Electric Utilities Face At Least $800 Billion Capital Outlays in Coming Decade

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Shareholder-owned electric utilities in the U.S. will have to spend at least $800 billion in the next decade to rebuild or replace much of the electric generating fleet and meet future growth in electric demand, Richard McMahon, the executive director of power supply for the Edison Electric Institute (Washington, D.C.), told about 1,000 attendees during Tuesday's keynote address at the 12th Annual Electric Power Conference & Exhibition in Baltimore.

"Our members will spend about $80 billion a year over the next 10 years, which will double our asset base. We have to find a way to do that without triggering rate shock among customers or regulators," McMahon said in his "state of the industry" address. Electric demand is projected to grow 21% in the next two decades, he said.

EEI's $800 billion price tag does not include the potential cost of carbon dioxide emissions-reduction measures, such as carbon capture and sequestration, he said. EEI is the trade group representing U.S.-based, shareholder-owned electric utilities, which generate about 75% of all the electricity consumed in the nation. The EEI estimate covers capital investments over the next decade in generation, transmission, distribution, the Smart Grid, and environmental remediation for SOx, NOx and mercury.

EEI's $800 billion capital expenditure projection is consistent with future electric utility project spending being tracked by Industrial Info Resources. Industrial Info is tracking about $818 billion of utility capital projects, including generation, transmission, distribution, and environmental remediation for SO2, NOx and mercury.

McMahon noted that EEI's predicted surge in capital expenditures is coming at a time when utility credit ratings have slipped: "Right now, the average utility is on the edge of a BBB credit rating, and lower credit ratings drive up a utility's cost of capital," McMahon told the conference attendees. By contrast, 20 years ago, more than 50% of electric utilities carried a credit rating of A or better from ratings agencies like Moody's Investors Service (New York) and Standard & Poors, a unit of the McGraw-Hill Companies (NYSE:MHP) (New York, New York). Today's lower BBB average credit rating reflects investors' perception that utilities face greater risks than they once did, causing investors to demand higher interest rates on utility bonds to offset the greater risk.

The $80 billion per year in capital outlays for 2010 and 2011 forecast by EEI reflects a decline of nearly $5 billion per year from an earlier estimate. But $80 billion in annual capital outlays are still about double what they were in 2003-04, and roughly 33% over what shareholder-owned electric utilities spent on capital projects in 2006, he said.

Click on image at right to see Edison Electric Institute's historical and near-term capex spending data.

McMahon said, in general, electric utility capital outlays over the next decade would be spread "fairly evenly" over the industry's generation, transmission and distribution assets. He emphasized that this capex projection included environmental retrofit projects for SOx, NOx and mercury, but not CO2 control.

"We are no longer a declining-cost industry," McMahon told the Electric Power conference attendees. "Our workforce is aging, demand for our product will increase, and concerns about the environment are increasingly impacting our business. Utilities face increasing legislative and regulatory mandates, and effectively managing relations with regulators is a key to success over the next decade," he said.

In building the next wave of electric generators, electric utilities can choose from a wide range of options that carry a broad range of costs, critical unknowns and potential pitfalls, the EEI executive said. For new generators with a 2016 in-service date, combined-cycle gas turbine generators are expected to generate electricity at a levelized cost of about $75 per megawatt-hour, which includes capital, operation and maintenance, and transmission costs, he said, citing an estimate from the Energy Information Administration (Washington, D.C.), the statistical branch of the U.S. Department of Energy. At the other extreme is solar photovoltaics, which is expected to generate electricity at a levelized cost of about $400 per megawatt-hour, he said. The EIA measured all costs in constant 2008 dollars.

Click on image at right to see the EIA's estimate for new generation costs for a 2016 in-service date.

The Electric Power show, running May 18-20 in Baltimore, has about 500 exhibitors and 5,000 attendees, estimated Sean Guerre, the president and chief executive of TradeFair Group, which hosts the event. This year, for the first time, TradeFair Group videotaped the event's keynote address (and the executive roundtable). Archived webcasts of McMahon's speech can be viewed at no cost at the conference website (www.electricpowerexpo.com).

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