It’s tempting to attribute the recent slowdown in electricity demand growth entirely to the Great Recession, but consumption growth rates have been declining for at least 50 years. The new normal...
The Path Forward
In the wake of the banking crisis, utilities lead the way to financial stability.
in capital expenditures by the U.S. utility industry between now and 2025, assuming electricity demand grows roughly on par with modest GDP growth. But those forecasts seem less certain now than they did before September 2008. Current sentiment suggests the financial crisis will constrain economic growth for at least two or three years, and maybe longer.
“It comes down to the customer having a certain amount of money,” says John Whitlock, a managing director with Standard & Poor’s. “Eventually you get to the point where people say, ‘No more,’ and you get demand destruction.”
Additionally, rising costs and economic turmoil translate into regulatory risk, as companies ask utility commissions to approve capital expenditures on top of pass-throughs for operating costs.
“In addition to dislocations in the financial markets, regulatory risk will be the story for the near- to mid-term future,” Redinger says. “It’s kind of a perfect storm. Can consumers digest rate increases given all the other pressures? Commissions will struggle, and companies will fare the best if they are working together with commissions on how best to implement their overall plans.”
If rate cases go badly, or the economy takes a major downturn, economic realities might force companies to scale back or postpone some investments. However, as long as financial markets continue functioning, most utilities won’t scrap their cap-ex plans—especially for investments required to satisfy regulatory obligations..
“The economy will affect demand growth, but a lot of this stuff has to be built anyway,” Rollins says. “A big chunk of what utilities are planning must be spent because we’re having reliability issues. Plus emissions standards and renewables requirements are driving spending.”
And arguably some companies might accelerate their investments, taking advantage of falling prices for building materials and labor, and an increase of available contractors in a slowing industrial market. Plus, if political winds continue blowing in their current direction, the industry might benefit from a wave of financial incentives for capital investments and energy technology development and demonstration.
“This is a great opportunity for us to invest and slay two dragons at once,” said Ralph Izzo, chairman and CEO of Public Service Enterprise Group, during a Fortnightly CEO teleconference on September 19. “We can address our dependence on foreign fuels and also environmental threats that have long-term economic consequences.”
On September 19, as the Wall Street crisis seemed to be easing, a bipartisan group of senators known as the “Gang of 20” announced that after the November elections they would introduce a revised version of an energy bill known as the New Energy Reform Act, or “New Era.” The draft revision reportedly proposes to extend federal incentives for efficiency and renewable energy development—including extending the production tax credit to 2012—and would dish out billions in funding to commercialize alternative fuel and electric vehicles. It also incorporates legislation sponsored by Rick Boucher (D-Va.) that would create a retail electricity surcharge to fund $1 billion for carbon capture and sequestration (CCS) technology development.
Whether the New Era legislation goes anywhere—or how aggressive it might turn out to be—remains uncertain. But