Smart Grid Expert: Momentum Is Overcoming Bad Economic News

Initial findings from the January 2010 Newton-Evans global tracking study of electric power transmission and distribution investment are somewhat positive, compared with the most recent tracking study (July 2009). Each of five “Smart Grid” component areas, plus transmission and distribution infrastructure development, has been reported by utilities located in more than 25 countries to more likely be either “increased” or “unchanged” rather than “decreased” from January of last year.

The highest percentages of officials reporting CAPEX increases were for the areas of protection and control, and transmission infrastructure budgets. The biggest decrease in CAPEX outlays for 2010 is reported to be in distribution infrastructure.  The question is just how much of a change is likely?  Our response currently is “less than 10% change” is likely for the North American region, and about the same outlook for Western Europe.  We base this outlook on the DOE’s EIA outlook that forecasts only a 1% growth in U.S. GDP coupled with the Smart Grid initiatives and government stimulus grants that will have a positive effect on 2010 expenditures.  Nomura Global Economics forecasts a more positive 2% increase for Western nations and 2.2% for the U.S., compared with a 6.6% increase expected for emerging nations. The Cantor-Fitzgerald 2010 outlook matches up well with Nomura’s outlook.

In our firm’s discussions with T&D equipment suppliers, the consensus view among major manufacturers is one of positive growth year-over-year compared with 2009’s dismal results.  Currently, we believe that any increases may not be sufficient to reach the values of industry shipments (including imports) obtained in 2008.  T&D equipment and systems sales for the U.S. amounted to about $18 billion in 2009, with ancillary supplies, towers, poles, cable, lines and T&D services amounting to an additional $18-21 billion.  Worldwide, the amount spent on T&D equipment hovered around $85 billion in 2009, and we expect T&D equipment and systems expenditures will rebound to $90 billion or more this year, with GDP growth looking very strong in some large developing markets (China, India, Brazil, GCC) compared with the expected 1-3% growth anticipated in much of the West.

Importantly, the U.S. Department of Energy’s highly regarded Energy Information Administration has released its Annual Energy Outlook for 2010.  The new report forecasts 2010 electricity utilization at levels comparable to 2009, suggesting either a gain in energy efficiency or a continuing low-growth economic outlook.  In addition, the Department has forecast an increase in the nation’s electricity generating capacity amounting to 13 GW for 2010, with more than 60% of this net addition coming from renewable sources, principally wind energy. 

Commercial use of electricity may increase by 2.1% compared with less than 1% increase for residential customers, according to the Energy Information Administration.  The DOE also foresees a further 2% decrease in industrial electricity consumption and a slight decrease in transportation sector consumption.

These findings support those utilities reporting decreases in CAPEX budgets who have indicated such decreases are being caused first and foremost by the economic outlook for 2010, a more important factor for their decisions than are regulatory mandates.

The Newton-Evans survey also requested utility officials to provide the reasons for their increases in CAPEX plans, looking into the rationale for change in year-over-year budget plans. In summary, Smart Grid initiatives were cited as being more important factors than either regulatory mandates or government stimulus programs.  These initiatives are going forward despite a less than rosy economic outlook at this time, spurred on in part by government stimulus, by regulatory directives, and by good business practices.  Indications are strong for a stronger 2011 recovery and further improvements in outlook for GDP growth, better utility access to capital markets and for Smart Grid initiatives overall. 

Charles Newton is CEO of Newton-Evans Research Co.based in Ellicott City, Maryland.