Okay, as promised....time to look at the external challenges that utilities will face in the coming years. These are the challenges which, as described earlier, are extraneous to the industry and the industry will have to live with it.
Fuel Price Volatility: Fuel prices, especially gas and oil, have been highly volatile since 2007 and predicting fuel prices has been a minefield. 2007 is also the year since when oil and gas prices have ceased to show any correlation between them, thus further complicating any fuel price prediction methodologies. A major reason for this change has been the exponentially rising production of shale gas.
Fuel prices affect the electric power industry in various ways. When gas was going at its peak price in 2007, there was a lot of activity in securing long term contracts with foreign natural gas producers and constructing LNG terminals in the US to import gas in order to keep domestic natural gas price in check. Since then, the realization of large resources of shale gas has pushed down gas price and rendered the LNG plans ineffective. The unrest in the Middle East and the Japanese catastrophe has again caused gas and oil prices to spike. As the global economy gets more intertwined, a small change in one place can affect fuel prices globally, making life difficult for this industry.
Access to capital: To tackle the internal challenges discussed above, the power industry would require a lot of capital investments, be it sourcing capital to set up a wind farm or getting a demand side management program going. Getting access to capital in this economic climate is not terribly easy and money is not flowing as easily as it was about 4 years ago. To add to the problem, credit ratings of utilities and independent power producers have taken a beating lately, making it even harder to source funds. The economic recovery, and the pace of it, should be keenly observed by this industry.
Carbon/Climate Change Policy: Politically, climate change seems to be a non-starter in the current Congress. However, regulations limiting emissions for both carbon and otherwise, cannot be ruled out completely. The Environment Protection Agency (EPA) has been very active in setting forth a set of regulations that would restrict emissions from the electric power industry.
These regulations, if implemented in their entirety, would necessitate installation of emission control equipment and significantly increase the cost of producing power. Or, these regulations would force several older plants into retirement because retrofitting them with emission control equipment would be uneconomic. This will bring forth reliability challenges for some areas in the country and would require further capital infusion to build new plants to cover for the shortfall. All in all, the policy space can be expected to be abuzz with activity in the near future, either through the Congress or through one of the agencies.
Emission control technology providers stand to gain if stiff regulations are enacted by the regulatory agencies. There could, potentially, be a big market for these technologies.
The electric power industry has come a long way from the days when its sole purpose used to be providing customers with affordable and reliable power. In those days, all these companies had to do was to maintain the status quo. This last decade has really added more dimensions to their mandate, in the form of providing cleaner electricity and information to the customers to better use this vital resource. Maintaining the status quo is not enough in this changed environment.
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