China Turning Away from Coal

The US coal industry is facing a wave of bankruptcies.  Nick Cunningham, of says:

The coal markets have collapsed in spectacular fashion over the last few years due to a perfect storm of factors. U.S. coal producers first had to compete ferociously with shale gas in America’s electric power sector as fracking took off about a decade ago. That forced an array of coal plants to shut down as cheap gas washed over the country. Subsequently a regulatory crack down from the federal government – including forthcoming restrictions on greenhouse gases – further dimmed the growth prospects of coal.

But U.S. coal producers always had the international market, and exports stepped up in concert with falling domestic consumption. Now the foreign buyers are shrinking as well. China, the one country that the coal industry could count on for ceaseless growth in coal consumption, actually burned 2.9 percent less coal in 2014 than it did the year before.

When China, which consumes about as much coal as the rest of the world combined, sees its level of coal burning stay flat or even fall, that raises red flags for the entire industry.

Here are the specifics from IEEFA’s Tim Buckley:

When the largest coal producer in China puts out the kind of numbers China Shenhua Energy Co. just reported, it’s an unmistakable signal that the most populous country on the planet is continuing to step back from coal.

In announcing its 2014 results and its 2015 business targets, Shenhua dropped some bombshells:

  • It sees a 10 percent drop in its domestic coal sales in 2015 (that’s a 47 million tonne reduction to 404 million tonnes).
  • Its capital expenditure plans for coal and power generation in 2015 are down 25 percent over 2014 to $3.2 billion.
  • It expects its ports and rail investment to drop 12 percent year-over-year to $2.5 billion.

The numbers reveal a strategic shift by Shenhua as it reduces its volumes, its operating costs and its capital spending, and the 2015 numbers in particular signal an acceleration in this strategy. These trends are bigger, actually, than Shenhua. The company has a 15 percent share of the Chinese coal market, so it’s a key barometer of the larger picture, and its cutbacks send a clear signal that China is intent on curbing its emissions by a rapid diversification away from coal.

You read that right:  “a clear signal that China is intent on curbing its emissions by a rapid diversification away from coal.”

Gone are the days when Bill Raney, president of the WV Coal Association, can claim that the US doesn’t have to do anything about carbon emissions, because China isn’t.  Gone are the days when Mr. Raney can claim that WV coal miners will be back at work soon exporting coal to Germany and China.

Real world economics have caught up to the coal industry and no amount of US or WV government subsidies can save it.

And where is China turning for energy?  Here it is from Jack Perkowski at Forbes:

According to The Global Status Report, which was released earlier this month by the Renewable Energy Policy Network for the 21st Century, China once again led the rest of the world in renewable energy investment in 2013, spending a total of $56.3 billion on wind, solar and other renewable projects. The report stated that China accounted for 61 percent of the total investment in renewables by developing countries, and that China invested more in renewable energy than all of Europe last year.

Dangerous Holding Companies Rebuilding Empires at the Expense of the Rest of Us

Back in the 1910s and 1920s, Samuel Insull, president of Commonwealth Edison in Chicago, and banker J.P. Morgan put together a network of privately owned holding companies that controlled must of the major electric utilities in the US.  In the late 1920s and early 1930s, this dangerous pyramid of companies collapsed, threatening the stability of electrical service across the country.

In 1935, the US Congress passed the Public Utility Holding Company Act which limited the size and activities of utilities to prevent the collapse of dangerous financial structures that threatened the US electrical and natural gas infrastructure.

This federal law remained in place until the Cheney Administration and the Republican-controlled Congress repealed it as part of the 2005 Energy Policy Act.  The 2005 Energy Policy Act was the same law that granted massive rate payer subsidies to power companies for building new high voltage transmission lines.  Readers of The Power Line are very familiar with the disastrous impacts of this transmission subsidy scheme.

So erstwhile “free market” Republicans passed the 2005 Energy Policy Act to encourage the growth of new, unstable monopoly holding companies in the electricity markets and huge subsidy schemes for those same holding companies to build obsolete and unneeded high voltage transmission, all at the expense of electric retail customers.

