Costs for utilities rise faster than politically palatable rate changes can keep up
This is one for the “Things No One is Talking About But Should” file.
Greenwire recently reported that the credit risk of our utilities depends in large part on their ability to recover rising fuel costs, and this ability is diminished due to the fact that:
High fuel costs translate directly to higher customer rates, but instituting constant and often significant increases is politically and socially unpalatable.
This gets it half right.
The half wrong part is that the fundamental upward price on electricity is only indirectly because of fuel. As I’ve shown before, the biggest upward price pressure on power is due to the fact that we haven’t built baseload power assets of any significance for nearly twenty years, and are now entering a build-cycle where we must factor much more expensive capital amortization into our power rates. Even if fuel got cheap again, we’d still be facing heavy upward pressure as we built new generation, transmission, and distribution.
But the half-right part is the more significant. In a “normal” market, higher costs translate into higher prices and markets adjust. But in electricity markets, higher costs only translate into higher prices at the rate which politically-appointed commissions can approve those higher rates. And if Gray Davis (and Maryland) have taught us nothing else, it is that that elected officials who approve big electric rate increases get fired.
This has created a situation in which the fundamental cost pressure is trending upwards much faster than politically-paced price trends. On the downside, this slows the rate at which clean energy can come online, since it must compete — at least in the near term — with a price that is, essentially, fabricated. On the other hand, this theft from Peter is unsustainable in the long run, and Standard & Poor’s notes that:
Utilities using renewable power not only may save money and bolster credit but also could profit from “free fuel” sources. With no input costs, utilities could even sell power back to the wholesale electricity market in times of above-average input conditions, the report notes.
In the medium term, things are strange. In many markets, wholesale spot prices are now higher than retail rates, creating strange arbitrage opportunities, but no long-term investment thesis.
In all cases though, the fundamentals are out-pacing politics, which virtually ensures that things will “pop” in unexpected ways. Stay tuned …
Note: This first appeared on Grist.