EECS4460.1911.4.19.pptx
Power System Management
EECS 4460/5460-901
Lecture #19
Utility Business Structures and Economics
1
Policy makers, with public support, are (appropriately) in pursuit of decarbonization
Tax incentives for investment and production enable that strategy
Renewables are typically financed by (often complicated) long-term Purchase Power Agreements (PPA’s)
Renewables typically bid into the market at zero cost and are usually not dispatched
The paradox is that growth in renewables must coexist with fossil fuels (excluding nuclear)
The paradox exists with today’s market structure; regulated utilities can normalize costs across the rate structure
Renewable Resources Financials
Growth in Corporate Renewables Procurement
Renewable Energy is a Highly Marketed Business
Sample Website of Modeling Templates
The Virtual PPA (VPPA) – not just a power contract
Buyer pays fixed price to seller for generation and REC’s
Energy goes to
the power market
When sold at market price,
revenue passed
to the buyer
“Contract for Differences”
Many Utilities are Investing as Well…
Xcel Energy Example:
10431MW total wind and solar
Wind growth 55% by end of 2021 – 7 states, 3700MW
Solar has grown +400% since 2011
Germany
Renewable penetration increase from 15.1% to 28.2%
Wholesale price decrease of 50%
Price to consumers increased by 41%
Italy
Renewable penetration increase from 16.6% to 33.4%
Wholesale price decrease of 40%
Price to consumers increased by 15%
Spain
Renewable penetration increase from 23.7% to 37.8%
Wholesale price decrease of 34%
Price to consumers increased by 62%
Renewables Longterm? – Three European Examples (2008-2014)* illustrating potential divergence between true cost of system and evolution of wholesale market prices
*Source: “Renewable and Sustainable Energy Reviews”,
Vol. 82, Part1, February 2018
Recap: Long-term Planned Additions are Primarily Natural Gas and Renewables
Prior to the mid-1980s, all investor owned utilities were structured within the regulatory framework
Recall the ratemaking fundamentals
Rate cases were routine, with a “push-pull” on rates
Investing in the utility sector was reasonably predictable
State-by-state variations on the political environment
With the advent of merchant generation and customer choice, utilities and investors saw growth opportunities
State-by-state variations in deregulation produced a variety of business strategies
Some utilities sold off generation to merchant generation companies and became “pure T&D” companies
Many placed their generation assets into unregulated subsidiaries
Some bought unregulated assets from others
Others, in ”regulated states” stayed the course
- All of the above
Utility Business Structures Have Adapted to the Changing World
A Fortune 500 Investor Owned Utility – A Holding Company
Founded in NYC in 1906, reorganized in 1925
Headquartered in Columbus, Ohio; serve 5.4M customers in11 states
Annual revenue $16Billion, 18,000 employees
G: 38,000MW; T: 40,000 miles; D: 224,000 miles
First 345kv line in the U.S. (1953)
There are many subsidiaries within the Parent Company structure
Eight “traditional” utilities in 11 states
A transmission holding company , a retail service company
A service company subsidiary for support
In Ohio, AEP Ohio owns T&D facilities and serves 1.5Million retail customers
In Indiana, I&M (Indiana and Michigan) owns Generation and T&D and serves 596k retail customers
Generation is “unbundled” in portions of all 11 states, including Ohio
A Case Study – AEP
AEP Ohio
Formerly two operating companies:
Ohio Power and
Columbus Southern
2014:Columbus Southern merged into Ohio Power
Prior to the mid-1980s, all investor owned utilities were structured within the regulatory framework
Recall the ratemaking fundamentals
Financials were sound; growth was predictable
Utility stock valuations were high (1965- $100/share )
With the growing rate pressures and restructuring, utilities faced increasing financial pressures
To improve the balance sheet (debt and equity structure), and to improve shareholder value, utilities began merging in the mid 1980s
Other options included asset sales, refinancing
Again, state-by-state variations in their response
The activity continues, not unlike other businesses
Mergers and Acquisitions have been plentiful since the 1980s
Merger and Acquisitions Just in the Past Two Years
State Public Utility Commissions
Broad discretion state-by-state
New ratepayer harm and benefit
Operating performance and service quality
Local economic impact
Financial viability – access to capital
Federal Government Agencies
Federal Energy Regulatory Commission (FERC)
Looking at antitrust (market power) and cross-subsidies
Interstate transmission review
Nuclear Regulatory Commission (NRC)
Financial and operational support
Decommissioning funding
Possible Federal Communications Commission (FCC) or Committee on Foreign Affairs
Utility Mergers Require Regulatory Approvals
State Authority Varies
Merger Approval is not an “Automatic”
Oncor is the regional utility in Texas, formerly
Texas Utilities (TXU).
Texas regulators rejected NextEra’s proposal.
Berkshire Hathaway bid, but then walked away
when Elliott Management Corp backed a
competing offer from Sempra, which ultimately
acquired Oncor.
Investor–owned utility business structures vary widely today
Many are holding company structures
Various combinations of generation, transmission and distribution
Local distribution company structure has changed the least and is still regulated
Public power and cooperatives not so much
Fundamentally a “cost of service” business model
Business Structure Conclusions
Business Structures and Economics
(Continued)
Utility Financial Profiles
Current Utility Strategies
Technologies
Energy Storage
Business and Financial
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