Are electrical utilities the next stranded asset?
March 16, 2015
All local governments have stranded assets – assets that through neglect have lost all or most of their value and have become a liability. Sometime a municipality is simply the last one standing and is left holding the bag.
Neglect can take two forms. The most obvious is neglecting the maintenance of an asset. This is often the fate of heritage assets – demolition by neglect. The other is neglecting to pay attention to the winds of regulatory, economic or technological change and failing to put in place the right strategy to respond.
Stranded assets have historically been swept under the rug. This is getting more difficult; new accounting rules require local governments to do a better job at disclosing liabilities on their balance sheets. Sometimes these assets have been neglected for so long that there is no one left who knows they exist until someone stumbles over one or starts asking questions.
New rules are shining a light on assets being physically neglected but what about strategically neglected?
Many municipalities own, or partially-own, their electricity distribution utility; the poles and wires that distribute electricity to homes and businesses. There is a radical transformation occurring in the energy sector in North America. Are local governments who own these assets paying attention?
Energy conservation and efficiency are driving down demand. This is a good thing; it keeps money in people’s pockets and reduces greenhouse gas emissions. The investment to meet peak electricity demand during summer months for air conditioning is high; managing demand reduces the need for more costly infrastructure.
However, for a utility that depends on revenue to maintain poles and wires that is tied to how much electricity flows through those wires, reduced demand has significant implications for their business model.
This is not unlike what municipalities have faced in managing their water supply systems. Water conservation and efficiency and managing peak demand reduce the need for costly infrastructure investments; they also reduce the financial base to maintain the existing system. Water rates go up although not as much as they would without managing demand.
However, this is where the analogy ends. There are no alternative water supply providers and municipal water remains more cost effective than private drinking water suppliers. In contrast, energy customers not only have more control over consumption, they also have more choice over their source of energy.
Distributed energy – decentralized power and thermal sources that are closer to end users – is also driving down demand. Utilities are losing customers to distributed energy. As their base declines, there are fewer utility customers to maintain the poles and wires. This only encourages more customers to look elsewhere.
Are some Ontario municipalities collectively sleep-walking towards stranding a major asset on their balance sheets? It looks that way.