2009/2010 Electric Utility Industry Survey Results

Energy industry participants rate their top three concerns as reliability, regulation and long-term investment.

Participants graded specific issues on a scale of 1 to 5, with 5 signifying the highest concern.

Note: The above chart includes the responses of all survey participants and is not included in the full electric utility survey results. To view industry snapshots by investor-owned and public power utility responses, please see pages 12-13 of the full report.

The Reliability Requirement

The energy industry is unique because it is required to have available enough supply to exceed the highest points of demand. In other words, on hot summer days when customers lower the temperatures on their thermostats, utilities have to be able to exceed the increase in demand. Failure to meet this reliability requirement can result in sweeping blackouts and brownouts that have major economic impacts.

In comparison, other industries, such as wireless communications, do not have such a strict requirement. When demand goes beyond what the carrier’s system can handle, calls are dropped. This is a minor inconvenience compared to power supply interruption.

In this year’s survey results, the reliability requirement is once again the top concern among all survey respondents. In a down economy, when access to capital is constrained, utilities are focusing on making due with what they have to continue meeting the cyclical demands of their customers.

Regulation Uncertainty

As pointed out later in this survey, the majority of participants believe carbon legislation will be enacted at the national level by 2012. However, until utilities have a clear view of what that legislation will include and what it will require, and until state regulators are on board with utility plans, many cannot risk moving forward with major capital programs that are intended to meet current or future demand and/or replace generation assets that are beyond their service life.

Long-term investment

Utilities have increasing demands to spend more money on basic infrastructure, energy efficiency, Smart Grid and cyber security. However, their sales – as a result of the very programs they are paying to implement – are declining or flat. Because of the economic climate, regulatory commissions are hesitant to approve rate increases.

Moving forward, regulators will need to provide leadership on such matters as advanced regulatory approval of new projects; rate of return; revenue requirements and rate structure (think peak and off-peak pricing). Without such changes, utilities are at risk of not being able to implement key programs, such as cyber security, at a time of heightened concern.

Many utilities rate their generation assets as at, near or passed planned service life.

Note: The above charts condense all of the “near,” “at end,” “past” and “well past” responses from the survey and are not included in the full electric utility survey results. To view these responses by investor owned and public power utility participants, please see pages 21-22 of the full report.

The age and service life of a power plant and transmission and distribution equipment can potentially affect utility customers. More than 40 percent of public power and investor-owned utility respondents believe their generation assets are at, near or beyond their planned service life. The following provides a brief description of the types of energy utility assets survey participants were polled:

• Generation assets are those items that produce power, i.e. power plants, solar plants, wind farms, etc.
• Transmission is the infrastructure that transports bulk amounts of the power produced from generation assets to where utility customers are located.
• Distribution assets are the infrastructure that convert bulk power from transmission lines into smaller units, such as substations. In addition, power lines deliver the smaller units of electricity to individual consumer locations such as houses and businesses.
• IT/computer systems are those systems within a utility’s operations that manage the flow of power, usage, billing and other essential customer service functions.
• Maintenance equipment and facilities are the trucks, machines and equipment used to maintain a utility’s infrastructure.

Survey respondents believe there remains a future for coal in U.S. power generation

Note: The above chart includes the responses of all survey participants and is not included in the full electric utility survey results. To view by investor owned and public power utility responses, please see page 63 of the full report.

Despite strong opposition among environmentalist groups, more than three-quarters of all survey respondents believe fiscal realities will force continued use of coal.

Utilities perceive nuclear technology as the best technology for meeting environmental standards.

A small majority of respondents felt that nuclear energy is where the industry should place its emphasis for meeting future environmental standards. As shown in the chart above, wind, solar, hydro and coal gasification all scored very close to each other.

Interestingly, natural gas has moved into third among what are perceived as environmentally friendly technologies. In 2008, this technology ranked sixth. Because natural gas is abundant, steady in price and produces approximately 40 percent less carbon dioxide than coal, it is a good “bridge fuel” for utilities as they transition their generation portfolios from fossil-fuel based to a more renewable future.

