November was generally a good month all around, with more than two-thirds of the C Three index companies in positive territory for the month. None of the indices, however, are keeping track with the S&P 500 or the Dow Industrials, a five-month trend and a first in nine years. This trend became even more pronounced in November 2009, with even the Less Regulated Natural Gas Index underperforming the two broad indices.
Less Regulated Gas Still Dominates
Even with depressed natural gas prices, the components of the Less Regulated Gas Indices still dominate the winners for the year, having recovered all of last year’s losses and then some.
EPA Slams Down Hammer
The Environmental Protection Agency (EPA) came down with an executive branch hammer timed with the opening of the climate conference in Copenhagen. The EPA had to act in a narrow band with its authority limited to stationary carbon emitters, primarily power plants. The EPA action was designed to spur Congress into dealing with the pending energy legislation. It will be seen whether the stick approach will work. No matter on which side of the fence you sit, the Copenhagen climate conference likely was frustrating.
Cap and Trade Equals Industry Full-Employment Act
Emission limits, whether by some kind of cap and trade or more draconian measures through the EPA, will directly drive more capital expenditures by the industry. That, in turn, will drive the creation of many new jobs ranging from engineering to construction to Wall Street types who must find financing for these projects.
New Kinds of Power Generation
Many of our ancient generating facilities must be retired, the cost of compliance outweighing the cost of alternative generation. During the past several months, there have been numerous announcements of the retirement of existing, mostly coal-fired capacity (Progress Energy, among others) and the conversion of old capacity to such fuel sources as biomass (Georgia Power, DTE Energy, PS of New Hampshire, among others). These conversions require the services of everything from engineers and steel workers to crane operators. Plenty has been written about wind and solar. New hydro technologies also are being tested with plans for implementation. Biomass, biogas, cleaner coal technologies and compressed air are some other options being investigated, researched and implemented.
Need for New Natural Gas Pipelines
While renewable energy has many positive attributes, the big downside is unreliability. One way to help balance the electricity generated from such sources as wind power is quick-start natural gas-fired capacity. Many times, this capacity must be located where there is no pipeline access. Thus, there will be a need for more pipeline construction, bringing with it the necessary engineering, permitting, environmental and construction jobs. Increased power plant-driven natural gas demand is a given.
Rather Than State-by-State Approvals Required for Big Transmission Infrastructure Projects, Feds Should Site Powerlines Same as Interstate Natural Gas Lines
If the U.S. is ever going to tap much of the wind and, to a lesser extent, solar capacity, it must figure out how to distribute electricity from rural areas to population centers. Most winners in the process are attorneys who have been charged with negotiating the regulatory hurdles that exist for permitting these lines. The construction, right-of-way and engineering jobs are only slowly trickling from the few lines that have received approval–outside of Texas, that is.
Low-hanging Fruit–Energy Efficiency, Distributed Generation
The U.S. lags most developed nations in the adoption and implementation of energy-efficient and distributed generation technologies such as residential and commercial solar systems. McKinsey recently estimated that the U.S. could lower its per capita electricity demand as much as 20 percent without real impact on quality of life. Yet in many states, there is little to no encouragement to adopt energy-efficient technologies. Many states and localities have erected roadblocks by limiting the amount of net metering for solar and small-scale wind, banning residential wind and outdoor clotheslines, for examples.
Broken Regulatory Model–How Utilities are Compensated at Root of Many Roadblocks
The financial regulatory process that determines how much money investor-owned utilities (IOUs), which have about 80 percent market share of electric distribution and transmission, is antiquated and highly politicized. Rate-of-return regulation controlled by individual states was created in a time of large baseload generation units being locally located, with coal about the only technological and financially feasible alternative for generating electricity on a large scale. What this has morphed into since the 1930s is 50 states with 50 sets of rules, being run by offshoots of the political process, either elected or appointed commissions, which may or may not have the long-term interest of the ratepayers they are charged with protecting at the top of their agendas. This model does not contemplate rewarding utilities for less per capita consumption. Generally, the regulatory financial model is punitive for a declining per capita electricity consumption and rewards the building and acquiring of assets to produce and deliver electricity. Many states have started to address this issue with respect to natural gas by implementing rate structures that decouple the natural gas sales from the infrastructure required to deliver it to end users. Thus, the per capita natural gas usage has decreased in the past decade as new efficient technologies are encouraged and without financially penalizing natural gas distribution companies.
Some states that have embarked down this road for electricity, however, have found the process long and contentious. But progress is being made, and, in some cases, rates structures have been implemented. Wisconsin, Michigan, Vermont, New York, Massachusetts, California, Maine, Hawaii, Ohio, Maryland, Washington, D.C., Delaware, Indiana, Connecticut, Minnesota and Colorado have implemented new structures or are considering them. This will drive the increasing adoption of energy-efficient technologies. The tie-back to the full-employment act is that the manufacturing and implementation of energy-efficient and distributed generation technologies will require many skills and jobs. The White House will divert unused TARP funds to residential energy efficiency programs to help spur job creation. States where incentives already exist stand to benefit directly.
How Will This be Paid For?
The current regulatory model for many IOUs will be for these costs to be into the rate base as much as possible. That is why utilities have liked for consumers to continue to use more. The more infrastructure needed, the more money utilities made by putting that infrastructure into their rate base. That model is beginning to change, but it still dominates at least on the electricity side of things.
Price is a Great Motivator
With the rise in electricity prices, the cost justification for all consumers will be easier. One of the first backlashes against rising electricity prices will be consumers looking for ways to reduce their usage. The gasoline price spike of 2008 raised awareness of energy demand elasticity among most consumers. Electricity demand should start behaving in similar ways as consumers recognize ways to reduce usage without impacting their quality of life.
Increasing Rate Base is How Utilities Grow
The recovery act enacted in 2009 lets utilities capture some of the tax credits from renewable generation sources. Thus, some utilities seek to put wind and solar facilities into their rate bases. This is positive for all vendors in the industry. Whether it is new renewable generation or scrubbers on existing generation, generally speaking, increasing assets means increasing prices for consumers, spurring the adoption of more energy-efficient technologies.
Whether Cap and Trade is Answer is Far From Clear
Most industry insiders agree that it beats an EPA compliance mandate. A third alternative for paying for reducing carbon emissions is a carbon tax. So far, it has had little traction, but if cap and trade is defeated, it is sure to raise its somewhat ugly head–especially because the potential EPA mandates hit the electricity generation industry especially hard, and it will have to fight against that.
Fourth Alternative: Do Nothing
From the viewpoint of being a vendor to the electric and gas utility industry, this is the worst alternative. It would lead to continued ambiguity in the marketplace, which forces companies to postpone plans. Doing nothing would grind many planned transmission and power plant projects to a halt. We have seen the impact of ambiguity during the past year as the new administration got its act together with respect to TARP funding and renewable energy. There appears to be forward movement. An example is FPL Group’s announcing it will pump $2 billion into renewable energy projects (generation and transmission) in 2010. Mitigating the impacts of carbon production will cost money. Getting an equal playing field with other countries so we maintain some competitive advantages was an important part of the U.S. agenda in Copenhagen. Setting realistic targets will continue to spur innovation and growth in the industry. We are seeing all kinds of new technologies and the scaling of existing technologies to meet mass needs. We are seeing many vendors grow. We are starting to recapture some renewable technology leadership in innovation and manufacturing. A tempered, reasoned energy policy that addresses carbon issues with real targets and goals will continue to spur the changes and evolutions we are beginning to see.