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It’s tempting to attribute the recent slowdown in electricity demand growth entirely to the Great Recession, but consumption growth rates have been declining for at least 50 years. The new normal rate of demand growth likely will be about half of its historic value, with demand rising by less than 1 percent per year. This market plateau calls for a new utility strategy.
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Ahmad Faruqui is a principal at The Brattle Group, and Eric Shultz is a research analyst. This article was revised from Faruqui’s presentation at the Goldman Sachs Power & Utility Conference on Aug. 14, 2012. The authors acknowledge research assistance by Jennifer Palmer.
A no-holds-barred interview with the electric industry’s chief architect of wholesale electric market design.
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People In Power
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John A. Bewick is Fortnightly’s contributing editor and formerly was secretary for environmental affairs for the Commonwealth of Massachusetts. He holds advanced degrees in nuclear science and business management.
When Revolutionary War veteran Daniel Shays led an attack on the federal Springfield Armory in January 1787—the spark that ignited the federalist movement—he scarcely could’ve guessed that now, 225 years later, his spiritual descendants would still be fighting that very same battle.
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Bruce W. Radford (radford@pur.com) is Fortnightly’s publisher, and Michael T. Burr (burr@pur.com) is the editor-in-chief.
Conditions are ideal for utility financing—but not forever. Although interest rates remain low, policy changes weigh on capital structures.
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Pay It Forward
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One way that some utilities have been getting ahead of market changes is by issuing equity to pre-fund costs they expect to incur later. This generally takes two forms: equity forward contracts, and mandatory convertible offerings. Examples include Pepco Holdings, which sold about $350 million in shares on a forward basis in March, and PPL, which sold about $270 million in April. Also, NextEra Energy issued $600 million in three-year, mandatory convertible bonds on May 1, and another $650 million in September.
Both approaches carry a premium, but they allow utilities to capture today’s high stock prices in a forward sale. And some issuers have found banks hungry enough to participate in equity deals that they’ll take a substantial haircut for the opportunity. (See “BofA loses $12m on bought convert,” IFR 1932, May 2012.)
However, terms likely will normalize as soon as the current confluence of forces drives utilities back into the equity markets in earnest.–MTB
Author Bio:
Michael T. Burr is Fortnightly’s editor-in-chief. Email him at burr@pur.com.
Utilities in the Midwest ISO want greater access to sell into PJM’s lucrative market. But that might require a virtual merger of the two RTOs — a move rejected seven years ago as too costly, and perhaps still impractical today.
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Commission Watch
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Bruce W. Radford is publisher of Public Utilities Fortnightly.
In competitive power markets based on locational marginal pricing (LMP), the facts sometimes conflict with popular belief. Most notably: 1. When there’s congestion, the books don’t balance, and ratepayers always pay more than the generators receive. The difference is sometimes called “congestion cost.” 2. Congestion in a competitive market doesn’t necessarily increase ratepayers’ costs; and 3. Reductions in LMP are incomplete and sometimes misleading measures of economic benefits of transmission upgrades. These three facts and their implications should be considered in transmission planning, market design, tariffs, and system operations.
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Energy Risk & Markets
Author Bio:
Hyde M. Merrill (hm@merrillenergy.com) is the proprietor of Merrill Energy, LLC. Richard D. Tabors (rtabors@crai.com) is a vice president at CRA International, and previously was a faculty member at MIT. The views in this article are solely the authors.’ They acknowledge the insightful help of J. Dan Watkiss.
Despite rapid development in recent years, green power sources might plateau at single-digit percentages of our total supply portfolio within a few years -- unless the utility industry changes its operating model. Former EPRI President Kurt Yeager discusses green limitations and the solutions promised by Galvin Electricity Initiative’s Perfect Power System.