PUBLIC POWER ELECTRIC UTILITY OUTLOOK FOR 2025
December 18, 2024
PUBLIC POWER ELECTRIC UTILITY OUTLOOK FOR 2025:
CLIMATE CHANGE POLICIES TO BE PUT THROUGH CONSERVATIVE TEST-AGVP ADVISORY
Public power electric utilities in the U.S. had a stable credit profile in 2024 but the challenges of potential shifts in federal regulation and the looming industry clean energy transition weigh heavily on the certainty of electricity affordability and reliability. Most public power electric utility ratings assigned by the four major credit rating agencies remained unchanged in 2024.
Looking forward to 2025, while many of the challenges of the industry remain such as technology risk, adaption to AI, rising capital investment, weather extremes, and rising demand, the election has brought further uncertainty and potentially a material change in federal energy policy direction.
It depends on where one is positioned how the change in direction will impact the financial position of utilities. For example, the expected lifting of more restrictive regulation on fossil fuels could provide time to comply with existing regulations and room to manage the new growth being caused by data center development. But this may slow the pace of transition to less carbon emissions. Utilities serving communities opposed to the use of natural gas fired generation or concerned about its future role, in favor of cleaner energy, may be faced with indecision about the next generation source if reliability can’t be assured.
Red flag risks in the 2025 outlook persist and must be successfully managed including the pressures of new demand growth, regulatory risk, cybersecurity risk and extreme weather risks and insuring transmission grid stability.
KEY TRENDS IN THE PUBLIC POWER ELECTRIC UTILITY SECTOR
Following are several leading trends into 2025 affecting public power electric utilities:
*Most public power electric utilities have maintained progress on their decarbonization pledges and planning their transition to cleaner energy. While progress on such policies took place in 2024, aided by the Inflation Reduction Act (IRA), the outlook for 2025 is cautioned on the role the federal and state governments play in regulatory and financial incentive policies, including how much of the IRA gets rolled back or modified.
*On average, city-owned electric utility retail rates will remain competitive versus other retail electricity suppliers. The American Public Power Association (APPA) estimates there has been a consistent average 10% plus competitive difference between public power electric utilities and investor-owned utilities. But even public power utilities have seen an increase in rates to account for new investment and power supply costs which will be a pressure in 2025.
*Significant increases have taken place nationwide in rate increases since 2021 due to new technology introduction, greater customer expectations and expanded policy objectives.
*Focus of regulators and governing boards has been on low-income ratepayers because of the rising costs. New rate structures and rate designs have been introduced from New York setting a 6% energy burden cap on income to tiered rates such as Duke’s cap of $42 per month. California is working on fixed charge reductions for low-income ratepayers to $6 versus $24 for other customers.
*AGVP estimates 2024 financial metrics for public power electric utilities were stable including debt service coverage and debt leverage ratios and liquidity, continuing the stable 2023 performance. While leverage ratios remain high, they remain manageable for most public power electric utilities. This after the effects of commodity price volatility and pandemic impacts in 2020-2022. The outlook for 2025 indicates a continuation of the stable trend if short-term risks are managed and longer-term planning is sound. New capital investment funded by debt is expected by numerous public power utilities for T&D; renewable energy generation which could also affect leverage burden.
*Fuel diversity, along with transmission reliability, will remain fundamental strengths and important public power management objectives , as extreme weather continues to potentially threaten operations. Intermittency of renewable energy still will become even more an issue as renewables expand their role. Overall, public power electric utilities have maintained sound reliability performance metrics including the most recently EIA reported index, SAIDI, at 1.27 hours versus the private sector ratio of 2.29 hours.
*Limited new transmission was built in US in 2021-2024, but FERC order 1920 is expected to identify and encourage new transmission. FERC Order 1920 establishes implementation of long-term planning with 5-year cycles; use of scenario planning and requires grid enhancing technology planning and use. Each U.S. region has significant new investment planned such as Midwest ISO has 488 projects involving 5,000 transmission line miles in planning stage.