We are witnessing the results of the repeal of the 1935 Utility Holding Company Act in real time.  Holding companies AEP and FirstEnergy have dumped obsolete coal-fired power plants onto the captive electric bills of West Virginians.  New post-2005 repeal holding companies are merging into ever fewer monopolies that operate in multiple business lines and exert increasing power in regional transmission organization cartels across the US.  The attempt by Chicago-based Exelon to swallow regional distribution company PEPCo Holdings on the East Coast is just the latest in the holding company monopoly game, and this one even includes Atlantic City.

I have posted a number of times, here, here, here and here, about the Exelon merger, because the forces at play in this case offer real insight into the train wreck that is West Virginia’s electrical system.  In the last few years, the WV PSC and the two Ohio-based holding companies that control WV’s electric utilities have played West Virginians for chumps.  AEP’s and FirstEnergy’s coal-fired power plants can no longer compete in wholesale electricity markets, so friendly regulators have forced their WV customers to pay for much more power plant capacity then customers will need for the next thirty years.

Exelon is moving to create that same situation for the customers of PEPCo’s companies.  Exelon’s shaky holding company structure is almost entirely dependent on expensive and obsolete nuclear power plants.  Like coal-fired power plants, nukes are struggling to compete in the free market.  Exelon is paying billions of dollars above PEPCo’s stock value because it wants access to PEPCo’s captive rate payers in stable regulated retail markets.

Wall Street bankers have seen the dangers facing unstable electric holding companies and their obsolete generating plants.  Starting last May with Barclays Bank, major investment banks have been downgrading the bonds of the entire electrical generation sector because they can no longer compete with natural gas plants, investment in energy efficiency and renewable power.

Last week, the Institute for Energy Economics and Financial Analysis published an in depth report by WV’s own Cathy Kunkel describing exactly how and why Exelon wants to control a captive PEPCo Holdings for its own profit.

Also last week, the always entertaining and informative David Roberts provided an overview of the Exelon/PEPCo merger, plus some important history and context.

If you are interested in real electricity innovation in the US, you need to understand the massive forces that are arrayed against us.  Understanding the newly hatched monopoly holding companies that control electricity in our country is essential for identifying who is resisting change and why they are doing it.

While the new holding companies still control most of the US electrical grid, they are becoming increasingly desperate as their market base erodes and their financiers get weak in the knees.  These companies have become the enemies of the free market in electricity.  Their only hope is to manipulate the political and regulatory process to maintain their slipping grip on power, as their industry association recommended back in 2013.

Look closely at the links in this post, and you will be able to see beyond the misleading information that pops up in the media (most of it from power company press releases) to see what is really at stake.  As I have always said here on The Power Line, knowledge is power.

EEI Report Shows US Demand Remains Flat

It is not good news for the US electric industry when the Edison Electric Institute begins its 2013 annual review (the last full year report available) of the industry’s financial health with this statement:

As shown in the table U.S. Electric Output, in 2013 the U.S. electric industry made available for distribution in the continental U.S. 3,993,521 gigawatt-hours (GWh) of electricity, an increase of 0.1% over 2012’s total of 3,991,408 GWh. This is the first time since 2010 that there has been a year-to-year increase in U.S. electric output, and 2013’s total was barely above 2005’s 3,992,966 GWh.
Yes, you read that right: “2013’s total was barely above 2005’s”.  That is eight years of essentially flat US load growth.
Here’s the regional summary:
On a regional basis, four of the EEI regions experienced increases in electric output in 2013. The South Central region saw the largest year-to-year gain at 1.9%, with the New England, Mid-Atlantic, and Pacific Northwest regions also showing growth. The Pacific Southwest region saw the largest decrease in output, at -1.5%. The Central Industrial, West Central, and Southeast regions also experienced decreases in output for the year.
In EEI’s system, WV is divided between the Central Industrial region (northern and western WV) and the Southeast (southeastern WV).
When EEI normalized its data for 2013 weather conditions, here’s what happened:
On a weather-adjusted basis, electric output actually declined in 2013 by 0.6%.
Here’s EEI’s explanation:
The anemic rebound [in the economy] continues to impact electricity sales in every sector, although increases in the adoption of energy efficiency are also contributing to the protracted weakness in sales.
When the industry identifies energy efficiency measures as “contributing to the protracted weakness in sales” look for the kinds of political and regulatory attacks on efficiency standards that we have seen in OH from FirstEnergy.  Big holding companies don’t like “protracted weakness in sales.”  If EEI is saying outright that energy efficiency is hurting the industry’s profitability, then it is.
The era of flat demand represents a whole new world for the US electricity industry, and the corporations that dominate the industry are having a very hard time adjusting to it.

