There will be no shortage of important issues to keep utility executives and their staffs busy throughout 2010. Few of these will be surprises, although a number will emerge quickly and assume larger-than-life significance. The confluence of the great recession and the sturm und drang of environmental legislation will create the liveliest of the debates, but more subtle trends will drive additional stressors. The results of Black & Veatch’s 2009 fourth annual industry strategic directions survey can offer guidance as to how these issues will affect the industry in the coming year.
The focus of U.S. state and federal regulation is undergoing a fundamental change that will affect power utilities and merchant generation. Simply stated, the nation has reembraced heavy regulation. Not surprisingly, rate and regulatory issues rule the day among the utility industry respondents to Black & Veatch’s 2009 fourth annual survey, Strategic Directions in the Electric Utility Industry: What Does the Future Hold for an Industry in Transition?
Reliability remained respondents’ number one concern, while regulation and long-term investment rose to second and third place respectively (Figure 1), up from sixth and seventh place last year. It is reasonable to believe that this remarkable ascension was largely attributable to the state of the economy, the financial markets’ meltdown, and a compelling — perhaps compulsive — national focus on greenhouse gas (GHG) legislation. The environment came in a very close fourth place. It seems that faith in free markets has been lost in the state and national capitals, and heavy economic and environmental regulation is back, at least for the balance of the current administration. The complete results of the survey will be available this month at www.bv.com.
1. Top 10 issues of concern to utility senior management. A rating of 5 signifies a very important concern; a rating of 1 indicates an issue of only average concern. Source: Black & Veatch’s 2009 Strategic Directions in the Electric Utility Industry survey
Upward Pressure on Rates
Tremendous pressures are forcing utility rates up. Sales and revenue are falling, the need for new infrastructure is increasing, and investments in smart grid, demand-side management (DSM) and energy efficiency (EE) programs are skyrocketing. Electric utilities are investing substantial sums in these technologies even as sales decline, driving up customer costs per kilowatt-hour, well before offsetting benefits can be realized.
Last year, we estimated the costs of smart grid technology (which also enables some DSM and EE programs) at between 5% and 10% of an average residential customer’s bill before the realization of offsetting benefits. We have seen nothing in the past 12 months to change our estimate. Furthermore, our survey respondents indicated that their companies are spending, conservatively, the equivalent of about 2% of gross annual revenue on DSM and EE programs (Figure 2). In fact, 56% indicated that they are spending more than 2%, up from half of those responding at that level last year. Assuming that this is an accurate representation, the electric utility industry is spending somewhere in the order of $5 billion to $6 billion a year on these programs — roughly the equivalent of between 15% and 20% of investor-owned utilities’ pretax income.
2. Survey results: DSM and EE. Respondents reported the expected share of annual operating revenue to be spent on demand side management and energy efficiency over the next five years. Source: Black & Veatch’s 2009 Strategic Directions in the Electric Utility Industry survey
Combine this with declining sales, attributable in part to the success of these programs, the lack of decoupled rates in most jurisdictions, and the pressures for transmission and distribution system upgrades, and it’s no wonder that utilities have been under-earning and the need for rate increases has become great. In its "2009 Long-Term Reliability Assessment," the North American Electric Reliability Corp. (NERC) estimates that, of the overall decline between the 2008 and 2009 forecasts of summer peak load, 20% is attributable to DSM and EE, and 80% is attributable to changes in economic conditions.
Email
Comments
Print
Reuse