*Inflation impact is continuing as evidenced by third-quarter 2024 data and will continue into 2025 on the rest of the household budget and will continue to be a complication putting pressures on the municipal electric utility cost recovery process. An economic downturn that some predict would challenge most utility budgets due to customer hardships and slower bill payment. Lessons learned from the pandemic-era program experience represents a positive factor.
*For some municipal electric utilities, fiscal stress on the city government could affect the utility as new pressure builds on increasing the utility transfer to the city’s General Fund. There are expectations that the city budgets are being increasingly stressed as Covid-related subsidies have ended and federal budget cutbacks to states become pronounced.
* Further evaluation of the municipalization of electric service may take place as customers in more jurisdictions will assert investor-owned utilities are slowing the pace to cleaner energy. San Diego, California, Tucson, Arizona, Ann Arbor, Michigan, and Rochester, New York, for example, are expected to remain engaged in their efforts, as are California cities formation of community choice aggregators (CCA). But the political and financial strength of incumbent utilities will remain a constraint on progress on changing the electric business model at the local level.
*Clean energy transition made progress in 2024, but the new federal administration could slow the pace in favor of strengthening the role of fossil fuels. Concerns about electricity transmission reliability and the narrowing of choices of fuel for generation in the future will prompt a sooner than previously expected resurgence in plans for new nuclear generation construction including small modular nuclear reactors.
(SMRs) and a larger unit project that uses lessons learned from Vogtle could move ahead faster. Some public power electric utilities will participate in the financing possibly through joint municipal action power agencies. The advanced SMR are eligible for federal production tax credits and if sited at an existing coal-fired generation site, there is an additional 10% credit. For example, Energy Northwest recently announced participating in a project in the Pacific Northwest and the Tennessee Valley Authority and Ontario Power Generation(OPG) , have joined in development of the GE Hitachi small modular reactor technology.
*New solar and wind generation will continue strong growth but supply chain issues on parts and limited grid scale storage applications to deal with intermittency remain constraints as is long delays in obtaining access to the regional transmission grids.
*Most of the storage that has been developed is 4-hour storage and below which does not meet the needs of grid stability in the face of significant new intermittent generation. There is 23 GW of short-duration storage now in operation, with most of it being pumped storage. Estimates are to get to net zero by 2050, 225 to 460 GW of long-duration storage will be needed. The regulatory commitment is present at both federal and state levels to encourage the scaling and better economics of long-duration storage but the advancement in technology to extend storage to 8 hours is still not there.
*Other new clean energy technologies at the doorstep is a success of the IRA. But many of the new technologies have not reached commercial scale and could be threatened by a federal pullback on tax incentives provided by IRA. It is expected that some, but not all parts of IRA will be impacted by executive orders issued
by the new administration. New scrutiny also could be healthy in weeding out technologies that can’t scale economically.
Some of the leading candidates of new clean capacity besides new nuclear include:
Geo-thermal-The heat and energy captured by geothermal systems would provide renewable energy and nearly zero emissions. Capturing geothermal production, while it has vast potential, is complicated. A major new development project by FERVO would sell 320MW to Southern California Edison. With the IRA incentives in place now, numerous projects are under development but will now face potential new scrutiny.
Green Hydrogen – Intermountain Power Project (IPP) will be the first gas turbine in the world being built to run on 100% carbon free green hydrogen. Built at the site of Utah’s largest coal-fired power plant, it is expected to be operational in 2025 whereby 30% of fuel will be green hydrogen and 70% natural gas and by 2045, 100% green hydrogen. Significant IRA incentives are being awarded to the project. Whether projects such as the IPP project are compromised by a federal pullback is uncertain.
Carbon capture on gas plants– Unless the economics of carbon capture improve, federal support may wane in favor of letting the market determine its success. But there is strong support amongst Republican legislators which may mitigate any adverse changes to incentives. The EPA regulations on new natural gas plants state they must capture 90% of emissions by 2032. The regulation does not impact existing natural gas fired generating units. The rule is controversial in the industry because the technology is not yet fully commercial. Carbon capture and storage would scrub the CO2 from emission sources and permanently store underground. Only one utility scale plant is operational and the other, Kemper, was abandoned before coming online. Without federal support, further development of scaling carbon capture may not be successful.
