Electric utility long-range planning and rate recovery in a changing power supply environment

Long-range forecasting for electric utilities is kind of dicey right now

The electric utility industry has been in a season of change since the 1990s, which is recent history for an industry that moves slowly and predictably. Now, there are potential proposals on the table that could accelerate industry changes even more quickly. As a long-range forecasting analyst or part of management in a utility, what does this mean for your process for power supply planning and rate recovery from your customers?

Electric industry trends

Industry trends in the 2000s have been moving power supply towards more renewable energy resources, retiring power plants and replacing them with less carbon-emitting energy sources and introducing new technological efficiencies, while some states are even introducing mandates on renewable portfolio standards. 

Depending on the outcome of the upcoming election, future and immediate potential changes include proposals like the Green New Deal, which would require a carbon, pollution-free power sector by 2035. If this comes to fruition, it will profoundly impact the electric industry and utility customer rates. This brief article is about math, economics, the electric power business' logistics and rate recovery of power supply costs from utility customers, including insights for consideration in long-range utility forecasting. 

Policy impacts electric production resources

The move to more renewable energy resources without sufficient battery storage technology creates a conundrum. There may be adequate energy production during the daylight hours from solar and wind power. However, at night when the sun is down and wind is less intense, traditional power supply resources are still needed to meet electric demand. This results in duplicate electric generation facilities being required to provide power supply to customers; i.e., renewable by day, traditional by night (California ISO).

As the move will continue to replace traditional electric-generating plants with renewable resources, the phase-out of these electric power production resources before sufficient battery storage is available can lead to situations like those found this summer in California. A heatwave found the state gasping for electricity in certain areas and undergoing rolling blackouts to keep the power grid intact (Fox Business). Improvements in battery technology and capacity will help this situation. Forecasted battery storage capacity will increase six-fold in this decade (Computerworld), which will help close – but not eliminate – the gap between energy supply and customer demand.

Electric utility generating units are financed with revenue bonds with a repayment period of 20–40 years. As the push will be towards more renewable resources by 2035 and the shut-down of more significant carbon emitting generating plants, some utilities will find themselves still owing bondholders for these older generating units, while needing to finance new renewable energy projects. 

How does this impact long-range utility forecasting?

Plugging some of these potential considerations into your magic forecasting box is prudent. Things to consider in your five-, 10-, 15-, 20-year and beyond long-range forecasts should include:

•  Forecasting growth in your service territory's customer base and electricity demand
• Evaluating existing generation resources for potential impairments due to an acceleration of their disallowable use[1]
• Evaluating the cost, financing and rate recovery of replacing existing generation resources with renewable resources; i.e., hydro, solar, wind and nuclear
• Forecasting cash flows under various power supply and debt repayment scenarios
• Forecasting the timing and amount of increases of customer rates
• Developing a communication plan for customers regarding future rate increases

Focus on the long-term future

Policy changes may significantly impact the electric utility business model. This includes potential scenarios of needing to pay for duplicate power supply resources, and the resulting large increases in electric customer rates to pay for those duplicate power supply facilities. Discussing these possible scenarios will help your utility's long-range planning and business strategy implementation process. 

Our team is always ready to help with insights into long-term planning. For more information on this topic, or to learn how Baker Tilly power and utilities specialists can help, contact our team.

[1] Even if assets are considered impaired, the bondholders who financed those assets must be repaid. This should be considered in any cash flow forecast.