Low demand and high investment for utilities will raise prices

The recession dealt a blow to power companies across the country, but as the economy starts to improve, the increase in demand for electricity is not growing at the same rate it did prior to the recession, utility CEOs agreed at a Thursday morning discussion at IHS CERAWeek.

“One of the key issues facing our industry is that one percent growth in GDP used to lead to one percent growth in electricity,” said James Rogers, CEO of Duke Energy, one of the largest power companies in North America. “Today it is closer to 0.4 percent. We are close to a complete decoupling of the growth of electricity to the growth of the economy.”

Many factors contribute to the slower rate of increase, including the growing popularity of smart meters and the increased use of energy efficient buildings and other power-saving technologies.

See more: Public utilities expected to make a slower shift to natural gas

Utility companies rely heavily on new residential hook up revenues, which meant that the recession dealt an additional blow for utility companies, particularly in California, where the real estate market was devastated and is only slowly coming back. Anthony Earley, CEO of PG&E Corporation, a California-based power company, said that new hook ups fell from 75,000 per year to about 20,000 after the recession, but have now only come back to the 30,000 range, meaning that the company has had a fundamental shift in its revenue streams.

At the same time, power companies are looking at having to increase their investment budgets by two-thirds by 2020, when many plants, which were built in the post-World War II boom, are expected to reach their lifecycle end.

“We have a critical job as an industry in letting people know about the importance of the infrastructure investment,” Earley said. “We will be able to modernize it to make our system more effective, and it will create great jobs – that is my pitch in California.”

The challenge for utilities is that lower demand and higher capital costs will mean that rates will need to increase in order to make sure the plants keep running — which could be a tough sell for customers.

“Ninety-three percent of that increased capital budget is for the new plants,” Rogers said. “The lights are still the same, but the price of electricity is going to go up. They don’t see that the new plants are a lot cleaner and there are emissions reductions.”

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