Booz & Co.
Two pivotal events in the latter part of 2012 will impact the utilities industry in the coming year. Superstorm Sandy knocked out power to 10 million people in the Northeast, creating a regulatory and media environment that will lead to increased scrutiny of the utilities’ ability to withstand and respond to weather catastrophes. President Barack Obama’s re-election means utilities can expect the Environmental Protection Agency (EPA) to continue to press utilities about emissions while state regulators focus on basic reliability and costs.
These challenges come at a time of historic opportunity for the industry. An unprecedented convergence of low costs of capital and pent-up infrastructure demand easing rate pressures have created ideal conditions for building the electric and gas utilities of the future. But these conditions won’t last. The challenge for executives is picking investments that make sense in light of Superstorm Sandy, the election and other long-term factors that will influence returns during the next several decades.
· As a response to Hurricane Sandy, utilities should invest in digitization and broader automation. The storm also demonstrated how the industry has improved its capacity for coordinated action when storms hit. That capacity should be improved further.
· With Obama in office, the EPA likely will continue pushing for tighter emissions controls at electric power plants. This federal emphasis on renewable and carbon emissions runs counter to an increasing focus on reliability and costs by state utility regulators.
· Capital expenditure requirements across the U.S. utility industry are expected to exceed $100 billion annually through 2020. This represents an increase of 100 percent over the annual costs of the early 2000s, according to the Edison Electric Institute. The good news is these expenditures can drive earnings growth for regulated utilities if they choose their investments wisely.
How can executives capitalize on these challenges?
· Deciding how to allocate capital among various new investment opportunities will be the central challenge utility executives face in 2013 and the next several years. A range of political, economic and technological variables complicate these investment decisions. The current favorable investment climate for utilities stems largely from the sluggish economic growth that has plagued the nation since 2008.
· Utility executives should avoid getting too accustomed to the current economic environment. Although dramatic change isn’t likely in 2013, history shows prices can rise quickly when conditions shift. For example, natural gas prices shot up 500 percent between the late 1990s and their peak in 2005.
· As executives weigh investment choices, they should consider the capabilities their companies will need to capitalize on technology and build a best-in-class operating model for the future. The capabilities each company needs will vary based on the strategy it chooses. Some will opt for a low-cost, core utility model; others will adopt a customer-centric, retail-oriented approach.