Electric Stimulus Crunch? Generating Utilities May See 10% Revenue Declines 11 comments
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A lot of renewable energy makes sense when one looks at the 20 year levelized cost of energy. All one has to do is make assumptions about Coal and Natural gas inflation over the next few years and wind and some forms of solar start looking good from a risk management perspective in a power generating portfolio. Here is a spreadsheet tool for comparing renewable energy costs with fossil based equivalents.
Please note oil generates only 1.6% of electricity in the U.S. So please ignore any pundit comparing electricity generation via wind and solar with oil prices at $X price, it is a red herring and something for the CNBC crowd.
Crunch Time!
The new stimulus package is going to include $54 billion for efficiency. If one assumes that these efficiency investments have a 6 year payback period or IRR of 16.6%, then we might see about $8.64 billion less spent on fuel for heating and electricity due to efficiency savings. If we assume a 50-50% split for electric and fuel based energy, then there could be a $4.3billion contraction going forward in the U.S. electric market due to the stimulus.
This isn't a huge hit for a +$320b industry, but look out if a green smart grid gets put in for transmission and distribution, then it could be a 10% upstream demand side hit going forward. Yes, I am for the green smart grid as it will make things more efficient, safe and reliable over time, but it is important to realize all change has ripples.
The real crunch: The larger impact comes from national HVDC transmission installation and efficiencies in distribution. You can read about the U.S. grid here.
ABB thinks upstream demand could be reduced over 10% with an HVDC grid and smart distribution. See report here and read with care, this is a vendor speaking.
That could mean a +10% decline in demand for power generation, a big decline in upstream generating requirements. From a value investor's perspective, some generators' moats are going to get smaller as the effective grids get larger and more efficient. Depending on the wholesale to retail mark-up, it could be $10 billion in lost upstream generating revenues. Utility experts feel free to submit your estimates in the comments.
On top of the decline in revenue for power generators, a national HVDC grid and / or making the current multiple U.S. grids more efficient would mean the retirement of many Peaker plants and other fixed assets held by generating utilities.
Currently grid congestion means that peaker plants and other capex are required to be available. Depending on the regulatory regime, firms receive compensation for a fair ROI on these assets. In light of efficient grids a lot of these will become redundant, shrinking the rate base. Regulatory regimes vary from state to state and region to region. EnerNoc (ENOC) and other smart load management systems could see their market shrink dramatically.
A smart green grid makes sense. Some wind farms actually had negative electric rates due to poor grid infrastructure. The generating utilities and FERC have been far too cozy for too long.
Upstream electricity demand will shrink. That might not be a bad thing on the macro scale. Some utilities with generating assets instead of just T&D (transmission & distribution) may face a bit of a challenge as the assumption of 1%/ year growth reverses quickly and they are fixed with usage assumptions and fixed debt loads. Earnings could suffer.
Ever wonder why those smart meters never made it into your home or why you never had variable rate electricity pricing? The technology has been around for 20 years. The problem is no utility wants to pay for the privilege of shrinking the consumption rate of their product. Variable rate pricing and in-house meters cause behavior shifts in domestic users leading to 3-10% declines in consumption. Makes a person think a little about what will happen if these become standard.
I am not advocating an energy or policy position, just saying, it pays to look around and see who the winners and losers are from inevitable change that is happening; in the long run efficient, sustainable use of resources benefits everyone. Decisions made in energy typically run for 20-30 years, so before you jump to a decision think about your children's world.
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This article has 11 comments:
I am sure efficiency improvements could be 10% but keep in mind, overall demand will most likely increase, especially has the new plug-in electric cars need to be charged every night. Electric utilities are quite low now, but with rate caps coming off, higher energy for HDTV's and new electric car demand, I see electric utilities becoming very attractive.
On Jan 18 08:55 AM upndown1313 wrote:
> "That could mean a +10% decline in demand for power generation."
