Utilities pivot from power plants to grid to work out for the profit

RALEIGH, N. C. – Electric utilities are pouring billions of dollars into a race to prevent terrorists and enemy governments of the shutdown of the power grid and everything that depends on electricity in America is hyper-connected society.

The U.S. Department of Homeland Security detailed last month how Russian hackers have focused on the nation’s energy grid. Officials said that they could have caused major black-outs, but instead, the hackers seemed to be more focused on exploration.

The concern about cyber-threats comes as energy companies shift focus to pursue extensive upgrades in software, switches and cables to enable a much more flexible distribution of electricity.

That means that the probability of rate increases for the consumer. Utilities have long based their business on building power plants and the sale of the sap customers, adding a regulator-approved profit margin to pay for it. But the need for large generation projects has fallen after decades of conservation of energy, less factories and the switching of coal-fired power plants to cheaper and cleaner natural gas.

So electricity companies tell Wall Street they shift their business plans. Now they are with customers pay for the replacement of obsolete equipment, block malicious hackers, minimize the downtime, suitable for the emergence of wind and solar energy and allow consumers more control over when and how much electricity they use.

The investment research firm SSR-projects that an increase of the investments in the distribution network are the primary source of growth for most of the utilities in the next five to 10 years. These investments mean a new flow of income that can last decades.

“This infrastructure will provide significant benefits for our customers, including the improvement of customer control and convenience, and cyber and physical improvements in security, while creating thousands of jobs and supporting the economy of the state,” Duke Energy CEO Lynn Good told Wall Street analysts this month. Her spokesperson refused an interview request.

The message that large expenditure necessary, is reinforced by the US government warnings of serious consequences if the grid is not refashioned to make it more difficult for a black-out and easier to recover from. The Ministry of Energy of the latest cybersecurity plan, a National Academy of Sciences report last year and interest groups, such as the Protection of Our Power are among the voices calling for a sustainable federal support for grid improvements.

The congress made grants for “smart grid” investments a decade ago, but there is still no reserved resources for them since the 2009 stimulus package.

“The grid” is built primarily to carry electricity in one direction, from power plants to homes and businesses via a network of poles, wires and high-voltage transmission equipment. Now it is to be adapted to be suitable for renewable energy that can swell and flow in many directions, to be stored in huge batteries, and even in reverse as a solar-equipped homes and businesses to sell their excess energy.

Important parts of the equipment, such as transformers and transmission wires, which are 25 years or older. And hackers are not the only threat: The power supply must be protected against physical attacks by criminals shoot out the transformers to severe weather and even solar storms.

“The old infrastructure needs to be replaced. It is that simple. And that’s great for the industry, because companies earn a very competitive return on new investments, and so there is a reason to invest,” said Ronald Silvestri, managing director of global equity research at investment management company Program Berman. “This gives the industry a very long tail of good growth for many years.”

More than three dozen regulated electric companies last year dedicated nearly half of their more than $120 billion in total capital expenditures to grid improvements, according to the Edison Electric Institute, the trade association for private utilities. The expenditure for new power plants decreased to less than a third of the total, the trade group said, as the demand for electricity has fallen to the lowest since the Recession-marred 2009.

A number of the fastest growing utilities in the past decade, including American Electric Power, California Edison International, and Florida’s NextEra Energy, the same that led the way in grid upgrades, ” Eric said Selmon of SSR. The profit in the next ten years will depend on the increase of the investment in the renewal and modernisation of the distribution network, Selmon said.

“We are in the early stages of the modernisation of the infrastructure. It is a multi-decade theme that I believe is highly undervalued,” Silvestri said.

Columbus, Ohio-based American Electric Power plans to invest nearly $18 billion in grid improvements over the next four years, in 11 states from Virginia to Oklahoma. AEP said it delivered a total shareholder return of 21 percent in 2017, and the investment will help to make the profit grows 5 percent to 7 percent of revenue year after year, chairman and chief executive officer Nicholas Akins said.

Charlotte-based Duke Energy plans to invest $25 billion on grid improvements over the next ten years in its territories in south Carolina, Florida, Ohio, Kentucky and Indiana.

Utilities not say exactly how they plan to thwart hackers, but their defense also include installing more “smart grid” technology, for communication over the network, such as sensors and transmission equipment that can better detect suspicious activity and automatically reroute power around outages, Duke Energy said.

Duke Energy already is the collection of the modernisation of the network cost in Florida, Ohio and Indiana. But North Carolina regulators this year it would not approve the company’s proposal to start charging the average household an extra $3,000 to $ 4,000 in the next ten years to bury power lines and the upgrading of electricity supply systems.

Well has told analysts that Duke Energy can deliver earnings growth of around 6 percent per year if state regulators approve the expenditure and the associated profit margins, the company wants to grid investments. That compares with an average annual yield of 8.3 percent in the last decade for companies on the S&P 500 Index. Including shareholder dividends, Duke Energy’s return should be more like a constant 8-10 percent per year, the company is telling investors.

“I see the next ten years more investments in the grid, relatively, than any other part of the chain of production of electricity,” Well, said in June in a speech in Washington.


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