Fixing the Grid
December 20, 2011
Growing energy demand and decades of underinvestment in the nation’s electricity grid will offer significant opportunities for companies with a long-term plan.
The long-awaited investment in our national energy delivery grid (electric transmission lines and substations) appears to be in full swing. Despite recent downturns in many areas of our economy, major investment commitments continue to take place in the build-out of electric transmission infrastructure assets. Industry experts have recently reported that electric utilities have plans to invest at least another $120 billion in transmission grid upgrades over the next decade. Of that total investment, 100 projects representing approximately $62 billion have already been identified.
However, some energy analysts suggest that that the $120 billion of planned investments does not reflect the true cost required to meet growing energy demands and to repair decades-old infrastructure. In fact, this total is, indeed, woefully short of what will be needed --especially when considering other major transmission projects that will be required to upgrade our nation’s electric grid system. According to Transforming America’s Power Industry, a report developed by the Brattle Group, by the year 2030 the electric utility industry will need to make a total infrastructure investment of $1.5 to $2.0 trillion. Whether these projections are realistic remains to be seen, but there is little doubt there will be significant growth opportunities for investors and providers of transmission infrastructure products and services in the years ahead.
Incumbent electric utilities, independent transmission developers and private equity firms are investing in new electric generation and delivery capacity for public and private infrastructure investment partnerships. This means long-term opportunities abound for the industry to continue advancing investment commitments while striving to avoid potential grid capacity conflicts by mutually capitalizing on strategic investment opportunities.
Translating system planning into actual system improvements remains a challenge, however, especially in the U.S. Investors can expect to be tested mainly due to existing barriers that will, in most cases, delay or even prevent energy delivery system planning from becoming a reality.
Securing financing for transmission projects is one of the biggest obstacles as the process is often lengthy and complex. And, while there is a move to expedite the process (at least on the federal level) there is a struggle that continues to exist with permit processing, resolving environmental barriers and other multiple project execution delays.
However, for those businesses committed to staying in the market for the long-term, market studies indicate most medium and longer-term energy delivery investments can expect major improvements. For instance, both federal and state governments seek to unbundle existing construction barriers in an effort to stimulate the economy. And, on the private equity side of the investment equation, recent federal rulings raise the allowable return on investment in energy delivered assets which has peaked interest in investing.
Lastly, credit markets, over time, are expected to relax. These and other changes in our business climate will promote more investor participation and sustained longer-term investment interest in key sectors of the energy delivery market. Ultimately, as the demand for electricity continues to grow over the long-term, the opportunities within the transmission and distribution industry will follow.
About the author: With nearly 40 years in the electrical construction industry, John Daley is a construction executive for Mortenson Construction’s Transmission & Distribution group.