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COMMENTARY
Balancing Essential Utility
Infrastructure Investment
with Customer Affordability
Jim Heidell
E
lectric utilities are entering an era of growing investment
opportunities following a decade of low load growth.
However, there is increasing evidence that regulators are
growing more concerned about the impact on customer rates
and looking for opportunities to moderate the growth in utility
investment and associated rate increases. As a result, it is
increasingly critical for utilities to demonstrate both the necessity
for near-term investment needed to meet anticipated load
growth and clean energy requirements, and voluntary targets.
It is equally critical to clearly demonstrate the benefits of utility
ownership of generation versus third-party ownership.
Outages associated with severe weather patterns are also
creating pressure to prioritize grid resiliency relative to enhancements
to support the clean energy transition. Resiliency
has a direct, positive impact on grid performance and customer
satisfaction but typically requires a large capital expenditure
(CapEx) investment to provide an immediate benefit.
Utilities need to be more detailed in quantifying the benefits
of the proposed CapEx and justifying both the necessity and
that the utility is putting forth the least-costly solution. Given
capital constraints it is also critical to have a clearly articulated
approach and transparent process to prioritizing needs
and identifying which investments have critical timing drivers.
Finally, an additional element of addressing customer affordability
is ensuring that the utility is maximizing the benefits
available from federal programs.
Recent industry increases in CapEx spending have significantly
exceeded load growth creating upward rate pressure,
which is anticipated to continue, creating record rate increase
requests. PA Consulting's forecasts indicate that on average
across the U.S. there will be 11.5% load growth over the next
decade, with some utilities experiencing much more load
growth than the average. However, investor-owned utility CapEx
increased on the order of 19% between 2023 and 2022,
and CapEx is expected to keep increasing with CapEx exceeding
depreciation by more than 160% based upon a recent analysis
by Regulatory Research Associates.
A challenge for utilities is that load growth will accelerate
over the coming decade, but infrastructure investment is needed
soon to meet the anticipated load growth. In our modeling
of load growth within utility strategic planning, and merger and
acquisition (M&A) work, we have found that load growth can
offset a significant portion of the rate impact in the long run.
However, in the near-term, impacts can be significant and the
risk that the load growth will occur depends on the type of
load growth, for example, large block loads such as data centers
and hydrogen production versus electrification of transportation,
buildings, and industrial processes. While rate base
growth is usually preferable, exploring third-party ownership
of generation may offer increased flexibility to structure cost
recovery to mitigate near-term rate impacts, even if it limits
40
long-term benefits for customers. Third-party ownership also
transfers construction and operational risk to a third party versus
utility customers.
Electric utilities should not have a singular response to
addressing CapEx needs driven by load growth, but instead
should consider:
■ Transportation Electrification. It is essential to fully evaluate
the potential benefits of load management to mitigate investment
in new generation and delivery infrastructure.
■ Residential Building Electrification. While heat pumps will
add load, the benefits of replacing electric resistance space
and water heating with heat pumps needs to be incorporated
into the analysis.
■ Data Centers. In some cases, and some projects, it may
make sense to transfer the demand risk to third parties.
■ Industrial Decarbonization. Developing specific rates with
risk mitigation measures to address new loads from electrification
or replacing customer-owned fossil generation with
dedicated utility renewable generation.
For utility-owned resources, it is critical that the utility
demonstrate to regulators the economic benefits of longterm
site and operational control, as well as maximizing the
benefits of existing assets. Long-term site control value
should include the optionality to repower and reuse assets
and transmission interconnections as technology and policy
evolve. Incorporating the value of operational flexibility
should capture the savings from avoiding the cost of minimum
off-take requirements in periods of low demand and
wholesale prices. As renewable generation increases, the
risk of excess generation and the associated need for curtailment
also increases, which can often result in customers
paying for power that is not needed. Finally, exploiting
brownfield opportunities to lower costs is critical to compete
against large third-party bidders.
Other challenges to utility ownership can include third-party
developers having an advantage on financing leverage, and potentially
less friction in monetizing tax credits associated with
investments in renewable generation and storage. To successfully
compete on capital cost, utilities need to take advantage
of all sources of federal support in order to be competitive with
third-party investment including funding available under the
Department of Energy Loan Programs Office, incentives under
the Inflation Reduction Act, and the Infrastructure Investment
and Jobs Act. These funding sources are not limitless and may
be in question following the 2024 election cycle. While we remain
in an inflationary environment, the availability of this lowcost
debt creates a vehicle for utilities to plan for and execute
capital-intensive projects on an accelerated timeline, all while
keeping an eye toward customer affordability. ■
-Jim Heidell is an energy and utilities expert at PA Consulting.
www.powermag.com
POWER | April 2024
http://www.powermag.com
pwr_april-2024

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