Monday, March 9, 2009

S&P's Ominous Language To Leveraged Electric Utilities From Upcoming "Smart Grid"

As part of the administration's stimulus plan, Obama envisions the development of a so-called "smart grid" which will receive $4.5 billion in government funding. In brief, the proposed smart grid will be roughly the following:
A 'smart grid' is a modern grid where customers and utilities can actively monitor and control the flow of energy. Customers would have the availability to purchase renewable energy and to conserve energy when prices are high, usually during peak demand. To accomplish these goals, the electric transmission lines must be geographically expanded and technologically enhanced. The electric meters must also be sufficiently upgraded to incorporate new technologies. Smart meters would allow the utility and customers to view electricity prices and usage in real time. Also, the smart meters would allow the utility to remotely turn off a customer's electricity for non-payment.
Oddly, Gabe Grosberg of S&P came out with a note today in which it had some ominous language for existing leveraged electric utilities:
The coming flurry of smart grid investments will affect electric utilities sector and some companies' credit quality. However, Standard & Poor's Ratings Services does not expect a general deterioration of credit quality because we expect that electric utilities will invest their capital in projects that allow them to recover their costs and earn a fair return.
Not much disclosure here but it seems that the ratings agency seems to be positioned with an implicitly negative perspective on current leveraged utilities (or such is my read). Of course any assumptions based on rational behavior these days have to be taken with a grain of salt. As S&P states, private financing has never been the gating issue for smart grid development, but rather was inhibited due to four other factors: siting, standardization, loan guarantees and cost.

Loan guarantees piqued our interest. S&P Had this to say about that concern:

As the electric grid expands, it's expected to incorporate renewable energy such as solar, wind, and geothermal power. However, many of these projects are expecting to use the Department of Energy's (DOE) loan guarantee program, which has been slow to issue the loan guarantees. In fact, despite Congress's authorization for the DOE to issue up to $42.5 billion since 2005, the agency has yet to issue a single loan guarantee. Under the current stimulus package, the DOE is expected to be responsible for much of the energy-related programs including an additional $6.0 billion in loan guarantees and a 30% cash grant for renewable energy projects. Any further delay by the DOE could significantly hinder the rollout of renewable energy projects and ultimately slow the expansion of the electric transmission grid.
What is scary, is S&P's conclusion of the end-cost to the end consumer. In S&P's words
All U.S. citizens will be expected to pay for this new smart grid (either through higher rates or taxes) which is estimated by some accounts to be in the hundreds of billions of dollars. In the future, we believe the generation portfolio will rely less on fossil fuels and more on intermittent renewables, which will again cost more but will also address global warming concerns. We expect the credit quality of electric utilities to remain stable because they will likely only invest in projects where they are assured recovery and a fair return.
The tradeoff will be whether the cheap upfront capital leveraged utilities use over the next few months will offset the gradual decline in revenue collections from increasingly troubled consumers, especially in a world in which the S&P continues its persistent drop to the 500s level.

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Anonymous said...

What is so scary about this situation?? I'm not seeing the point.

Don't fall for the kool-aid that leads one to believe renewables can do anything but perhaps take a meaningful share of new electricity demand. They cannot be deployed at scale, and they are not reliable enough to cut into the existing base of power plants. These technologies normally disappoint.