Generators feel squeeze from weak demand, higher fuel costs

Investor owned utilities that seek the biggest base rate increases are apt to be under the greatest pressure in today’s power sector, according to a commentary by Bernstein Research.

After looking at the efficiency of U.S. utility regulation over the last two decades, Bernstein Senior Analyst Hugh Wynne and Francois Broquin issued a report for clients Sept. 19 that discusses how stagnant demand has eroded earned returned on equity (ROE) for power companies.

From 2003 through 2012 “regulated utilities enjoyed rapid increases in average electricity rates but faced significant headwinds in the form of sluggish growth in power demand, very rapid growth in rate base, and an acceleration in cost increases for fuel and purchased power,” the Bernstein analysis found.

Where from 1992 through 2002, the retail sales of the regulated electric utilities grew by 26%, or 2.4% annually; over 2002-2012, by contrast, retail sales increased by only 5%, or 0.5% per annum, the analysis found.

To further complicate matters, Bernstein forecasts that anemic demand growth will continue through 2015. Using Energy Information Administration (EIA) figures, the analysts expect slightly less growth (0.4% annually) from 2012 through 2015.

This weak growth in power demand and increased prices for electricity consumers become even more troublesome in light of expected high capital investments and rising prices for coal and natural gas, the Bernstein officials say.

“In particular, based on currently prevailing forward prices for natural gas and coal, we expect gas prices to increase at a 12% annual rate from 2012 through 2015 and Powder River Basin coal prices to rise at 3% p.a.” Appalachian coal prices are about the only fuel source expected to weaken, falling by roughly 2% annually, the analysts said.

 “Those companies with the highest forecast increases in electricity rates will continue to be vulnerable, in our view, to the erosion in earned ROEs witnessed across the industry over the last ten years,” the Bernstein review said. Utilities with modest expected rate increases are less at risk.

Bernstein Research is an affiliate of Sanford C. Bernstein & Co., LLC.

About Wayne Barber 4201 Articles
Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 20 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants. Wayne can be reached at wayneb@pennwell.com.