Utilities Are Better Suited To Handle COVID Uncertainties – That’s Good News For Clean Energy
- Jul 16, 2020 12:30 pm GMTJul 15, 2020 10:12 pm GMT
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Utilities have been thrust into an environment of uncertainty by Covid-19: Overall power sales and wholesale electricity prices have fallen as activity has slowed while residential customer demand has increased. In response, public utility commissions have blocked disconnections and postponed late fees while expanding subsides for vulnerable customers to help shield residential ratepayers from higher bills.
But are utilities inherently positioned better than many other corporations to weather the pandemic’s ups and downs?
Pearl Street Station Finance Lab (PSS) executive director Albert Lin expects that utilities are relatively financially well-positioned during this current public health and economic crisis because they carry relatively less risk compared to other industries.
This is a relief as utilities provide an essential service and must continue investing in infrastructure to capture the opportunity for clean energy to provide economic stimulus, reduce public health impacts, and provide resilience to increasingly severe weather.
Energy Innovation Policy Analyst Amanda Myers interviewed Albert Lin at PSS to learn how utilities are facing less risk than other industries as the nation confronts this multi-faceted crisis.
Q: Clean energy advocates and analysts have discussed how utilities are currently being negatively affected by lower demand, commercial and industrial customer revenue collapse, disconnection moratoria, and supply chain disruptions. Why do you have a more optimistic view of utility prospects?
A: It’s easy to hear about negative developments from different sources because so many parties are motivated to highlight topics like these. Utilities are considered defensive investments because of their unique economic and political position in the economy. Currently, utilities benefit from several developments including:
- Lower financing costs in parallel to rate cuts by the Federal Reserve
- Flood of investor money picking from a shrinking pool of investment grade companies
- Declining inflation with stable return on equity rates
- Superior fundamental economics versus other major industries
- Business climate forcing everyone to make changes, including utilities
Q: From the perspective of climate change, why does it matter that utilities are less at risk during the pandemic?
A: We need our utilities to be financially sound today with an eye on tomorrow so they can adopt the technology and business model changes required to successfully shift our electricity system to clean resources. The financial future for utility shareholders is best served by the near-zero fuel cost of renewables coupled with rapidly falling costs for integrating renewable resources and storage onto the smart grid.
The financial outlook for utilities remains solid and the outlook quite encouraging. During this pandemic, long-term clean energy projects are one of the first expenditures to be cut or delayed, which is a short-sighted knee-jerk reaction. The momentum of technology progress and job creation from clean energy will be hard to restore if the industry suffers a major downturn.
A factual assessment of the economic strength and trends benefiting utilities shows clean and long-term investments can be maintained as there are many positive impacts offsetting the well-publicized negative impacts.
Q: How are utilities specifically carrying less risk than other industries, and do they currently have access to financial tools that might further aid them during this time?
A: Investors should see utilities as an area of strength in the current environment. Unlike many other industries, utilities can refinance their debt during the pandemic using recently (and significantly) lowered interest rates from the U.S. Federal Reserve and Treasury.
We believe some utilities could largely or fully offset the impacts of lost revenue with interest expense savings. Utilities recovering their entire bad debt balance through approved programs essentially offsets their largest fear – the inability to disconnect and face rising collection issues.
The pandemic is also driving countries to rely less upon outside parties for critical supplies and services, and the U.S. is uniquely situated to be relatively economically self-sufficient, so this trend would bolster the energy market’s role and electricity demand while reversing the globalization trend.
Utilities’ relative strength compared to other major industries also means the record-setting injection of liquidity seeking investment grade projects will have fewer companies to pick from outside of utilities.
Q: What’s unique about how utilities are structured and regulated that allows them to fare better than other industries?
A: Over many decades, we have adopted a very complex set of policies to ensure reliable supply of electrical power. Some of these age-old policies allow utilities to avoid almost all risks other businesses must face in order to ensure their stability and survival.
Two major policies and practices include:
- Fixed ROE levels with low inflation: With a trend of declining rates of inflation, fairly stable utility ROE rates actually result in higher and higher investment returns. It’s not a mystery why publicly traded utilities almost never miss an earnings forecast.
- Fuel cost pass through: If the price of coal, natural gas, uranium, oil, wood, or garbage rises, utilities pass that cost to their customers in almost all markets. Investors rarely find a company they can own which can avoid the risks of a major expense like utilities. To be fair, adopting a technology where fuel costs are nearly zero like solar or wind makes that major risk go away, and we can move on with implementing the technologies to control and manage a fairer – and far more environmentally beneficial – electricity generation system.
Green stimulus policies can boost the economy and meet climate goals, utilities are key players
Rapidly transitioning to a clean electricity grid can save customers money and create hundreds of thousands of jobs. A recent report from the University of California, Berkeley and GridLab found a 90% clean electricity grid is possible by 2035, will attract $1.7 trillion in utility investment, create more than 500,000 annual jobs, and decrease wholesale electricity costs.
Though a federal clean electricity standard would drive a cost-effective clean energy transition, the cost savings forecast indicate utilities are poised to leverage their balance sheets to coordinate this investment while reducing costs for customers, due to their relatively strong financial position.
The 2009 American Recovery and Reinvestment Act (ARRA) showed a federal green stimulus can help an ailing economy rebound, nurture industries for long-term economic growth, and kick-start the transition to a low-emission economy. In fact, one study found shifting fossil spending to renewable energy and energy efficiency created nearly three times as many jobs, and many ARRA studies found clean energy was the most cost-effective type of spending for job creation. As infrastructure investors, utilities are central to any green stimulus effort.
Utilities can also be program administrators for new and augmented projects using federal dollars, providing their most vulnerable customers with bill savings when they need it most. The GREEN Act, recently proposed as part of the Moving Forward Act, includes important green recovery policies.
To support utilities’ important role in economic and climate recovery, the federal government should provide state and local stimulus funding earmarked for green stimulus projects and programs that are job-intensive with high potential to lower emissions and customer bills.
Congress should create grid investment opportunities, especially for transmission, which can help integrate renewables onto the grid. Congress can also increase funds for the Energy Efficiency and Conservation Block Grant, Low Income Home Energy Assistance Program, and Weatherization Assistance Program, ensuring these efficiency programs include an electrification carve-out.
States should also enact economically advantageous programs to reach climate goals and stimulate economic growth. In addition to stronger clean electricity standards, electrification can help ease customer energy burdens. Energy Innovation’s California modeling found that electrifying cars and buildings creates direct household savings for Californians while reducing emissions.
Electric utilities can be prime electrification movers by proactively targeting fuel switching and electric vehicle charging infrastructure, and are increasingly prompted by regulators to increase energy efficiency (using carrots and sticks), so more investment will support those goals while helping residents struggling with higher energy bills.
Utilities can address multiple crises, even during COVID-19
Covid-19 has not gone away but we are out of the surprise phase and we must simultaneously address public health, economic, and climate crises. Utilities are key players in reducing economic burdens on Americans and reaching critical climate goals.
Fortunately, while utilities are experiencing uncertainty like every other organization, they benefit from relatively lower marketplace risk and better access to capital. This is critical as we depend on their ability to provide essential service at an affordable rate, and increasingly, address the climate crisis.