Like a physician with her stethoscope at the outset of a check-up, astute shareholders and directors should use the level and trend of a utility’s market-to-book ratio (MtB) as one of the first...
Beyond The Downturn
Today’s challenges are transforming the industry.
to make large commitments to invest in low-carbon–emitting infrastructure or watch new competitors build it instead.
Confronting any one of this litany of challenges will be difficult. But managing the combustible interaction of volatile costs, new competition, and transformative technologies—and their potential impacts on utilities and their customers—will present immense challenges. As electric companies wrestle with these new threats, they increasingly will find themselves battling for market share across a broad front. It is a battle they will have to wage to defend their franchises against new rivals who aim to win over their best customers—cost-conscious, big industrial users, top-rate-paying commercial buyers and conservation-minded residential consumers—with customized products and services.
Three actions can help investor-owned utilities build their competitive muscles and emerge stronger from the maelstrom. Utility companies should understand the economics of their businesses—from their customers’ point of view. Even as natural gas prices recently have trended downward, their steep increase over the past five years signals a fundamental transformation in utility industry economics. It’s a shift that will influence ratepayers’ calculations of what they should pay for power—and from whom they will buy it.
Fossil-fuel prices have spiked in the past, of course. But the changing relative costs customers soon may face reveals just how stark a challenge the long run-up in fuel costs will pose. For many power companies, the pass-through cost of natural gas long has been the prime determinant of how much end-users will pay for the electricity they consume. At the current price of around $6.50 per million Btu, on average, consumers are paying some 8 cents/kWh, still well in line with longer-term upward trends.
Utility customers’ options will change dramatically if natural gas prices double from recent levels over the coming decade, a reasonable forecast given demand from China, India, and other big emerging-market economies. The price of electricity generated from natural gas could increase from current levels to some 25 cents/kWh from such a steep run-up in fuel costs. Meanwhile, prices for central-station–generated photovoltaic power likely will drop from today’s 29 cents/kWh to less than 16 cents/kWh; and prices for solar thermal power could drop from 16 cents/kWh to 10 cents/kWh, making these environmentally-friendly renewables the more cost-effective options. Adding electricity generated from wind, geothermal, and biomass into the mix, the blended cost of installed power-generating capacity from renewable sources in the United States could run between 4 cents and 5 cents/kWh within 10 years. As electricity prices enter this crossover zone, most top-tier industrial, commercial and residential utility customers will migrate to efficient renewables and the companies that offer them. Utilities that aim to hold on to their most profitable customers continually will need to assess their likely energy options, anticipate their needs, and gauge their vulnerability to being picked off by new competitors.
Utility companies proactively can market their products and services by grounding their insights in a detailed understanding of the economics customers face. They can begin by segmenting customers to tease out the sensitivity of their most attractive customer groups to rate changes and how that will influence