Utilities Must Rethink Capital Investment Strategies as They Face New Energy Economy
by Bob Shively, Enerdynamics President and Lead Facilitator
“The power industry is moving at a tremendous, innovative pace. We have new technologies being introduced all over the world.”
~ Dallas Winslow, Delaware Public Service Commission Chairman
The utility business model used to be very clear. Forecast expected load growth, demonstrate to the regulators that utility infrastructure must be expanded to meet load growth, build new facilities or upgrade existing facilities, and earn a rate of return on the capital expended. But with flat loads, low-cost renewables, distributed energy resources, and wholesale competition, the path to utility earnings has been disrupted. Utilities must now carefully consider where to direct future capital spending and how to ensure earning an acceptable rate of return on capital spent. To explore this, let's look at current trends affecting utilities and then consider new avenues that utilities may need to explore to ensure sufficient financial performance.
PG&E in California became the first utility to declare bankruptcy due to circumstances created by climate change.
In a recent survey titled “Pulse of the Power Survey”, Public Utilities Fortnightly (PUF) magazine asked its readers to comment on key industry trends. Here are some interesting results:
- Renewables and distributed energy resources are the most disruptive force to the utility business model.
- Climate change threats are here today for utilities who should value climate risks in investment decision-making and in implementing resilient infrastructure upgrades.
- Utilities need to both invest in their current business model and in future services likely to be implemented under new business models.
- Barriers to investing in new business models include the rigidity of utility regulation and competition from technology and telecom companies.
“With enough runway and sufficient regulatory rewards, today’s emerging threats will be future opportunities for utility growth.”
~ Managing Director in Navigant’s Energy Practice
Utilities leaders are now caught in a conundrum. Should they continue to make capital investment decisions based on the cost-of-service model that has served them well for the last century? Or should they instead begin changing investment strategies assuming some future unknown business model? Failure to change risks future stranded costs that may or may not be recovered in rates. But failure to focus on current business models risks a shortfall in short term earnings that are all important to Wall Street investors.
Here are some possible strategies:
- Work within the current cost-of-service model to obtain approval for grid modernization to address climate change risks and to adapt the system to attain the economic benefits of renewable and distributed energy.
- Simultaneously, work closely with regulators and stakeholders to begin a transition to new ways of setting rates and attaining earnings through performance-based ratemaking or through unregulated earnings.
- Work with regulators and stakeholders to gain support for expanding utility services into new areas such as utility-owned renewables, behind-the-meter distributed energy resources, electric vehicle charging, microgrids, and smart-city initiatives.
- Work with regulators and stakeholders to establish acceptable ways of financing the stranded costs associated with closing facilities that no longer make sense.
- Create new marketing initiatives that allow utilities to integrate the positive impacts of renewable energy and smart grids on economic growth.
- Tread carefully when considering new technologies – while all utilities must implement new technologies, partnerships with more entrepreneurial and well-funded technology and telecom companies may be the best strategy.
Moving to a new energy economy won’t be easy. As employees are asked to prepare for the new world, they also must be safe, keep everyone’s lights on, and keep rates at reasonable levels. But the utility workforce of today and beyond has the opportunity to develop new paradigms that will eventually be discussed in the same breath as the ideas of past utility stalwarts such as Thomas Edison and Samuel Insull.
Want to learn more about the challenges and opportunities facing today's utility business? Enerdynamics offers several live seminars designed to educate and excite employees about the future utility. These include The Future of the Utility: Evolving Customers, Changing Technology, Revised Regulation, New Business Models, and Growing Opportunities, Utility Ratemaking: Now and in the Future, and The Advanced Grid. Call 866-765-5432 ext. 700 or email firstname.lastname@example.org for details.
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