Utilities Defer, Cancel Small Portion of Planned Capital Projects Due to Lower Demand, Regulation

---

Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--The U.S. Power Industry plans to make hefty investments in generation, transmission and distribution in 2012 and beyond. But a small minority of capital projects are at risk for delay or cancellation due to lowered consumer demand and regulatory incentives for energy conservation.

Project spending by the U.S. Power Industry totaled about $65 billion in 2011, according to Brock Ramey, Industrial Info's manager of North American Power. He sees a similar level of outlays in 2012, particularly as construction begins on planned nuclear power projects in Georgia and South Carolina. Gas-fired generation construction is expected to continue at a rapid rate. And outlays for environmental projects are scheduled to begin in earnest once the U.S. Environmental Protection Agency (EPA) (Washington, D.C.) finalizes its pending rules to reduce emissions of sulfur dioxide (SO2), oxides of nitrogen (NOx), particulate matter (PM), mercury and other hazardous air pollutants. For more on these pending regulations, see December 7, 2011, article - Power Industry Ends Roller-Coaster Year, but 2012 Holds Plenty of Uncertainty, a "Navigating the Currents of Change" Webcast.

But at the margin, scheduled spending may be pushed back or trimmed slightly, a combined result of weak consumer demand, state regulatory initiatives favoring energy efficiency and federal energy efforts.

It's not clear how significantly these factors could cut into Power Industry project spending. But a recent study from the Brattle Group (Cambridge, Massachusetts) said that energy efficiency measures could reduce forecast electric consumption between 5% and 15% by 2020. The group also forecast a reduction of 7.5% to 15% in peak electric demand over that timeframe.

These reductions will partly result from rising electric rates, driven by utilities' capital programs. Meaningfully higher electric rates should encourage customers to use less electricity. The Brattle study also cited state regulatory support for energy efficiency programs, where utilities pay for a portion of the cost to install high-efficiency lighting and refrigeration equipment in customers' businesses and homes. Innovative utility rate designs and higher efficiency standards for appliances and buildings technology also will contribute to lowered overall consumption and peak electric demand by 2020.

"The survey clearly shows that the age of energy efficiency has not come to an end," said Ahmad Faruqui, one of the study's authors. "On the contrary, the survey heralds a period of acceleration for energy efficiency." The Brattle study consisted of a survey of 50 energy experts.

Earlier this month, Northern States Power Company (Minneapolis, Minnesota) postponed a $600 million coal-to-gas conversion of its six-decade-old, 600-megawatt (MW) Black Dog Power Plant because its forecast for electricity shows consumer demand will be 5% less than forecast in 2016, according to Laura McCarten, a regional vice president for Northern States Power Minnesota.

The utility, a unit of Xcel Energy Incorporated (NYSE:XEL) (Minneapolis, Minnesota), also is delaying plans to increase the power output at its two-unit Prairie Island Nuclear Power Station, according to a report in the St. Paul Pioneer Press. Industrial Info is tracking uprate projects at both units of Prairie View that carry a total of $660 million in total investment value (TIV).

Another utility, Great River Energy (GRE) (Maple Grove, Minnesota), recently took the highly unusual step of mothballing a new $437 million, lignite-fired cogenerator due to lower-than-expected consumer demand for electricity, among other factors. Other factors that led to the mothballing of the 99-MW Spiritwood Station in North Dakota include lower wholesale prices for electricity and the loss of a key industrial customer for some of the plant's steam.

In Colorado, another Xcel unit, Public Service Company of Colorado (Denver, Colorado), recently proposed cancelling a $180 million transmission line because the utility said it did not need the solar power the line would bring to metropolitan Denver from south-central Colorado's San Luis Valley. Loss of the transmission could stymie development of more than 200 MW of solar generation in the San Luis Valley.

"Utility plans for project spending are in great flux now, mainly because of the uncertain impact of environmental regulation, but also because the weak economy has allowed utilities to defer planned capital projects," said Industrial Info's Ramey. "In many cases, we're seeing generation projects shift from coal to gas for risk-management purposes. And renewable construction will continue as recipients of Section 1603 cash grants move forward in their construction."

At the margin, a number of state utility regulatory commissions have mandated that utilities reduce electric sales by 1% to 2% per year. Utilities that meet those goals can increase their profits, which are set by the commissions. Failure to meet those electric-reduction goals will result in financial penalties.

Even with the potential for increased utility profits, regulators say it is far cheaper to conserve energy than it is to generate electricity from a new power plant. It costs about 3 cents to save each kilowatt-hour (kWh) of electricity through efficiency and conservation programs compared to 8-10 cents for generating that kWh at a newly built generator, according to Brattle's Faruqui: "It has taken a while for these programs to take hold, but they are very cost-effective."

Xcel estimates that conservation measures in its Colorado market could shave as much as 994 MW off its electric demand over the next seven years. The utility recently spent about $1 billion to build the 766-MW, coal-fired Comanche Unit 3, according to The Denver Post.

In the Intermountain West--Arizona, Nevada, New Mexico, Utah and Wyoming--utilities are spending about $280 million per year on energy conservation measures, a sharp increase from the $77 million they spent on those measures in 2006, according to the Southwestern Energy Efficiency Program (SWEEP) (Boulder, Colorado), a non-profit energy-conservation group. Colorado's spending on these programs jumped five-fold to $85 million over the last five years, the group told The Denver Post. The state of California is spending hundreds of millions of dollars per year to encourage customers to lower electricity usage or install solar panels on their roofs.

State action is also being supported by federal laws and equipment efficiency standards. Incandescent light bulbs and older compact fluorescent lamps (CLFs) are being phased out in favor of higher-efficiency lighting products. Consumer goods like refrigerators and televisions are being required to be more energy efficient than the previous generation of goods.

The Obama administration has been trying to improve the energy efficiency of federal and commercial buildings through initiatives known as "shared savings" performance contracts. In these arrangements, the cost to retrofit a building is paid off with savings on the monthly utility bill.

Earlier this month, President Obama joined former President Bill Clinton to announce $4 billion in government and private-sector commitments to finance building renovations that make properties energy efficient while creating thousands of jobs in the process. They emphasized that this initiative risked no federal grants or taxpayer funds.

President Obama originally announced his Better Buildings Initiative this past February, but he is stumping for it now as a job-creation measure. In a recent media event, the president said he had directed all federal agencies to make at least $2 billion worth of energy-efficiency upgrades in the next two years. And he said 60 private-sector companies, nonprofit organizations and state and local agencies had committed an additional $2 billion to finance building upgrades that would cut energy use.

"We are entering a new era," Doug Larson, executive director of the Western Interstate Energy Board, told The Denver Post. "I think we'll see fewer transmission lines and power plants built." Exactly how these "demand-side" measures will affect utilities' "supply-side" project spending plans remains to be seen.

View Plant Profile - 1519018 1013897 1070631 1016426
View Project Report - 30001168 30001116 30001128 31000321

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.