German Power Giant E.on Shedding Coal Burners

Here’s the story from Reuters.

Germany’s top utility E.ON (EONGn.DE) said it would split in two, spinning off power plants to focus on renewable energy and power grids, in a dramatic response to industry changes that could trigger similar moves at European peers.

Europe’s power sector has been hit by weak energy demand in a sluggish economy, low wholesale power prices and a surge in demand for cleaner renewable energy which is replacing gas and coal-fired power plants.


Brattle Group Says Stagnant Demand Is Here to Stay

The Brattle Group is an industry consulting firm that knows what it is talking about, most of the time.  Here is a link to a presentation by a Brattle Group engineer, Ahmad Faruqui, at a June 2014 electric industry conference.

Mr. Faruqui starts with something what we have been saying on The Power Line for the last six years, but that a lot of industry people still won’t let themselves admit:

Normal electricity growth has not resumed four years after the Great Recession ended

  • According to Dr. John Caldwell of the Edison Electric Institute, normal growth usually resumes within five months after the recession ends; the longest it has ever taken has been twelve months
  • The EIA’s May 2014 Short-Term Energy Outlook (STEO) projects that electric retail sales will grow by 2.3% in 2014 and 0.0% in 2015; in the residential sector, the corresponding growth rates will be 3.1% and -1.5%
 The graph on the next slide tells the tale clearly –
screenshot-www brattle com 2014-09-01 20-44-08
So all that stuff we heard from PJM back in 2010 and 2011 about how demand would recover when the “recession” ended just hasn’t happened.
And, of course, this is all part of a long term trend that started back in 1950.
screenshot-www brattle com 2014-09-01 20-46-46
Mr. Faruqui was speaking to an industry group, so he tried to point to four solutions that electric utilities could employ to save themselves in this new future of stagnant demand.  After identifying the five forces that have combined to create the industry’s nightmare scenario, he posits four responses that utilities could take:
What are the options for electric utilities?
To deal with the five forces, utilities can pursue one of four strategies
1. Stay the course
2. Push electrification
3. Become a wires company
4. Become an energy services utility
Mr. Faruqui essentially dismisses the first three options as all having failed to save utilities’ bacon in the past.  The rest of his presentation describes what he means by an “energy services utility.”  You can go to the power point slides and see his description for yourself.  I think you will come away, as did I, with the feeling that this really isn’t a practical solution either, for most utilities.
The fact that a very smart engineer from the Brattle Group can’t really come up with any good solutions to utilities’ current problems is a sign that power companies are in real trouble.

Stagnant Demand Now Well Established in US Electrical System: Bleak, or Not Bleak?

I have been citing Rebecca Smith’s excellent reporting on falling electricity demand in the US for almost five years.  The Wall Street Journal’s editors deserve credit for keeping Ms. Smith on the electricity beat so she has the time to develop a deep understanding of the industry.  Most media outlets don’t allow this kind of growth, and their reporters simply reprint industry press releases instead of doing real journalism.

Last week, Ms. Smith updated her longstanding coverage of the decline of US electricity demand and its dramatic impact on the US electrical industry.  Here is a link to her story, but you will have to have a subscription to the WSJ to view it.

Ms. Smith’s story is a status report on the now well established disconnect between US load growth and economic growth, which I have also been covering here on The Power Line.  A graph in her article, taken from the Dept. of Energy’s Energy Information Agency, shows that 2008 was the peak for annual US electrical production, with a total of 3.77 trillion kwh.  Production has not reached that level in the five full years since then, and the EIA does not project any change in that trend in the future.

US power company mouthpieces claim that electricity demand will continue its past upward trend “when the economy turns around,” but the disconnect between economic growth and electrical load growth shows that this is unlikely to happen.  So the US is now “past peak” in electricity demand.

