Utilities in Transition - The Changing Balance of Power

November 02, 2014| By Mike Maloney | Property | English

Traditional electric energy utilities are under increasing economic stress as competing renewable generating technologies, such as wind and solar, eat into their business. These utilities are shutting down their least efficient coal plants, often their oldest, because of the high cost of bringing these plants into environmental compliance and due to renewable energy sources satisfying an ever-larger part of consumer demand.

For many traditional energy companies around the world, that means enlisting political help to stabilize their earnings. The battle cry for some will be reliability, and the need for policymakers to find a way to solve the (sometimes) intermittent peak time supply from renewables. In Germany, for example (and the U.S. to some extent), one solution has been to pay a retainer to traditional utilities to “top up” supply when there’s a shortfall from renewables.

Reliability will come at a cost, ultimately borne by consumers and/or taxpayers, which may offset any savings from purchasing renewable sourced energy.

Renewables are gaining in political clout, on the back of popular support, plus the initial capital costs of renewables are steadily coming down, reducing their dependence on subsidies to survive. The other piece of the puzzle is power distribution. In the U.S., power producers and distributors are separate companies due to deregulation. The grid is getting old, its technology is frequently inefficient and it does not adequately connect areas now being used for renewable energy sites.

Estimates for rebuilding/upgrading the U.S. grid over the next 15-20 years vary from $100 - $250 billion and that’s leading to a great deal of finger pointing over how to fund it, who owns it and who maintains it.  

Nevertheless, rebuilding is underway and such projects are being submitted for Fac capacity.

From an underwriting point of view, and in the context of the trends outlined, it’s worth keeping an eye on the following:

  • Turbine generators that are being used outside their design parameters. Units designed for continuous base load operation become less certain when used as “peakers."
  • Business interruption renewal values should be closely monitored. Changes will not come overnight, but the way power generators earn their money is evolving.
  • Ownership interest in transmission lines for renewable generation sites.

The transition from traditional fossil fuel power generation to renewable technologies won’t be easy, but it is gathering pace around the world. It will take carefully considered, sustainable risk transfer to make sure the changing balance of power generation works out for all the parties involved.


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