CONTEXT: INCREASING CAPITAL INVESTMENT BY U.S. ELECTRIC UTILITIES AMID HISTORIC UNCERTAINTY AND RISK

The U.S. electric utility industry, which has remained largely stable and predictable during its first century of existence, now faces tremendous challenges. Navigant Consulting recently observed that “the changes underway in the 21st century electric power sector create a level and complexity of risks that is perhaps unprecedented in the industry’s history.”1 These challenges include:
- an aging generation fleet and distribution system, and a need to expand transmission;
- increasingly stringent environmental regulation limiting pollutants and greenhouse gases;2
- disruptive changes in the economics of coal and natural gas;
- rapidly evolving smart grid technologies enabling greater
customer control and choice;
- increased policy maker emphasis on demand-side resources requiring new regulatory approaches and utility business models;
- competition from growth in distributed generation;
- slow demand growth due to protracted economic
recovery and high unemployment;
- substantially weakened industry financial metrics and credit ratings, with over three-quarters of companies in the sector rated three notches or less above “junk bond” status.3

Many of these same factors are driving historic levels of utility investment. It is estimated that the U.S. electricity industry could invest as much as $100 billion each year for 20 years—roughly twice recent investment levels. This level of investment will double the net invested capital in the U.S. electricity system by 2030. Moreover, these infrastructure investments are long lived: generation, transmission and distribution assets can have expected useful lives of 30 or 40 years or longer. This means that many of these assets will likely still be operating in 2050, when electric power producers may be required to reduce greenhouse gas emissions by 80 percent or more to avoid potentially catastrophic impacts from climate change.