>
>
> I am sure efficiency improvements could be 10% but keep in mind,
> overall demand will most likely increase, especially has the new
> plug-in electric cars need to be charged every night. Electric utilities
> are quite low now, but with rate caps coming off, higher energy for
> HDTV's and new electric car demand, I see electric utilities becoming
> very attractive.
if conservation does occur new construction could be reduced, capital needs will be reduced & the utilities bottom line may not be affected as much as you think.
> jack
Also, state subsidy for solar will certainly be less generous given their tight budget. I doubt CA can afford any solar subsidy in the next 2 years given their $41B budget gap.
I) eliminating wasted energy (56 of 97 Quads, or 58% of total US consumption is lost), and
II) leaving natural energy resources stored in the ground until we REALLY need them, while maximizing readily available and free forever solar and wind, and other alternatives (while eliminating trillions of foreign financial payments).
1. Reduce wasted energy in ELECTRIC POWER GENERATION (26 Quads or 68% of power generation energy is lost).
1.1. Promote Solar PV and Wind.
1.2. Promote pumped/stored hydro (and end-use storage technologies to handle the variability of 1.1. generation).
1.3. Permit steam-to-electricity generation in combined cycle plants only where low pressure steam is utilized (even if thermal solar; AND nuclear[?]. Nuclear is dense enough and safe enough to promote block heating in cities as in Europe, or process industrialized areas?)
1.4. Stop burning coal (and the networked supporting industries from mining, transportation, pollution, reclamation, maintenance, etc., without causing a depression - like, put the folks to work building solar and wind farms, and the new interstate power grid and electrified ferries of 1.7 below; same for the oil, gas and auto guys, etc.). Do 1.1. and 1.7.
1.5. Stop burning natural gas. Do 1.1. and 1.2.
1.6. Don't even think about processing any tar sands, oil shale, or coal gasification and liquefaction methods which are ultimately burned for POWER GENERATION or TRANSPORTATION after adding cost (not to mention all the networked industry complexities as mentioned above for coal). Consider these sources only "when there is no other way" situations: like we run out of crude oil and need plastics.
1.7. Construct the new upgraded electric power grid in, above, below, or alongside the existing interstate highway right-of-ways which lead to major cities (where energy is used while passing thru the hinterlands within 50-100 miles of future solar and wind power farms).
1.7.1. Integrate within these same interstate right-of-ways ELECTRIFIED FERRIES for cargo, vehicles and people, both two-way high speed interstate express and two-way local intrastate travel.
2. Reduce wasted energy in TRANSPORTATION (21 Quads or 80% of transportation energy is lost):
2.1. Do 1.7. and 1.7.1. for intra- and interstate travel.
2.2. Promote local transit systems within congested urban beltways, linked to the interstate highway system of 1.7.
2.3. Promote hybrid and electric vehicles for personal commuting, local fleet service and commercial delivery.
2.4 Promote biofuels for hybrids, ground, rail, air and water transportation.
Much of the above is currently valid for developing countries which are repeating the mistakes the US made which hopefully can be redirected - be it because of air pollution [China, India], government edict, new alternatives, etc.).
Much of the above already exists in Europe, Japan... So it can be done. It may take a permanent energy tax to fund the above; and as wasted energy is reduced, the tax goes away. A wonder we've not seen.
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add bottoming cycles (e.g., butane vaporizer/ turbine/ condenser/ compressor) cycle to existing powerplants to increase efficiency.
> jack
are we violating any laws of thermodynamics here?
> jack
The kickStarters are in place and will do more than restart the World economies. They will make Berkshire & Google look like chump change as they skyrocket into the future. On one side of the picture you will see Mark Goldes & John L. Mealer on the other is a new upstart company who's technology is ready to use, and will save the fossil industries while providing low cost high strength carbon fiber materials for the auto industry. AND at the same time help the Electric Power industries compete with Zero Point Energy. All energy intensive industries will benefit. Whether you believe this or not, you will not have long to wait to see for your selves. My Prediction: The Trillion Dollar debt will be paid off with in ten years!