As Ms. Smith puts it:

Utility executives across the country are reaching the same conclusion. Even though Americans are plugging in more gadgets than ever and the unemployment rate had dropped at one point to a level last reported in 2008, electricity sales are looking anemic for the seventh year in a row.

Sluggish electricity demand

Sluggish electricity demand reflects broad changes in the overall economy, the effects of government regulation and technological changes that have made it easier for Americans to trim their power consumption. But the confluence of these trends presents utilities with an almost unprecedented challenge: how to cope with rising costs when sales of their main product have stopped growing.

Sales volume

Sales volume matters because the power business ranks as the nation’s most capital-intensive industry. When utilities are flush with cash, they buy lots of expensive equipment and raise dividends for investors. When they’re selling less of their product, they look for ways to cut or defer spending. Regulators typically allow utilities to charge rates that are high enough to cover their basic expenses, but that doesn’t guarantee them strong profits. Utilities typically need to expand sales volume by 1% or more a year just to maintain their expensive, sprawling networks of power plants, transmission lines and substations, says Steven Piper, an energy analyst for SNL Energy, a research company. “That’s where the existential crisis is coming from,” he adds.
Historically, economic expansion meant expanding electricity sales. In fact, during the 1950s and 1960s, energy demand outpaced the growth in the gross domestic product. Then, from 1975 to 1995, GDP and electricity sales grew in tandem.

But the connection now appears to be broken. The U.S. Energy Information Administration said recently that it no longer foresees any sustained period in which electricity sales will keep pace with GDP growth. [emphasis in original]

Ms. Smith points to a number of factors, including customer generated solar power and energy efficiency investment, as major causes of the industry’s problems:

Local Solar Power Generation

Increasingly, both residential and business customers are making their own power rather than buying it from utilities. In Arizona, for example, solar companies are siphoning off utility customers. Sherry Pfister, a retiree who once worked at the Palo Verde nuclear power plant 45 miles west of Phoenix, says she didn’t hesitate to lease solar panels for her home in Waddell, Ariz., and says the panels have cut her utility bill by a third. “Why isn’t everybody doing it?” she wonders. Her supplier, Sunnova Inc., wooed her with
solar panels that cost 70 cents a watt, a fifth of the cost in 2008. Solar energy “is the next shale gas,” says Sunnova Chief Executive John Berger, predicting it will upend the utility business.

Energy efficiency

Energy efficiency blunts the impact of population and economic growth, because upgrades in lighting, appliances and heavy equipment reduce energy needs. In 2005, the average refrigerator consumed 840 kilowatt-hours of electricity a year, according to the U.S. Energy Information Administration. A typical 2010 replacement needed only 453 kilowatt-hours of electricity.

Higher rates

As their sales have lagged behind, utilities have raised prices, and that, too, is discouraging use. Most U.S. households pay 12 cents a kilowatt-hour today, up one-third from a decade ago, according to EIA data. A 2012 study from the California Public Utilities Commission found that customers have had a “strong response to price changes.”

Consumers fight back

To fight rising costs, Washington, D.C., has hired a consultant to help cut its electricity use 20% by 2015—and to save $10 million a year. FirstFuel Software sniffs out waste at the district’s 400 buildings with the help of smart meters and special software. “We’re not going to win the grand innovation prize,” says Sam Brooks, head of energy and sustainability for the District of Columbia, but he adds that just turning off the lights and shutting off furnaces when buildings are unoccupied turns out to be an easy way to save money.

And Ms. Smith concludes with a quote from our old friend, FirstEnergy CEO Tony Alexander, trying desperately to put a happy face on the company’s future.

New utility business models

Utilities aren’t waiting for better times. They’re increasing spending on big solar projects and energy-efficiency programs for which they earn income as investors or managers. And many executives are searching for new services to offer. “The industry has been pretty resilient the past hundred years,” says Bill Johnson, chief executive of the Tennessee Valley Authority, which furnishes electricity to nine million people in seven states. “I wouldn’t count us out quite yet.”

