U.S. Utility Investment is Booming, but Sales Are Not Keeping Up

A booming market

U.S. utility investment has been on a tear. In 2016, regulated utilities invested $73.5 billion in property, plant and equipment, more than twice in real terms what they spent per year in the early 2000s, according to our data. Today, annual investment exceeds 10% of total asset value, up from around 6% a decade ago. There are regional variations across the U.S., but one thing is consistent: utilities are investing more than at any point since our dataset starts in 1994.

There are multiple factors contributing towards this jump in spending. Distribution continues to grow at a steady clip, led by regions that were liberalized in the 1990s. Utilities there may be offsetting the loss of generation assets by building up the distribution grid. In some parts of the country, utilities are making significant outlays on generation – since 2010, annual regulated power plant investment in MISO and the Southeast has been twice the previous average. But the most noticeable change is transmission. The segment has seen breakneck growth and now accounts for more than a quarter of utility investment, up from 11% in the 1990s.

What’s the problem?

For utilities and their owners, this is a positive story. Regulated power companies make money by earning a return on capital investments. The business model is simple: the more they spend, the more they earn, all else equal. But investments and profits are ultimately paid for by customers, and sales have not kept pace. Is the utility business model broken?

Historically, the value of utility assets and electricity sales grew at similar rates, but over the past decade they have diverged sharply. This raises questions about how the recent spate of investment will be paid for and whether it can continue. Ageing infrastructure, reliability concerns and the need to connect more renewables are all good reasons to spend more. But if sales do not catch up, it may be hard to sustain.