Government policies and the industry’s response has increased the risk factors affecting the quality of earnings at U.S. electric utilities. Deferred taxes and ballooning pension obligations...
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Utility deals resume after 18 months of austerity.
A lot of old coal-fired power plants are quietly being retired, and that capacity needs to be replaced. On top of that, utilities need to satisfy RPS requirements in many states, and the T&D system needs to be upgraded. And at the same time, many utilities have postponed their cap-ex programs to avoid going in for large rate increases during an economic downturn. As soon as the economy starts to take off, utility capital requirements will increase.”
Precisely how companies allocate that spending will depend, at least in part, on trends in regulation and commodity prices. Changes in air-emissions standards and green-energy mandates will affect the number of coal-fired plants that need upgrading or replacing. “Some new EPA rules could add $30 to $40 billion to the industry’s cap-ex budget,” Lange says. “That’s additional spending for pollution control equipment on top of already-planned maintenance cap-ex for the rest of the system.”
Additionally, continued success at domestic shale-gas developments will keep fuel prices low, making other generating options less competitive by comparison.
“Natural gas supply is the big wild card,” Redinger says. “I don’t think anybody expected the amount of gas that’s been discovered over the last 12 to 18 months. Renewable power developers didn’t expect it.”
Cheap gas—and by extension low marginal power prices—have contributed to what seems like an impending bust phase in the renewable energy industry’s perennial boom-bust cycle. Wind projects in particular have been sidelined by low gas prices. At the same time, weakening government support has effectively increased the relative cost of renewable power capacity—and made financing more difficult to find. Specifically, the investment tax credit (ITC) cash-grant provisions of the American Recovery and Reinvestment Act (ARRA) are set to expire at the end of 2010, leaving project owners to compete for a limited supply of tax-equity financing. Morgan Stanley estimates between 20 and 25 projects, totaling 3 GW of capacity, will be canceled for lack of equity funding when the ITC cash-grant expires.
Additionally, some renewable developers face a shortage of long-term debt financing, because most of the institutions in the market provide only short-term construction loans, and not permanent debt.
“The renewable energy market in this country is still in its infancy,” says Anton Cohen, audit principal at accounting firm Reznick Group. “Although we’re seeing some pension funds and other investors come in to make construction loans, small to mid-sized projects are waiting for a permanent financing platform to develop.”
Arguably America’s on-again, off-again federal tax policies have kept the wind and solar industries from maturing. The industry’s predicament is exacerbated by economic hardship; some states, balking at the cost of some renewable energy proposals, are moving to scale back or even suspend their RPS requirements. A ballot measure in California—Proposition 23—would cancel the state’s RPS entirely until unemployment in the state drops from the current 13.2 percent to 5.5 percent for four consecutive quarters. And earlier this year, Connecticut state legislators came close to adopting a bill that would have cut the state’s 20-percent RPS down to 11.5 percent. Other states reportedly are considering adding