Electricity demand also isn’t bleak everywhere. FirstEnergy Corp. based in Akron, Ohio, says demand is increasing from such industries as steel, auto, oil refining and chemical production. But that hasn’t been enough to make up for losses elsewhere. Anthony Alexander, the company’s chief executive, forecasts that it will take until 2016 at the earliest for its electricity sales to recover to prerecession levels. “It’s pretty much a lost decade,” he says.

I find it hilarious that Ms. Smith introduced the FirstEnergy paragraph with the words “isn’t bleak.”  Go to yesterday’s Power Line post on UBS’s downgrade of FirstEnergy’s stock.  In his analyst report, UBS industry specialist Julien Dumoulin-Smith said about FirstEnergy’s future, “It looks bleak.”  Oops.

10 States Have Already Met New Carbon Targets

The NYT reports this morning that ten states had already met the new federal targets for carbon emissions reductions by 2012.  This is an indication that the choice of 2005 was an easy way to let states off the hook for real reductions.  Much of the carbon emissions reductions has happened because electricity demand has fallen, not from any other changes in behavior or generation.

Although reductions from falling demand indicate how weak the new EPA standard is, they also illustrate the kind of impact demand management, including investment in energy efficiency and conservation, can have.  The whiners need to stop whining and get to work.

The NYT story also illustrates that multi-state agreements like RGGI work:

Maine, Massachusetts, New Hampshire and New York cut their power-sector emissions more than 40 percent from 2005 to 2012, according to the Georgetown Climate Center, with Maryland close behind at 39 percent. The states are part of a nine-state project called the Regional Greenhouse Gas Initiative and, like much of the country, have benefited from the recent abundance of cheap natural gas.

Some Thoughts on the New EPA Carbon Rule

There has been lots of hyperventilating today following the EPA’s announcement of its new carbon rules.  I’m not going to join in the chorus, because I don’t think the announcement is really that big a deal, particularly for WV.  I laid out my thoughts back in March on the policy failures in WV with regard to having strong credit and offset programs in place.  That train has already left the station, and the war on coal crowd has missed it.  And WV will pay the price.

Here on The Power Line, I like to deal in facts, not overstated benefits or overstated horror stories.  Here is a great graph that Ken Ward posted today in discussing the EPA rule:

The new EPA rule requires coal fired power plants to reduce their carbon output by 30% of their 2005 output by 2030.  The graph shows that WV’s carbon output was 85 million tons in 2005.  As you can see from the graph, carbon emissions have fallen off dramatically since then in WV.  Readers of The Power Line can readily identify the reasons – the recent drop in electricity demand and intense price competition from natural gas.

So WV’s carbon output in 2011 was 72 metric tons, down 13 million from 2005, or about 15% less than the 2005 output.  Ken Ward and Evan Hansen both pointed out that WV is already halfway to the 2030 reductions without really doing anything.  So no, 30% is not 30% for WV, it is really only 15% or a reduction of about 13 million tons of carbon.

Keep in mind also that the deadline for the full reductions is 2030.  That’s more than 15 years away.  There will be a lot of lawsuits, legislative attacks and general resistance in the meantime.  The coal industry is likely to throw its money behind candidates who want to roll back the rule, the way they backed Cheney over Clinton’s enforcement of the new source review prosecutions in 2000.  This rule is an executive branch action and, with a different president, could disappear.

In her statement today, EPA Administrator Gina McCarthy blew the war on coal guys away.  She pointed out a fact of economics in response to their claims that electric rates will rise and little old ladies will freeze in the dark.  Ms. McCarthy said that if electric rates rise, this will increase the value of conservation through energy efficiency improvements and electric bills will actually fall.  You have seen how that works here on The Power Line.

As Ms. McCarthy points out, investment in efficiency technologies and renewable power will increase overall employment when the new rule is fully implemented.  This investment will end up cutting electric bills, not raising them.  This is exactly what has happened in European countries that have strong energy efficiency standards.

West Virginians, particularly the coal industry, will have to adjust to the new reality.  Unfortunately, the people who could be leading this transition in a productive way have decided to throw tantrums and whine.  They have failed us and our state.

The “Invisible” Shift

I recently saw this article that fact checks a segment that apparently ran on CBS’s 60 Minutes in December titled “The Clean Tech Crash.”  I do not have a subscription to satellite TV, cable companies refuse to serve me and I don’t get broadcast TV in my holler.  I can see the miniscule amount of TV that interests me on the Internet or DVD.  So I didn’t watch the original show.

