Editor in chief
I recently attended DistribuTECH Conference & Exhibition, where smart grid was the topic of conference sessions, vendor presentations and general conversation. (Read more about DistribuTECH on page 34 of this issue.) Stimulus funding, new technologies and increased customer expectations were discussed. One subject, however, wasn’t mentioned much: how utilities will pay for this transformation to a smarter grid.
Utilities receiving $3.4 billion in stimulus funding from the U.S. Department of Energy for smart grid projects finally are signing contracts and receiving money. That money, however, is a fraction of most projects’ total costs. Utilities must raise much of the funding themselves and state regulators are reluctant to pass the projects’ costs to consumers, many of whom are already suffering in this economy.
Instead, utilities must find capital from equity investors and lenders. As J.P. Morgan’s Sean O’Donnell said during the Electric Light & Power Executive Conference, held in Tampa before DistribuTECH, shareholders are a big part of the picture. They expect a reasonable rate of return on their investments. No matter how much a project might improve quality of life, save energy or curb global warming, “capital markets are not patriotic,” O’Donnell said. Equity investors understand that utilities can’t offer the rates of return on capital investments that other industry sectors can, he said. Further, the utility industry has become over-leveraged and too dependent on banks, more so than any other industry. O’Donnell compared utilities’ dependence on bank debt to the nation’s dependence on foreign oil. At some point, he said, they must wean themselves off it. He mentioned one bit of good news: The cost of capital for well-rated utilities is lower than it’s been in a while. Overall, his message was not encouraging.
Two others speakers on the panel had similar messages that were difficult to hear. They revealed a side of smart grid development to which I am unfamiliar. I’ve assumed that as long as the technology is available and proven, utilities will buy it, install it, and we all will reap the benefits.
There’s more to it. Utilities have faced difficult financial times before, and they employ some of the nation’s best and brightest, so I’m confident the smart grid will be a reality someday. But, it will take much more than technology.