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Huge investments needed to meet US power demand growth

US utilities and their customers are feeling the pinch. Amidst the credit crunch, huge investments are needed to meet power demand growth, but inflation is rife across the supply side.

Renewable obligations are pushing towards high-cost generation and the price of carbon has still to be counted. Gas remains the easy option, but that too has implications for a fuel which increasingly sets the marginal price of power.

The US now faces a likely new round of increases in electricity rates, as a combination of forces pressure utilities.

When asked where US energy prices are going, R. Skip Horvath, president and CEO of the Natural Gas Supply Association, offers two directions: "up" or "up and up."

Horvath's views reflect warnings coming from many top players who are trying to brace the American consumer for a continued upward cost spiral.

Already reeling from gasoline price hikes, the US now faces a likely new round of increases in electricity rates, as a combination of forces pressure utilities.

Demand for power is growing. Costs for fuel and new infrastructure are up (podcast: Fuel & construction costs drive US power prices up). And Congress appears ready to impose costly greenhouse gas emissions restrictions.

Few are more aware of these factors than the residents of New York, where electricity rates are the second highest on the continental US at 17.05 US cents/kWh (see map: US residential retail prices for electricity in 2007).

In May 2008, just a few weeks after imposing a $425 million rate increase, US utility Consolidated Edison, which serves the majority of the New York area, again knocked on the door of state regulators saying it needs an additional $557-$654 million.

The request came after two major credit rating agencies lowered the company's bond rating, and a third major rating agency put the company on negative watch. The utility says its revenue is not sufficient for adequate return. (Article continues below).

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The effects of price hikes on New York

Con Edison, which has $13 billion in annual revenue and $29 billion in assets, points to cost pressures beyond its control, such as a 23% escalation in copper prices and 71% in steel this year alone.

The rise in copper prices led directly to a higher property tax bill for the utility, a major reason it sought the second rate hike.

Tax appraisers increased the value of the copper in Con Edison wires in calculating the utility's tax.

The utility, one of the nation's largest, listed a series of other growing expenses in its plea to regulators. A small underground network of transformers now costs $34,200, compared with $26,600 18 months ago.

A typical overhead transformer has gone up from $1,600 to $2,200 since April 2007. And the cost of high-voltage transmission cable increased from $66 per foot in 2006 to an average of $95 per foot in 2007 (see chart: Electric wire and cable price indices).

These price hikes hit Con Edison particularly hard because the utility is embarking on major upgrades and an expansion of its distribution and transmission system.

The improvements are necessary, in part, because customers are using much more electricity.

The $5.5 billion in new infrastructure will help the company meet the 1.2% annual growth created by its 3 million customers in greater New York City.

The utility says consumers are using far more power-hungry devices. Con Edison's customers plugged in 650,000 new home computers between 2002 and 2007, and they are expected to add another 500,000 by 2012.

They purchased one million air conditioners in the past five years and are likely to add 900,000 additional units over the next five, according to the utility.

The company aims to develop some 3,200 MW of gas-fired capacity across the region to replace and supplement existing coal capacity.

New York is just a microcosm of the kind of demand growth occurring nationwide. The Edison Electric Institute expects US consumption to grow by as much as 30% by 2030.

The average household uses 21% more electricity than it did in 1978, according to the EEI. Household consumption is likely grow another 11% over the next two decades (see chart: US electricity demand to 2030)..

Next page: Sticker shock delays projects

Created: June 4, 2008

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