I am not really interested in rebutting 60 Minutes.  I am interested in how and why a network like CBS would be interested in proclaiming some kind of end to renewable power.  And beyond that, why CBS is now competing with its main competitor, Fox News, to generate silly claims about government skulldugery concerning renewable power.

First, let’s look at the relationship between the TV industry and the electric power industry.  AEP’s Web site has this post which claims that the average household in the US owns almost 3 television sets.  Those TVs are getting larger and larger and consume more and more electricity.  A 50″ plasma TV burns 400 watts.  If that TV runs 8 hours per day, that is 3.2 kwh per day, or almost 100 kwh per month.  The DoE has a good explanation of the impacts of these trends on energy consumption.

So the interests of the TV broadcasting companies are deeply tied to increasing the amount of TV people in the US watch, because their advertising revenue depends on eyes on the screen.  More TV means more electricity consumption.  So, guess what, TV broadcasters are the natural allies of the large electricity holding companies that control the US electrical system.  CBS has moved through a number of buyouts and realignments over the years, but it was owned until the 1990s by Westinghouse, a major electrical giant in the US.  And NBC is owned by General Electric, a major player in the US electrical hardware industry.

It should surprise no one that CBS is trying to proclaim the death of renewable power following the Edison Electric Institute’s declaration of a strategy to strangle solar power in particular before it can destroy any more of the reigning centralized electric industry business model.

Broadcast TV has always been about mass advertising.  Content is always secondary.  The basic behavioral conditioning techniques of mass advertising have now completely taken over what networks claim is news reporting.  Fox started with the “Solyndra” mantra that sought to trigger the viewer response: solar power can only survive with subsidies, no other electrical generation receives subsidies and is solely market driven, the Obama administration is trying to destroy the economy with its hidden “green” agenda.  CBS, for its part, echoes the Solyndra gambit, but goes further to proclaim the “greentech crash.”

But it’s not.  Grid scale solar capacity is now a major component of all new generating capacity being built in the US.  Small scale residential solar capacity installation continues to explode.  A total of over a gigawatt of solar capacity of all kinds was added in the third quarter of 2013 alone.

TV World is not interested in facts, however.  Broadcasters sell advertising to a segment of the population that is already programmed to buy more and larger TVs.  This market segment welcomes the constant message that electricity will always be there when they buy another TV or video game.  This market segment isn’t focused on scaling back their viewing or TV watching because it wastes valuable national resources, or because it destroys much of southern WV (or poisons the water supply of the state capital).  These people are certainly not the active, innovative citizens who are out there in the real world transforming the US electrical system.

So there is no surprise here that 60 Minutes is bent on proclaiming renewable power “over” like last year’s toothpaste.  Just because the transformation of the US electrical system is invisible to the US media, does not mean it isn’t happening.  Just ask the holding companies that run the Edison Electric Institute.

FirstEnergy in Serious Trouble

Someone has been coming to The Power Line recently using the search term “is firstenergy the next enron.”  Well, I wouldn’t go that far, for lots of reasons, but take a look at what blogger Jonathan Bluhm is saying about FirstEnergy over at Seeking Alpha.

I have seen a number of articles lately about FirstEnergy’s coming dividend crisis.  Companies pay dividends out of the profit they are making.  FirstEnergy’s problem is that their profit has been falling steadily over the past year or so.  The company has kept its dividends the same throughout that same period.  This means that they are reinvesting less and less of their profits back into their company for things like, oh, I don’t know, maybe meter reading and distribution line maintenance.

Let’s see what Mr. Bluhm had to say.

While the company can be applauded for its dramatic efforts to transform for the future, they are still way too late to the party. As such, they have lagged their industry peers drastically over the past few years, down over 40% vs. the Vanguard Utility ETF (VPU) being up 40% and the S&P up 102%.

In fact, the 10-year chart for FE shows that they haven’t even managed a positive return during that time period. The shares went on a nice run-up to their peak at over $80 in 2008, but since then, have given all of those gains and more back, finishing the 10 years down almost 10% total.