RED FLAG RISKS
There are several red flag risks that will be challenging for public power electric utilities in 2025:
*The transmission grid, particularly in California, cannot fully handle the growing demand from the electrification of the transportation and building sectors and federal and state policy mandates, and threatened by extreme weather, subjecting the grid to reliability issues with potential for public safety impacts. The same issues will be faced elsewhere in the U.S. in 2025. Furthermore, the immense computational power needed for generative AI and the significant new investment in US manufacturing facilities and data centers and EV charging will continue to present new challenges to demand management. Substantial focus will be public power electric utilities incorporating advancements in strengthening grid resilience.
*Cyber security risks remain present and public power management remains focused on mitigation, but new threats continue to create uncertainty.
*Solar roof top and plug-and-play solar devices and other distributive generation programs could upend utility revenue certainty should customers not be required to fully support a utility’s systemwide financial requirements. Cost of service studies and implementation of automatic meter reading (AMR) will continue to expand in 2025 to try to better manage customer revenue.
*Public power electric utilities will continue to be more responsible in 2025 for the reliability of the transportation sector in their service area as electric vehicle adoption expands in 2025. An existing public power electric utility strength is strong electric system reliability performance, but taking on EVs will test local utility demand management. Bidirectional EV battery charging may be a possibility to ease serving demand but initially it will complicate residential supply-demand management.
*Natural gas volatility remains a risk particularly as natural gas maintains its dominance in most US regions and is critical as that capacity now balances renewable energy intermittency. While the price of natural gas has dropped in half from 2022 levels, supply fluctuation is subjected to international events. Current EIA forecasts now show a more manageable price level in 2025 below $3.00/MMBtu at the hub. The new federal administration is expected to be more supportive of natural gas drilling on federal land and other expansion efforts which could keep prices stable to declining.
*Compliance on long-term all-requirement and take-or-pay wholesale power contracts will remain but political pressures will increase particularly for participants in coal-fired generation projects that have outstanding revenue bond debt, such as Prairie State, a 1600 MW coal-fired plant owned by 300 cities in the Midwest. Legal precedents are bolstering contract stability with legal guideposts such as FERC’s 2023 ruling on Tri-State G&T member contracts that uphold Tri-State’s creditworthiness or the strong ruling by federal court in the MEAG Power-JEA take-or-pay contract dispute.
* Federal action on Environmental, Social and Governance (ESG) rules, SEC climate disclosure requirements and future US Supreme Court rulings on carbon regulation remain uncertain but the new federal administration will certainly urge lifting of disclosure and compliance requirements. The US Supreme Court could further rule in 2025 on whether the SEC and EPA have authority to regulate carbon emissions and that only Congress can specify in legislation what can be regulated regarding carbon emissions.
* Not preparing for the extreme weather risk is a risk, but preparation is a cost that will pressure budgets in 2025 for some utilities. The lingering question is “who is next? “regarding unpredictable extreme weather. A winter blizzard in Orlando affecting power generation? An unexpected 500-year flood in Omaha? Or will there be a cold wave in Phoenix in July? Utility planning for climate change extreme weather will continue to be a heightened planning activity and a budget pressure.
*Reduction in fossil fuel carbon emissions and the federal net zero timetable will be affected by the new federal administration’s policies. For example, will current federal policies to lower carbon emissions continue or will the tax credits in the IRA be scaled back should there be a new scrutiny on the overall federal budget deficit? Or will new policies be implemented to expand natural gas exploration versus current federal policies?
CONCLUSION
Public power electric utilities due to their inherent strengths such as local governance and lower cost structure, should maintain their stable financial position in 2025. As the US electric industry transitions to cleaner energy and adopts new innovations in technology, there are potential risks that if not managed could present long-term challenges. But a longer-term perspective is that the electric industry goes through periods of uncertainty and outsized risks. Strong public power utility management and leadership going forward will continue to make a difference.
Dan Aschenbach
AGVP Advisory
Credit and risk
Consulting
Dan.aschenbach@agvpadvisory.net
