementally contracting forward, while maintaining a two-year visibility window, allows them to capitalize on evolving market conditions and potential price increases. Bilateral Negotiation Success: The recent RA contracts were secured outside the larger procurement processes, indicating Clearway's ability to command a premium through bilateral negotiations. This further strengthens the argument for potential upside in future contract pricing.

Hypothetical Scenario: 10% Premium on RA Pricing

Let's consider a hypothetical scenario. Assume Clearway manages to secure a 10% premium on average pricing for the remaining 875 MW of open capacity for 2027. Combined with the already contracted capacity, this could lead to a CAFD contribution from the gas fleet exceeding initial expectations by a significant margin. This, in turn, could fuel dividend growth surpassing the 5% to 8% target, potentially pushing into the double-digit territory.

Visualizing Clearway Energy's Growth Levers

RA Contracts: Resource adequacy contracts for California gas fleet, providing essential grid reliability services. Potential Impact: Organic CAFD growth exceeding 5% to 8%, potentially reaching double-digit growth with favorable pricing.Dropdowns: Acquisition of new renewable energy projects from Clearway Energy Group's development pipeline. Potential Impact: Significant CAFD contribution, supporting long-term dividend growth (details to be provided later in 2024).Fleet Optimization: Repowering existing wind farms and adding battery storage to existing solar projects (Honeycomb project). Potential Impact: Increased efficiency and revenue generation from existing assets, enhancing CAFD.Third-Party M&A: Strategic acquisitions of complementary businesses in the renewable energy sector. Potential Impact: Potential for significant CAFD growth depending on market conditions and acquisition opportunities.

Conclusion

While this scenario is purely hypothetical, it underscores the often-overlooked potential of Clearway's existing gas assets. As the company transitions its focus towards growth beyond 2026, these RA contracts could become a hidden treasure, fueling dividend growth far exceeding current market expectations.

"Fun Fact: Did you know Clearway Energy's wind farms generate enough clean energy to power over 1 million homes? That's like powering every home in San Francisco and Oakland combined!"