Consumers should expect inflation to ‘inch higher’: Polcari
Slatestone Wealth Management chief market strategist Kenny Polcari counters the Biden administration’s ‘peak inflation’ prediction.
American utilities are planning their biggest spending increases in decades to upgrade aging grids, prepare for electric vehicles and make the transition to renewable energy—moves poised to further boost power costs as consumers face historic inflation.
The plans propose tens of billions of dollars in spending in the coming years to reduce carbon emissions, partly in response to state and federal mandates, and to replace aging infrastructure that has become more prone to failure. Edison Electric Institute, an industry trade group, expects that utilities will invest roughly $140 billion each year in 2022 and 2023, substantially more than any year since 2000, when the group began tracking spending.
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Executives said the investments are critical to meeting renewable-energy targets and bolstering the reliability of the grid as outages become longer and more frequent. Climate change, they said, has heightened the need to simultaneously hasten the shift to carbon-free electricity sources and upgrade the grid to withstand severe weather patterns scientists link to rising temperatures.
Utilities are also preparing for higher electricity demand as customers increasingly adopt electric vehicles and become more dependent on the grid to charge them, in addition to replacing traditional furnaces and gas appliances with electric alternatives. The movement toward electrification is in part driven by consumers, as well as efforts by cities and towns to phase out natural gas for cooking and heating in the midst of concern regarding climate change.
Santa Ana, CA – September 10: Workers with Southern California Edison replace a transformer on Holt Street in Santa Ana, CA on Friday, September 10, 2021. (Photo by Paul Bersebach/MediaNews Group/Orange County Register via Getty Images) (Getty Images)
The increased spending is expected to result in higher electricity bills, as utilities are typically allowed to recoup the cost of capital investments, as well as a rate of return, from customers after receiving regulatory approval.
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"We have entered a historic period of transformation in the energy industry, especially in the electric industry," said DTE Energy Co. Chief Executive Jerry Norcia. "When we weigh the pace of investment, both in the transformation of our generation fleet as well as the investments we’re making in our grid, we’re looking very closely at how we finance that."
The spending proposals come at a challenging time for the industry, as the war in Ukraine exacerbates supply-chain snarls, inflation and a global natural-gas supply shortage that has made it more expensive for utilities to produce or purchase power. Already, U.S. electricity customers are facing some of the largest bills in years as a result of those factors, and analysts said utilities might face pressure from regulators to keep spending in check to reduce the need for further rate increases.
The proposed investments are likely among the largest since the 1970s and 1980s, when many utilities incurred major cost overruns while building nuclear plants. Both fuel prices and inflation were high at the time, largely because of the 1970s oil crises, creating challenges for regulators in determining whether the companies should be allowed to recoup the overruns through customers by further raising rates.
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Hugh Wynne, an analyst with Sector & Sovereign Research, said average residential electricity bills remained mostly flat over the past decade as utilities kept rate increases below inflation. Now his firm expects average residential bills to increase between 2.5% and 3% a year for the next several years as a result of higher capital investment, with further increases likely as a result of higher gas prices.
"The overall inflation environment itself is creating further risks for utilities," Mr. Wynne said.
People pass a water treatment plant and electrical power lines on a a bike path in Arlington, Virginia on August 13, 2021. (Photo by ANDREW CABALLERO-REYNOLDS / AFP) (Photo by ANDREW CABALLERO-REYNOLDS/AFP via Getty Images) (Getty Images)
DTE, a Michigan utility company that provides gas or electricity to more than three million customers, has proposed investing as much as $35 billion in its electric system between now and 2031 to accelerate the replacement of coal-fired power plants with renewable energy and battery storage as it works to reach net-zero carbon emissions by 2050. It is also investing heavily to modernize its system, parts of which were built in the first half of the 20th century.
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Mr. Norcia said the company has long recognized the need to spend more to make its system more resilient to windstorms, which he said have become stronger and more frequent in recent years. The company has lately more than tripled its spending to keep trees away from power lines, an expense that the company has partially securitized to help reduce the need for rate increases as it steps up capital investment.
"It’s really driven by the need for customers to have reliable power, as well as the fact that we expect a significant increase in demand through the electrification of the transportation fleet," Mr. Norcia said.
SOUTH SAN FRANCISCO, CA – AUGUST 30: The sun shines over towers carrying electical lines August 30, 2007 in South San Francisco, California. (Photo by Justin Sullivan/Getty Images / Getty Images)
Southern California Edison, a unit of Edison International that serves about five million electricity customers, is planning to invest as much as $30 billion in its system between 2021 and 2025 to reduce the risk of its power lines starting wildfires, prepare the grid to support greater electricity demand and build large batteries to store wind and solar power and discharge it as needed. California is working to decarbonize its power grid by 2045, an effort that will require the state’s utilities to procure an unprecedented amount of new renewable generation and battery storage.
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Edison International Chief Executive Pedro Pizarro said Southern California Edison is working to reduce expenses to give the company more leeway to make capital investment. Bills have lately risen as a result of higher natural-gas prices, and he expects longer-term increases as a result of investments in renewables and electrification—as well as higher electricity use—in pursuit of the state’s carbon-reduction goals.
"Ultimately, that’s the key metric for the economy for the next 25 years and beyond," Mr. Pizarro said. "We’re obviously very focused on trying to manage electric costs as much as we can, but let’s also recognize that there will be more pressure on electric costs."
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