Finance

ARRA Sunset

A renewable incentive expires with the Treasury grant program.

With incentives under the Treasury grant program set to expire at the end of the year, green-power development once again seems to be entering the bust phase of its perennial boom-bust cycle. Statutory deadlines presage a surge in new construction beginning between now and the end of the year. What happens after that depends on Congress.

Energy Trading Under Dodd-Frank

Wall Street reform hits the utility business.

Utilities, long accustomed to regulation by FERC and state PUCs, now face extensive regulation of their energy trading activities by the Commodity Futures Trading Commission (CFTC). Under the Wall Street Reform and Consumer Protection Act—commonly known as Dodd-Frank—signed into law July 21, 2010, energy swap contracts may be subject to new capital, margin, reporting, business conduct, and other requirements that likely will increase their trading costs and create new compliance concerns.

Hybrid Finance

A solution to high electricity prices in restructured states.

New baseload generation is needed in many areas of the United States, but financing new plants will be particularly challenging in restructured states where generation facilities are no longer included in rate base and therefore not financed through the traditional rate-of-return paradigm. A market hybrid approach—in which new baseload plants would be partially owned and financed by the regulated distribution company with the other portion owned and financed by the unregulated generation company—would combine the advantages of lower cost capital and regulatory oversight associated with traditional rate of return regulation, with the cost control and efficiency associated with competitive markets.

Rethinking Revenue Assurance

Reducing leakage to improve the bottom line.

Utility companies are actively engaged in a range of activities with the goals of reducing the effects of weak demand, a higher uncertainty in energy costs, increased capital costs, and stagnant rate cases. Among these efforts, a rigorous revenue assurance capability likely will produce the greatest immediate and long-term return, as it can produce 1 to 2 points of revenue recovery through a single, unified investment.

Regulation by Formula

Tools to facilitate changing utility economics.

These are challenging times for the electric and gas utilities. Reliability projects, renewable portfolio standards, greenhouse-gas emissions control, AMI, smart-grid investments, and conservation programs—all these things add to costs, but might bring in no additional revenue. Moreover, there will be unprecedented capital investment in transmission, renewable generation projects, and replacement of old facilities from the 1950s and 1960s. Thus, earnings likely will be more closely watched and traditional general rate cases might not be able to keep up.

New York Negawatts

Balancing risks and opportunities in efficiency investments.

In June 2008, the New York Public Service Commission (PSC) established the electric energy-efficiency portfolio standards for New York’s investor-owned utilities. In its order, the PSC directed utilities to file three-year energy-efficiency plans. Later that year, the PSC issued a supplemental order approving shareholder incentives for utilities successfully implementing their portfolios. If all goes according to plan, the six affected IOUs stand to earn about $27 million annually in performance incentives over three years. The structure of the incentive mechanism approved by the PSC presents risk factors that might affect utilities’ ability to realize the full earning potentials the mechanism offers.

Crisis Capital

Volatile markets call for alternative financial models.

Should the power industry adapt its approach to capital markets in this environment? The answer, of course, is yes. Multiple frameworks are necessary to establish a power company’s or project’s current cost of capital, especially under volatile capital market conditions. The analyses reveal that in today’s capital markets, it is critical to balance or combine the alternative approaches to the cost of capital in order to develop a long-term view.

Fingerprinting the Invisible Hands

Opaque markets inflate power prices.

Secrecy is the norm in electric power bidding. This lack of transparency impedes an efficient electricity market. Bringing daylight to power markets would reduce prices and save consumers money.

Capacity Markets Demystified

Emerging capacity auctions offer limited but valuable risk-management tools for asset owners.

Fast forward to today’s partially deregulated electric power markets. Wholesale electric energy often is traded in various central markets, as well as among individuals in bilateral transactions. Wholesale electric energy prices largely are deregulated, and clearly, over the past decade, market participants have become adept at routinely charging much more than their variable production costs. This “rent extraction,” as economists commonly call it, can take various forms, and while the mechanism for achieving it can be complicated, the evidence is quite clear that today’s wholesale electricity prices typically are higher than the variable costs of most or even all suppliers.

The Color of Money

Wall Street sees “green” in demand response, energy efficiency, and distributed generation. Will the industry step up?

We recently conducted research to evaluate whether innovative solutions for meeting future energy needs such as demand response (DR), energy efficiency (EE), and alternative distributed generation (DG) (e.g., photovoltaic cells, wind, energy storage) could become a sustainable and viable part of the future energy infrastructure.