The U.S. power sector anticipates significant demand growth and capital spending over the next few years, but it will also need to navigate new federal rules and resource restrictions as it meets that demand, officials representing the investor-owned electric utility sector told Wall Street on Tuesday.
Members of the Edison Electric Institute’s C-suite met with analysts, investors and bankers to brief them on the state of the industry.
“This industry is key to the U.S. economy,” said EEI President and CEO Dan Brouillette. "We make up roughly 5% of the GDP and ... it is the very first 5% of the GDP because the American economy, indeed the world economy, depends upon the provision of electricity for so much of our lives.”
Brouillette said the Inflation Reduction Act and bipartisan infrastructure bill are helping to drive the energy transition, and EEI will continue to promote the programs and initiatives the laws put in place. “They're important to our resilience. They're important to everything that we do in the provision of electricity,” he said.
Here are five takeaways from the day, from how utilities view resource adequacy challenges to the state of cybersecurity.
Resource adequacy is a growing issue
Utilities are seeing significant demand growth at the same time they transition towards more intermittent resources, creating concerns about sufficient electricity supplies.
While resource adequacy concerns have shown up in specific markets over the last few years, “now, basically every part of the country is facing some amazing projected demands,” said Phil Moeller, EEI executive vice president, business operations group and regulatory affairs. Moeller also formerly sat on the Federal Energy Regulatory Commission.
Building and transportation electrification, data center growth, industrialization, artificial intelligence and other factors are all driving demand higher, and the solutions will be specific to regions and states, depending on market structure and resources, Moeller said.
“This concern about resource adequacy has really informed all of our engagement with [the U.S. Environmental Protection Agency] over the last couple of years as they move to finalize a suite of regulations addressing the environmental and climate impacts that generation has,” said Emily Fisher, EEI executive vice president of clean energy, and general counsel and corporate secretary.
“In the near term, one of our big focuses has been on ensuring that we can continue to run some existing units when we need them, particularly during critical peak periods,” Fisher said. “This is where we're feeling the squeeze in the near term.
Rulemakings on the way
The utility sector anticipates several consequential rulemakings this year, including for the Securities and Exchange Commission to finalize climate disclosure requirements.
The SEC proposed the rule two years ago and it has garnered significant pushback, in particular around the reporting of scope 3 emissions. “Something is going to get promulgated within the next few months, probably April,” said Richard McMahon, EEI senior vice president of energy supply and finance, and chief ESG officer.
“We'd like to see some changes from the original proposal,” McMahon said. “We'd like to see less emphasis on scope 3 ... because the one thing we do know about scope 3 is it’s almost inherently inaccurate.”
Scope 3 emissions are those not directly produced by the company itself, or assets it owns or controls.
“It’s going to be a really busy March, April and May,” said Fisher. “Prepare yourselves. ... We are expecting some pretty big things to come out in the next couple of months before the Congressional Review Act deadline, which is going to drive a lot of regulatory activity in the near term.”
Fisher said utilities are watching for completion of a mandated eight-year review of the Mercury and Air Toxics Standards, which should be headed to the Office of Management and Budget “in the next couple of weeks.” In addition, rules addressing coal combustion residuals “will be out in the near term,” she said.
Fisher said she expects the EPA’s new power plant carbon reduction rules will rely on either hydrogen or carbon capture and sequestration for compliance. “Those are technologies we think have incredible significance in the long-term ... because they provide 24/7 clean power,” she said. However, “the fact that those technologies aren't available at cost and scale right now is actually one of the contributors to our concerns about resource adequacy.”
Equity issuances this year?
The clean energy transition is leading to record spending by utilities, and analysts want to know how the electric sector will support their continued capital needs.
According to Deloitte, utility spending will “reach new heights and continue to rise well into 2024.” Citing data from S&P Global Market Intelligence, the firm said utility spending across a sample of large electricity providers was up 18% in 2023, with further growth expected this year and next.
The utility sector will likely be issuing equity to help maintain the clean energy transition but “it is a matter of timing, and when is appropriate,” McMahon said.
“I think you will see issuances later in the year, probably, but it's obviously a function of market conditions and all the good advice of people in this room,” McMahon said. “So I think I think the short answer is yes. But it's sort of a matter of timing.”
Affordability will be ‘front and center’
Residential electricity prices averaged $0.1588/kWh across the U.S. in 2023, jumping from $0.1372/kWh in 2021, and prices are expected to rise further.
Electricity inflation “continued to increase in January ... putting further financial pressure on consumers across the country even as headline inflation slows,” according to data from the Electricity Transmission Competition Coalition. Electricity inflation increased by 1.2% on a monthly basis, and 3.8% over the last 12 months, the group said on Feb. 13.
Affordability will be “front and center” at the National Association of Regulatory Utility Commissioners’ winter policy meeting next week, said Brian Wolff, EEI’s chief strategy officer and executive vice president of public policy and external affairs. “The value of regulation is really about our customers.”
The federal Low-Income Home Energy Assistance Program was funded at about $6 billion in 2023 and helped millions of families keep the lights on. “But we had to do more than that,” Wolff said, particularly to help address arrearages following Covid-19 moratoriums on service disconnections. EEI member companies developed customer-specific discount plans to help customers get back on their feet, he said.
It has taken several years to address the impacts of Covid-19, and now EEI sees consumers getting help from an improving economy as well.
“We are just now seeing the broader economy coming out of an inflationary period,” Wolff said. “At the same time, we're seeing fuel costs coming down. We're seeing the cost of goods coming down.We're all thinking that we're going to turn the corner this year. But again, we're not going to take our eye off affordability for our customers.”
Utilities ‘still learning’ to counter cyber threats
With extreme weather and hackers continuing to challenge the grid, Brouillette was asked to assess the current threat environment for critical infrastructure.
The industry is “well positioned on the mutual assistance side,” said Brouillette. “We have a long history there, following Superstorm Sandy and some of the hurricane events, and now wildfires.”
While utilities have plenty of experience in helping each other restore power following a storm or fire, “we're still learning, somewhat, in the cybersecurity world,” Brouillette said. But, ”I feel really confident that our industry, our companies in particular, are doing the right things to protect not only their company, but their consumers. There's a lot of work to be done because the nature of the threat is evolving.”
The U.S. Department of Energy has been working with the utility sector to bolster security, in particular on the next generation of clean-energy technologies like inverter-based resources, smart meters, sensors and control systems, virtual power plants, cloud-based systems and distributed resource aggregations. In general, experts say the electric sector is well protected relative to other critical infrastructure.
“I don't want to create the impression that we've done everything we can can do,” Brouillette said. ”We're learning how to do a lot of this and we're going to be very aggressive as we move forward.”
