This is really a case of turning the tables, of interviewing the interviewer. In this instance, we interview veteran utility banker, Lewis Hart, whose firm, Chappaqua Capital Consultants LLC has, for almost a decade, conducted in depth interviews with the financial community, probing bankers, bond raters, security analysts and investors to determine what they really think about the electricity market, its finances and its strategy. These surveys present an unbeatable look inside the world of money. But should anyone else care? Wall Streeters don’t produce the electricity. But they do determine the cost and availability of capital for this most capital intensive of industries, and Wall Street can change corporate direction with a disapproving phone call or an encouraging report. They have enormous influence and invest both time and money to stay ahead of the curve. Mr. Hart recently completed his latest survey, and we will explore what it says in several installments. First topic: U.S. demand for electricity
1. Electricity demand growth has been near zero for past eight years despite rising GDP. What are Wall Street expectations for growth?
Interviewees expected kWh growth to be slower than GDP growth by a margin of 49 to 6. The mean expectation for future annual kWh growth was a little less than one percent versus a consensus of about two per cent for GDP. In the 2014 survey, I asked, whether interviewees expected growth in kWh sales to continue to be slower than GDP, and they answered yes by a similar 49 to 2 vote. Although the questions were worded differently, the respondents, in effect, gave the same answer. Related: A Lasting Solution To Low Oil Prices
2. What's behind slowing demand growth?
In my 2014 survey when I asked about the causes of slower sales growth, the largest number of interviewees (13) cited the shift from a manufacturing to service economy (a long used response to explain slow electric load growth). Distributed generation (11) and energy efficiency (7) were the next most popular answers. Twelve of 51 interviewees passed on answering the question, the highest number of failures to answer of any of the 18 questions in the survey that year, indicating either a lack of interest in or familiarity with the issues relating to the question. It could be that a lack of perceived investment opportunities had not awakened the financial community’s interest in this topic.
What a difference a year makes! In the 2015 survey, interviewees showed familiarity with and interest in the issue of slower load growth: 57 of 58 were willing to rank by relative importance the causes of slow load growth. There was also a change in perceived reasons for the slowdown in load growth and more commentary from interviewees about their thinking in projecting lower growth.
The 2015 survey question asked interviewees to rank the two most important factors accounting for lower load growth. Energy efficiency equipment led with 50 mentions and demand response was second with 23, which suggests a potential new paradigm. Energy efficiency and demand response (and perhaps eventually grid storage) will become the industry focus instead of renewables and state Renewable Portfolio Standards (RPSs).
3. Do finance industry respondents see something that might change their weak growth outlook?
Only the electric vehicle market. This was mentioned by five survey interviewees.
If the question is, "Does the financial community see a trend to higher levels of kWh sales growth?", a dominant majority answered no. Of nineteen interviewees who offered commentary, six went out of their way to indicate that annual load growth may eventually go negative. One energy economist commented: “Energy efficiency will continue to erode load growth… Five years out, kWh sales may start an absolute decline.” Related: Oil Back On Track As Markets Dismiss Doha
This may sound like doom and gloom but there is a silver lining. First, for most industries electricity is simply an expense. If the electric company can make it and sell it more cheaply, your industrial customer can show better margins. This leads hopefully to business expansion and increased kWh demand. It’s a virtuous cycle or can be. Interestingly it’s also not limited just to demand for electric power. For example, its brother commodity, natural gas, is a major feedstock for the production of many petrochemical products. The significant decline in US natural gas prices has resulted in an enhanced position for US petrochemical companies.
Also, a sizable number of interviewees cite programs that offer electricity users a return for non-use of electric generation. Customers are paid not to use power (“negawatts”) usually at peak load times. As one interviewee put it, “It has to be cheaper to pay a customer not to need your power than to install new gas peaking turbines that may only be used a few times each year.”
4. So there's no growth in overall demand but a growing supply of renewables. Do investors view this as a challenge for the incumbent industry? Do they expect this trend to continue?
This is a complex issue. Lack of growth in demand is inconsistent with an increasing supply from renewables. But it is actually a worse situation than what you describe.
Consider the following:
Wind and solar power are not dispatchable. They produce power when Mother Nature deems it appropriate. Back up sources of power, usually gas turbines, running in spinning reserve mode, are required to keep the lights on. Most states have renewable portfolio standards (RPSs) requiring increasing production of electricity from renewables by certain dates.
In some regions with significant wind power most of its energy is produced late at night and early in the morning when electricity demand is low. Base load plants, facing these increasing economic challenges, were not designed to be cycled up and down to follow load. Related: Oil Prices Up On Weaker Dollar, Declining Production
The above creates conflicts. How does the electric power financial community react to this?
45 percent of interviewees see the need to reduce carbon emissions and mitigate the adverse impact of climate change as a moral imperative. Issues like grid management and grid
stabilization are necessarily subordinated.
55 percent of interviewees see “Wind benefits as not being worth the cost of reduced grid efficiency”, and “the impact on the grid is not factored into the cost of such generation. Wind
doesn’t pay for lots of costs associated with its generation.”
A small group of independent thinkers among interviewees stated we should start over and eliminate RPSs and renewable tax credits. They advocated the government face the issue
directly and tax carbon. Another small group felt that the problem is not large enough to warrant concern until renewables pass a threshold of providing ten per cent of generation.
Absent unexpected rational action on the part of policy makers the trend of increasing renewables against a backdrop of declining demand appears set to continue. Managing it will be a challenge. A senior rating agency specialist offers the following: “There’s a disconnect between renewables policy makers and grid operators who are oblivious to each other’s perceived needs. Good chance this will continue until there is a major blackout.”
A year ago, the utility gurus on Wall Street did not think much about falling demand and rising renewables. Now they see that combination as a major challenge for the conventional, network-based electricity industry. A year ago, they attributed slow growth to a shift from manufacturing to a service economy. Now they see more forces at work. Formerly heretical thoughts are percolating through the investment community and they could not only affect the valuation of electric company stocks and bonds but also the real capital investment decisions in many areas related to the electric power sector.
By Leonard Hyman and William Tilles for Oilprice.com
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