Posts tagged “utilities”
Energy use in the US can be split into two large (very, very large) pies. One is electricity for use in homes, buildings, and industry and the other is transportation, which is powered primarily by liquid fuels (gasoline and diesel) from oil. There are some exceptions, and small overlapping fuel uses – direct industrial use of liquid fuel (a fairly significant quantity), some liquids burned to make electricity (this used to be a significant amount, but is now only a very small amount), and now a very small amount of electricity used to power electric vehicles (“EVs”).
American consumers spend, on average more than $1 billion every day on each of these energy uses.
Daily U.S. Consumer Energy Spending
Electric utilities have never made a serious effort to attack the transportation market at scale. Historically this made sense. Transportation infrastructure was built around liquid fuels and virtually the entire fleet of U.S. cars and trucks run on liquid fuels and there was no viable electric-drive alternative and fueling infrastructure was non-existent.
Barclays Just Threw Gasoline on the Fire that is the Battle Between Utilities and the Solar Industry
This week Barclays downgraded the high-grade bond market for the entire electric utility sector because “we believe that a confluence of declining cost trends in distributed solar photovoltaic (PV) power generation and residential-scale power storage is likely to disrupt the status quo.” While this is not the first statement about vulnerability of electric utilities to competition from new technology it is the most important to date.
Electric Utilities vs. Solar
There has been growing tension between the electric utility industry and the solar industry – specifically the part of solar industry that is focused on distributed, or point of use, solar installations. This friction has really been a proxy for what is developing as a larger challenge to the utilities. New technologies are making generating, storing and managing electricity at the point of use much easier and much more economical. This technical evolution is occurring at the same time that overall electric demand growth has been stagnant for several years and rising infrastructure requirements are putting upward pressure on the price of delivered electricity. Those factors together mean that electric utilities are struggling with eroding demand and eroding profitability, and the best available option is to increase the price per unit of electricity, which only accelerates the economic competitiveness of the competing technology – and thus starting the “spiral”.
Texas both produces and consumes more energy than any state in the U.S. It controls one-quarter of U.S. proven oil reserves. Energy companies looking to grow or to establish a U.S. presence set up operations in Texas. The primary electricity transmission system in Texas is independent of the rest of the country (a long-time source of pride). The Electric Reliability Company of Texas, or ERCOT, is responsible for regulating the generation and supply of power to 85% of the state, except the extreme eastern and western portions.
The fundamental challenge of a closed system is that it must meet its own needs, and that has not happened. There are increasing concerns about rolling blackouts in America’s “energy capital”. NRG Energy reported that by 2016, Texas could experience four rolling blackouts a year, and strongly recommended that the state build more power generation reserves to improve grid reliability. CONTINUE»
The following article was written by S. Michael Holly, the Chairman of Sorgo Fuels & Chemicals, Inc. Sorgo has developed technology for the production of ethanol, electricity and protein from sweet sorghum. Mike was formerly an alternative energy engineer and business analyst with the Minnesota Department of Energy and Economic Development. He holds masters degrees in chemical engineering and business administration from the University of Minnesota.
Many U.S. special interests are misrepresenting wind power costs, including the wind industry, environmental groups, utility monopolies, independent system operators, educational and research institutions, and even federal and state governments. On September 24, Bill Ritter, the current director of the Center for the New Energy Economy at Colorado State University and former Governor of Colorado, wrote in the Wall Street Journal that “Long-term contracts for wind energy are being signed by utilities in several states in the range of 3 cents per kWh over 20 years” (1). Xcel Energy, the nation’s leading wind-generating electric utility, declares “wind power is simply the cheapest resource” (2).
Last year Maryland Governor Martin O’Malley asked the Energy Future Coalition (EFC), a project of the UN Foundation, to design a multi-faceted and comprehensive pilot-project plan for the state’s utilities. EFC assembled a stakeholder group including two Maryland utilities, PEPCO and Baltimore Gas & Electric Company (BGE), to submit ideas for pilot projects that could build a “better utility future.” The resulting report, “Utility 2.0: Piloting the Future for Maryland’s Electric Utilities and their Customers,” takes a different path than typical electricity utility reform strategies. Rather than dictating a single pathway for higher renewable penetration, the report calls for a number of pilot projects designed to create an entirely new grid system that advances innovation, resilience, reliability, flexibility, and financial viability for customers.
Electric utilities are usually characterized as ‘anti-innovators’ as their ultimate goal is only to sell electricity at the lowest cost and highest reliability. Integrating and transmitting distributed renewable energy presents a challenge to the standard operation of utilities due to intermittency issues, distribution, and new infrastructure needs.