Utilities expect nuclear power will play a larger role in the U.S. electricity mix by 2050.

Currently, nuclear energy accounts for approximately 18 percent of the nation’s energy mix. And, considering the time and complexity required to bring on new nuclear generation assets, 45 percent of respondents indicated they do not believe nuclear energy will provide more than that 20 percent by 2015. The survey responses are consistent with Black & Veatch’s own projections of 18 percent nuclear power in 2015.

When considering the long-term potential of nuclear generation, just over half of respondents believed the technology will account for 30 percent or more of the nation’s electric generation by 2050.

Utilities are investing in renewable energy with wind and solar leading the way.

Note: The above charts do not include the “not applicable” responses from the survey and are not included in the full electric utility survey results. To view these responses by investor owned and public power utility participants, please see page 40 of the full report.

Nearly 80 percent of public power and investor-owned utility respondents indicated they have wind projects planned or currently underway, with the percentages almost as high for solar.

Carbon legislation and water supply are the most pressing environmental concerns for utilities

For this question, respondents were asked to rate on a scale of 1 to 5, with 5 indicating most concern, their top environmental concerns. Both investor-owned utilities and public power utilities ranked carbon emissions legislation and water supply as their top two choices.

Carbon regulation, as indicated in the overall top concerns, represents a new challenge for energy utilities. The lack of clear or consistent regulation regarding carbon emissions exacerbates this issue.

Water supply has been rising on the list over the past four years. Thermal generation, such as coal, natural gas, nuclear and even solar thermal, require massive amounts of fresh water to produce steam and to cool the plants.

In most instances, the availability of a reliable fresh water supply is as essential to power generation as the actual infrastructure. An example of water supply impacting project plans can be found in the award-winning Black & Veatch design of the Gateway Generating Station for Pacific Gas & Electric Company (PG&E).

PG&E recognized the impact the current and severe California drought could have on the new plant’s operation and also the amount of scarce resources it would take up. To counter this, PG&E changed project plans to include dry cooling technology that reduces the plants water use by 98 percent.

In other instances, solar thermal plants have been denied permits in the desert southwest because of a lack of available water resources.

Beyond the carbon and water issues, investor-owned utilities and public power entities have differing views on how other environmental concerns rank. Investor-owned utility respondents are most concerned with regulated pollutants such as mercury, NOx and sulfur dioxide. Public power respondents, on the other hand, have high concern for coal production and transportation. It is possible the change reflects the differences in the two types of utilities’ generation portfolios.

Most utilities believe that some type of carbon legislation will be approved at the national level by no later than 2012.

Note: The above chart includes the responses of all survey participants and is not included in the full electric utility survey results. To view responses by investor owned and public power utility participants, please see pages 51-52 of the full report.

More than 93 percent of all survey respondents believe some type of carbon legislation will be adopted at the federal level. The majority of these respondents believe it will happen by 2012.

While the majority of these respondents oppose cap-and-trade legislation as it is currently defined in the Waxman-Markey legislation passed by the U.S. House in June 2009, many utility executives would support federal legislation if for no other reason than to provide regulatory certainty.

Survey participants do not favor the cap-and-trade approach as specified in current legislation.

Although a good number of respondents indicated that they favor cap-and-trade among the discussed legislative alternatives, the cap-and-trade targets and emissions reduction trajectory defined in Waxman-Markey, as it is understood by survey respondents, is very unpopular. Nearly 70 percent of investor-owned utility respondents and more than 75 percent of public power respondents said they oppose the current legislation.

If cap-and-trade legislation approved by the U.S. House in June 2009 is enacted, a plurality of survey respondents believe it will add between $500 and $1000 to the average homeowner’s annual energy expense by 2015.

As indicated in the previous section, the majority of survey participants do not support current Waxman-Markey legislation. Perhaps, one of the reasons is our respondents’ belief that this legislation will significantly increase (between $500 and $1,000 per year) the annual average household’s energy expense.

The cost of limiting carbon emissions will be an important issue moving forward. Some 52 percent of respondents believe that the United States cannot afford carbon legislation.