Pam Boschee, Managing Editor
It could be that we’ve become desensitized. Or maybe it’s just that clearer heads now prevail. Whatever the reason, the term “crisis” is losing momentum in references to California. This may not be the case if one lives in California, but to much of the country, it is no longer viewed as a crisis.
The financial community seems to agree, if recent comments are any indication.
Andre Meade, a Commerzbank Securities utilities analyst, recently spoke with EL&P about market trends and the industry’s outlook. Asked about economic repercussions resulting from wildly varying electricity prices, he said, “In general, there are probably very few industries where energy is the deciding factor in whether it’s profitable to continue operations or not.” Exceptions noted by Meade were aluminum smelters in the Pacific Northwest, which are energy-intensive, that recently opted to shut down operations and instead sell their contracted electricity back to the utilities.
Meade added, “The broader economic forces of over-investment and corporations not spending as much will probably have a much bigger impact than electricity prices.”
Standard & Poor’s analyst, Peter Rigby, said in a recent teleconference, “The U.S. is not in an energy crisis, but [is] experiencing the occasional volatility and cyclicality that has been part of the energy industry for more than 30 years.”
He pointed to the improved credit profiles of many of the nation’s energy industries as an indicator of robustness. Energy and electricity companies have been issuing debt, most of which has been investment grade, in record amounts this year to fund new investment.
New investment is something Meade sees as potentially threatened in California if legislators, the governor and the PUC don’t play their cards right.
“There are a lot of issues and I think California, through its multiple voices, seems to be going part carrot, part stick. I think they’re walking a fine line and should be careful because the only thing going right in this market-the only thing-is private sector investment to build out new power plants.
“I don’t think it’s a good thing for the state to be building power plants, and the state doesn’t have any turbines being delivered in the near term; the [generator] companies do. There are plenty of other states that are easier to build, cheaper to build and more welcoming to new power plants. They can certainly allocate those turbines to other states and a lot of companies are.”
Although investment in generation is strong, transmission investment continues to be generally stagnant. Meade commented that in generation, there was a slowdown in the building of new plants during the late 80s and early 90s while the rules were changing and no one wanted to commit capital. Now that the rules are clear, there’s a building rush almost everywhere in the U.S.
Meade said, “For a transmission investment, it depends on what the rules are going to be. Right now there is talk about moving to RTOs with transmission investments continuing to be regulated.”
A regulated, attractive rate of return would most likely jump-start investment and development.
“Transmission investment has just as high likelihood to become stranded as a generation investment, especially if you’re siting all new power plants in the high-priced load pockets. For example, if you have a constrained area and an unconstrained area, you can build a power line between the two to equilibrate the prices, and you’ll see a lot of power going over those lines-and you can collect the money you spent to build it. But if you build the line and two days later someone puts a power plant in the middle of the load pocket, the need for the line isn’t as clear. You could wind up seeing those costs stranded,” he said.