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Analysis

From growth to modernization

The changing capital focus of the US utility sector

In the future, both electric and gas utilities will continue to invest in a safer, more reliable and environmentally responsible energy infrastructure, but they might have to renew their focus on efforts to keep energy supplies affordable.

US electric and gas utility capital expenditures expected to reach all-time high in 2016

In Deloitte’s “math series,” published from 2012–2014, we analyzed the trends prompting US electric power companies to increase capital spending and examined the “dilemma” they could face as the costs to produce electricity rise, while demand remains fairly stagnant. Since then, as these trends have played out, spending has predictably climbed to unprecedented levels. US electric and gas utility capital expenditures soared from $69 billion in 2008, to an all-time high estimated for 2016—about $115 billion.

Drivers behind the spending vary and include the following:
  • The need to upgrade and reinforce electric and gas infrastructure due to age, increasingly severe weather, and cyber and physical threats
  • The equally critical need to deploy information technology to boost the systems’ efficiency, effectiveness, and resilience; accommodate the surge of new technologies and devices; and respond to customer demand for more flexible and customized products
  • The need to address environmental concerns with an increasingly clean energy slate
  • The opportunity to take advantage of burgeoning supplies of domestic natural gas.

In addition, the quest for predictable growth in earnings may be shifting the focus back to regulated investments with relatively stable rates of return.

Capital expenditures likely to remain substantial, but is it sustainable?

These drivers are evolving and changing the pattern of investment across individual companies and the industry as a whole. The group of electric and gas utility companies examined in this report generally project capital spending plans across five segments: transmission and distribution; generation; environmental; renewables; and natural gas pipelines, distribution, and storage. Electricity transmission and distribution spending has dominated the mix in recent years, and will likely grow further. At the same time, generation investments are projected to ramp down, while expenditures on natural gas pipelines, storage, and distribution are slated to continue to grow.

Overall, company projections indicate that capital expenditures will likely remain substantial, which is not surprising, since key drivers behind the spending continue.

So, the question arises whether spending at today’s levels can be sustained. Rapidly rising expenditures are beginning to boost retail electricity rates, and while much of the cost is being offset by lower fuel costs thanks to abundant, moderately priced shale gas, the specter of potentially rising natural gas prices, increasing interest rates, higher taxes, or a host of other possibilities could intervene to alter capital investment momentum.

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