A look at the issues that the Federal Energy Regulatory Commission must address concerning allocation of costs for certain high-voltage transmission lines 500kV or greater, planned for the PJM...
IOUs Under Pressure
Policy and technology changes are re-shaping the utility business model.
have significant immediate ratepayer impact. No single utility is asking for regulatory benediction to immediately spend a trillion dollars. Third, and directly related to the second reason, no single utility ever will request approval to spend a trillion dollars. Given the balkanized nature of the U.S. electricity industry ( i.e., 50 state jurisdictions, multiple federal agencies, numerous regional transmission organizations, public interest groups, etc.), requests for rate relief will come piecemeal, over time and, individually, will not appear too onerous. Finally, the price impact of these enormous expenditures might be mitigated to some as-yet-unknown degree by offsetting reductions in prices, due to increased energy efficiency, load shifting, and better utilization of delivery infrastructure. But while the impact to ratepayers will be diluted—one rate case at a time—it will add up.
What might the total impact be? The Edison Foundation recently released a report, Transforming America’s Power Industry: The Investment Challenge 2010-2030 , which included a finding that the U.S. electric utility industry by 2030 will need to make a total infrastructure investment of $1.5 trillion to $2 trillion. Excluding generation investments, the total ranges from $0.9 trillion to $1.1 trillion, 1 or approximately $50 billion per year. By way of reference, EEI estimates 2009 industry-wide transmission- and distribution-related capital expenditures of about $32 billion. 2
The revenue requirement impact of such an investment is imprecise at best, but on an annual basis will include standard cost elements of O&M, taxes, and a return of, and on, the investment. This could equate to rate increases of 5 percent or more per year based on 2008 revenues from retail sales of electricity totaling about $350 billion. 3 And these rate increases are exclusive of the production cost impacts that will accompany changes in the nation’s supply portfolio as the industry and technology go green. 4 And what of future supply costs? The estimated costs of providing electricity through increasingly green and renewable supply portfolios are as numerous as there are pundits and special interest groups ( see Figure 1 5). While the range of such estimates is wide, the trend is for continued closing of the cost gap between renewable and conventional technologies. Renewable technologies will continue to decline in costs as technology advances increase efficiencies and larger production volumes decrease unit costs.
For example, according to the U.S. Department of Energy, photovoltaic capital costs will decline from $7,500 per kilowatt in 1995 to less than $1,000/kW by 2020. But the $1,000/kW hurdle already might have been met since panel manufacturer FirstSolar recently announced a panel manufacturing cost reduction to $980/kW. Photovoltaic technologies aren’t the only examples of reduced costs and increased efficiencies. Biomass technologies are expected to a reach a similar $1,000/kW installed cost (down from more than $2,000 in 1995). Geothermal and wind energy tell similar stories, with rapid, non-linear declines in cost (see Figure 2) . And these trends (as of late 2005) are apparent well before the recent influx of attention and funds from the federal government.
Simultaneously, conventional technologies ( e.g., coal, gas and nuclear) have,