Burns & McDonnell

Looking Ahead for Utilities With Optimism After a Challenging Year

Written by James Amato | January 5, 2023

To describe 2022 as a volatile economic year is an understatement. Raw materials shortages, multiple interest rate hikes by the Federal Reserve, trillions of dollars of federal deficit spending, labor shortages and inflation levels not seen in decades have contributed to massive levels of supply chain disruption, industrial production constraints, and increased construction and operating costs.

In addition, we witnessed consumer confidence at its lowest point since the start of the COVID-19 pandemic. The year began with two consecutive quarters of slightly declining GDP, which by traditional metrics is the definition of a recession. To round it out, war in Eastern Europe has created an energy and economic catastrophe affecting all of Europe and global supply chains. The geopolitical future for the region and the countries they engage in trade with is filled with uncertainty.

And Yet

While one might have expected these negative socioeconomic factors to drive negative results for electric utilities in 2022, the opposite has occurred. Investor-owned electric utilities performed well in 2022 despite a rough year in the broader stock market — the S&P 500 index was down nearly 24% for the year after three quarters. The energy sector was the year’s strongest performer, and the utility sector overall, although down, was outperforming most others.

Established private-sector capital and operating expense investment commitments to transmission and distribution upgrades are at an all-time high. Compounding that investment, the federal government injected billions of dollars into the industry before the November elections initiated a shift in the balance of power in the U.S. House.

There are roughly 1,700 electric utilities in the United States. Upgrading their infrastructure to safely and reliably supply the 100 million-plus homes and over 38 million businesses, while an exciting challenge, is a massive undertaking. From investor-owned utilities to developers and public power providers, we are seeing broad commitments to regulators that investment will continue across all regions of the market. The conservative forecast for continued investment in electric utilities remains a healthy $2 trillion for the decade.

Getting There With Gas

Amid the hype about a clean energy economy, a dose of reality is needed. Despite continued investments in renewable energy, natural gas will be a decades-long bridge fuel on the path to a clean energy economy. We can’t get to where we want to be as a society without natural gas as a bridge fuel. We are currently witnessing the consequences of premature closings of bridge fuel production facilities and pipeline infrastructure, resulting in unnecessary blackouts and economic upheaval in the U.S. and Europe.

The Edison Electrical Institute reported that 40% of the nation’s electricity in 2021 was generated from renewables and other carbon-free sources, including nuclear energy, hydropower, and wind and solar energy. With offshore wind poised to make an impact on the market, electric utilities are struggling to clear record backlogs in the interconnection queues. Regulators and policymakers at the federal and state levels are aware of this problem, and they have introduced policy reforms to alleviate the gridlock and accelerate the process of connecting renewable energy to the grid.

Critical Communications

As distributed energy resources and renewables deployments continue to increase, the importance of building in connectivity to support them has gained greater attention. Private LTE networks address the need for secure, reliable and resilient wireless communication networks, which are essential for utilities to deliver next-generation ratepayer-focused services. Without a secure wireless network, it is next to impossible to reliably connect everything from customers’ residential meters and sensors to commercial heavy industrial equipment, grid applications that gather data from grid assets, and workforce management applications. Utilities are realizing that private LTE provides them with the secure, flexible and reliable connectivity that so many applications require.

Heading into 2023, these exciting challenges are creating a watershed moment for the industry, which will be designing and building some of the largest and more unique projects of our time. And while that is exciting, the reality is that there is more market demand than there is supply. So when it comes to capturing quality resources, capitalizing on value (versus cost) for dollars invested is more necessary than ever. Leveraging all possible resources throughout the economy in the procurement process is not only crucial; it is essential to realize successful outcomes. Utility commitments to investing in diverse businesses also have begun to bear fruit. In a severely resource-constrained market with insufficient supply to meet utilities’ demand, there is a powerful competitive advantage to leveraging diverse-owned businesses.

Reinforcing the high-voltage network; continuing to advance decarbonization, digitization and electrification; and standing up private LTE networks will require everything the industry can bring to bear. Policy challenges — surrounding legacy issues regarding permitting and FERC-driven initiatives like Order 1000 — will need to be addressed by industry leadership in new ways. The future of the electricity market amid disruption depends on it.

 

The Inflation Reduction Act sweetens the rules for tax credits to incentivize building renewable generation in more challenging areas. Those sources will need to be interconnected.