Report: Higher costs, lower demand for power generators

A report from the Deloitte Center for Energy Solutions makes a couple of predictions: the cost of providing electricity will go up in the future, as will the price for buying that electricity.

But there’s not necessarily a straight line between the two.

Demand for electricity is likely to be flat or even declining between now and 2020, according to the report, The math does not lie: Factoring the future of the U.S. electric power industry.

“That is the dilemma that’s out there,” said report author Greg Aliff, vice chairman and senior partner in Deloitte’s energy and resources division.

Even if demand for electricity doesn’t grow, power generating companies still have to make major investments in new plants over the next few years. The study, quoting estimates by the U.S. Energy Information Administration and the Brattle Group, suggests power companies will spend about $250 billion for new generating plants and transmission assets by 2020.

That doesn’t count the cost of smart meters, environmental compliance or other expenses.

Some companies, of course, will fare better than others, and one difference will be the fuel they use.

Natural gas may not be the all purpose panacea some of its proponents suggest, but Aliff says it will help.

“There is little doubt, at least in my mind, that the abundance of natural gas we are seeing in the United States is a positive factor when we look at the prices of electricity going forward,” he said.

Prices are unlikely to stay as low as they are now, he said. Natural gas was trading at $3.61 per million British thermal units Friday.

“But all other things being equal, the company with significant natural gas generation vis a vis coal will clearly have a significant cost advantage,” he said.

He recommends power companies develop new revenue streams.

That could include things like rooftop solar or fuel cell projects, or “bundling” similar to the type of services common in telecommunications.

Aliff said most utility executives think first about cutting costs, rather than starting new ventures, but he suspects it’s coming.

“I think they’re monitoring technology very closely,” he said. “The thing they are most interested in is technological breakthroughs and how that might change their business model.”

Electric vehicles are one possibility.

Electric cars could change projections about the demand for electricity, Aliff said, as well as providing additional business lines for power companies. “Why wouldn’t they own that battery?”

Higher electric rates are inevitable, he said. If the backlash against rising gasoline prices are any indication, that won’t be popular with consumers.

It’s possible that will drive demand even lower, Aliff acknowledged. Technology that allows people to cut their power use, including phone apps that allow people to turn thermostats on and off remotely, is likely to become less expensive and more common.

Still, Aliff said the picture isn’t entirely bleak for power companies, which can range from independent companies with one plant to transmission companies to integrated companies that both generate and transmit electricity.

Most are still considered a good bet for investors.

“Most of them are viewed in the marketplace as very stable, cash-generating companies,” he said. “They typically pay a reasonable dividend, so it’s a pretty good place to be if you’re looking for steady earnings and steady dividends.”