In the most recent issue of our subscriber-only newsletter, Energy Trends Report (ETR), I took a look at the lessons learned from the decline of the US coal industry. As we have done previously, we would like to share a story from ETR with regular readers of this column. Interested readers can find more information on the newsletter and subscribe for free at Energy Trends Report.
Lessons From the Beginning of the End of America’s Coal Industry
Only a few short years ago the U.S. coal industry enjoyed a mini-renaissance with several new large power plants brought on line in 2010 and 2011, which at the time firmly entrenched coal as the dominant source of electric generation in the U.S. Since then, coal’s share of the electric market has contracted sharply, and against the backdrop of the White House’s new position on climate change is why many see an industry in serious trouble.
The U.S. coal industry has been left to fight an uphill battle with the EPA over the agency’s authority to set rules on CO2 emissions from power plants. The coal industry is fighting this battle virtually alone, as traditional fossil fuel allies sit on the sidelines (oil) with no direct stake, or wait eagerly to absorb market share (natural gas). In parallel to this new policy reality, technology developments – from advances in unconventional gas extraction to startling declines in the cost of renewable energy generation and efficiency – are redefining the economics of electricity markets.
In our energy finance newsletter a few weeks back I wrote about some possible fallout after Energy Future Holdings (EFH), the massive private equity-owned Texas electric holding company and the result of one of the largest leveraged buy-outs ever, formally warned that it might need to seek bankruptcy protection.
Last week, EFH offered a restructuring plan to creditors in an effort to avoid bankruptcy. The restructuring offer will almost surely be rejected, but may lay the initial groundwork for some type of structured resolution outside (or even inside) of bankruptcy court.
A little more than five years ago EFH was created as the vehicle for the most expensive leveraged buy-out in history when a private equity group led by KKR, TPG and Goldman Sachs Capital Partners bought the Texas energy company at a price of $43.2 billion. The failure of EFH will be hugely important in terms of the direct impact on investors, lenders and the private equity market, but perhaps more important will be what this failure means for the broader energy landscape.
In my previous column, Energy Industry Capital Spending Reaching New Highs, we looked at how the industry continues to ramp up spending across its sectors. As I noted, this is no surprise given the enormous capital requirements to sustain its business models.
However, what is surprising is that despite the significant tailwind of high crude prices since 2010 to current, net free cash flows (operating cash flow less cash capital spending) have actually declined for the industry overall. Operating costs are increasing crimping margins, and investment spending is rising faster than top-line revenue growth. To put things into perspective, although total industry operating cash flow (OCF) dropped only 1% in 2012 from 2011, from 2007 to 2012 spending grew at a per annum rate of nearly 10% while OCF increased at a 5% per annum rate.
The worst offender has been the U.S. E&P sub-sector heavily weighted to natural gas production at low prices; the sector has seen its deficit cash flow grow. In 2012, despite spending decreasing 2% from 2011, OCF dropped a whopping 17%. From 2007 to 2012, capital spending grew at nearly a 7% per annum rate, while OCF increased only 3% per annum.
The value chain for the energy industry is a simple one: Resources to Production to Cash Flow to Value.
At first glance, higher capital spending in the energy industry may seem a paradox during a period of weak global economic growth. However, it requires enormous capital to maintain — let alone grow — its business model. To that end, several tailwinds have helped fuel the industry’s relentless re-investment, simulative monetary policy – low interest rates, high crude prices, rising costs, increasing demand from developing nations, increasingly remote and difficult regions to explore for oil driven by globally constrained light sweet crude oil.
Particularly, high crude prices are a major catalyst driving spending higher. Since 2011, on average, crude prices — whether WTI or Brent — have been at a consistently historically high level; WTI at roughly $94/bbl, and Brent at about $112/bbl.
Looking at the overall energy sector that includes the oil & gas (U.S. E&P, Western Majors and Canadians), refining, pipeline, utility, and oil services sectors, the industry spent over $450 billion, or 58% higher in 2012 compared to 2007 spending, and 6% above 2011, at a per annum growth rate of nearly 10% from 2007 to 2012.
Zachary Shahan just put together statistics on the amount of solar installed by state on a per capita basis through 2012.
The results are interesting (and the full post can be found here) but none of these results are more interesting than the curious case of Arizona.
Arizona has historically been a large coal producing and consuming state and despite recent growth in solar has not been a leader on renewable energy policy or deployment.