Almost five years ago we predicted that electricity sales would start to grow again and that utility capital expenditures would soar. And we said that the industry was not spending enough. Apart from patting ourselves on the back, here are the latest numbers confirming our long-held view.
Figure 1 shows the five-year spending of investor-owned utilities (IOUs) on electric plants in current dollars. Note how the numbers peaked in the early eighties, fell off, and finally picked up in this century. More meaningfully, Figure 2 shows the five-year spending program as a percent of the beginning of the period electric plant in service. This figure shows the same pattern in a different way. But that is history.
Figure 1. IOU electric capital spending ($ billions)
Figure 2. IOU electric CAPEX as % of the beginning of period electric gross plant in service
We would guess that the costs of construction have risen perhaps 30% between 2015-2019 and 2020-24. If so, industry spending barely rose in real terms. The industry’s projection for the next two years shows spending around current levels, a number that we regard as risible. Utility management has been behind in spending for years.
All of this means higher prices. Let’s say that volume (in kWh) rises 3% a year and operating expenses (half the expense budge) also rise 3%. So far so good. But capital costs (the other half of the expense budget) rise 9%. Total costs then increase by 6% a year, so electric companies have to raise prices by 3% a year. Why should the asset base grow faster than sales.? Two reasons. First, because new equipment (whether conventional or renewable) costs a lot more than equipment purchased years ago. Second, the electric company is also adding equipment that should have been installed years ago. It is playing catch-up.
Now that Trump has won the election, and concerns about climate and pollution fall by the wayside, and new data centers demand electricity (and huge amounts of water) we expect capital spending to go up even more. “This is what we have been waiting (stalling?) for”, the industry’s executives clamor gleefully. “We can build gas-fired power stations and that’s what we always wanted to do. So let’s do it.” What about utility customers? Well, new equipment costs a lot more than old equipment, interest costs are higher than they were a few years ago, and more pro-business regulators are now in charge of the chicken coop. This all leads us to anticipate higher electricity prices in the US. One thing is for sure, though. Construction/engineering firms, bond and stock dealers, and gas producers will make a lot more money in the electricity business.
