Energy Efficiency = New Era for Electric Utilities

Last week, we wrote about the gloomy outlook for public power utilities in 2009 due to the severe recession. This week, we take a longer view, thanks to a pair of reports from Standard & Poor’s Credit Research.

Largely as a result of new priorities under the Obama administration and stimulus spending aimed at energy efficiency, S&P sees a new era for electric utilities in the U.S.

Energy efficiency and conservation schemes could reduce demand for electricitiy, but S&P sees mitigating factors, such as “decoupling” or divorcing sales from revenues. This would allow a utility to earn a predetermined level of revenue regardless of the actual electricity sold.

Amid the current recession and the significant increase in federal spending on energy efficiency, we believe that utility sector credit quality may benefit from regulatory and public policy that addresses concerns over cost under recovery. Provisions like decoupling mechanisms may untie or lessen the correlation between a utility’s profits and energy sales, mitigating potential utility financial risks.

The stimulus package provides $41 billion toward a modernized power grid, or “smart grid,” that would allow utilities and customers to monitor and control the flow of electricity.

S&P points out that the CEOs of two major electric utilities – American Electric Power Inc. (NYSE: AEP) and ITC Holdings Inc. (NYSE: ITC) – have said they see little trouble raising private funds for a smart grid and would pursue it with or without the stimulus.

Several obstacles remain, however, including:

• Siting: overlapping state and local government jurisdictions will make it difficult to get approvals for new transmission lines
• Standardization: establishing national standards for lines and switching stations
• Loan guarantees: the Department of Energy has been slow in handing out loan guarantees

For details, see “When Energy Efficiency Means Lower Electric Bills, How do Utilities Cope?” and “Credit Implications for Smart Grid for U.S. Electric Utilities.”

Comments

[john s. gordon:]

we are having trouble siting a new line in northern VA due to citizen and intervenor opposition.

the basis of the opposition is that the utility company (D) has not done enough to encourage conservation, and the power to be transmitted comes from old polluting plants in OH, IN, KY, MI/
> jack

Mar 11 08:31 AM