The reason for the especially harsh decline in FE this year has been because of their terrible earnings reports. The company has seen earnings per share steadily decline since 2008 when it was $4.38/share to 2012, when it was $1.84/share. But for the trailing twelve months, the EPS total is only 25 cents. That means FE is trading at the ridiculously high P/E ratio of 126.8. That’s an expensive utility. In their most recent quarterly report sales, earnings, cash flow and profit were all down, while debt, expenses and interest payments were up.

The dividend at FE looks great right now compared to their peers, yielding almost 7%. But the truth behind that number is that it hasn’t been raised in 5 years. At its peak in 2008, it was actually only yielding 2.65%, pretty paltry for a utility. The drop in share price since then is the only reason its yield has gone up so much, not dividend raises. The last two quarters, the company has been Free Cash Flow negative, meaning they’ve taken on debt to pay shareholders their dividend. While it’s not a desirable situation to be in, this happens from time to time for plenty of companies, especially utilities. But management will do it for the sake of not alienating shareholders and justify it by looking to future growth to get the cash flows back in the positive again. This isn’t the case for FE, and it won’t continue to happen much longer.

Ruh roh.  And here is his conclusion.  It’s pretty funny from an analyst who claims he never tells investors to sell a stock.

I’ll never tell investors to “sell” a stock because I’m just not that type of investor. I don’t ever short a company – it’s just not my style. If that means I don’t make as much money as the guy who does, then so be it. I guess you could say I’m an optimist?

However, I will say this – do not buy FirstEnergy, even at these extremely low price levels. Especially don’t buy FE for the yield as that appears to be a trap. I wouldn’t even think of touching FE with a 130 foot electrical tower (inside joke) until the shares touch the 50 day moving average, the debt ratios improve, and the company posts solid numbers for a couple of consecutive quarters. Utilities is not the sector you want to bottom feed in. Utilities are some of the slowest companies to enact change due to the regulatory environments in which they operate and their long-term outlooks.

FirstEnergy’s efforts to transform the company into a leaner and greener one are to be applauded, but they will take years to realize. This isn’t my opinion, it’s the managements. Many of their projected changes are not due to be completed until 2017 or later. Over that 3-4 year time period, I predict that dividends will have to be cut and sales and earnings growth will stay relatively flat. The changes the company is undergoing will take substantial levels of capital investment, which the company currently does not have partly because of the dividend. You can safely leave this stock out of your considerations for a while, though they may be worth checking in on in a year or two.

So Bluhm is saying that FirstEnergy is in a real bind, in several ways:  the company needs to invest a lot of capital in itself, but it has too much debt already; the company has to cut its dividend which will cause its stock price to fall further; FirstEnergy has been too slow diversifying its generation mix and seeking havens in regulated markets and can’t change far enough fast enough.

There is an interesting map in the article of FirstEnergy’s service area:

Now look at this map of PJM Interconnection’s service territory:

pjm-zonesNotice that FirstEnergy now has geographic reach across the whole PJM region, from the NJ shore to northwest OH.  While most of the population centers in PJM remain in other hands, in the two years since it joined PJM (after swallowing PJM member Allegheny Energy) FirstEnergy is now a force to be reckoned with inside the PJM cartel.

Note also that of the four states in which FirstEnergy operates, only WV has a regulated electricity market.  We know that the Harrison deal was an attempt by FirstEnergy to suck cash out of its Mon Power subsidiary, as well as a belated attempt to arbitrage a regulated state by dumping an obsolete coal plant onto WV rate payers.

But as Mr. Bluhm points out, this may be too little too late to allow FirstEnergy to escape the financial strait jacket it has created for itself.

EEI Implementing Strategy to Attack Solar in AZ

The power company lobbying group Edison Electric Institute published a report in January laying out their strategy to crush residential solar generators by eliminating net metering.

Now there is growing evidence that EEI has poured “dark money” into a campaign by an Arizona power company to roll back net metering in the US state with the best solar power potential.

As part of the fallout from Arizona Public Service’s (APS) scandal surrounding lying about funding dark money organizations to attack rooftop solar and in response to Edison Electric Institute’s (EEI) series of television and radio ads against rooftop solar in Arizona, the Alliance for Solar Choice (TASC) wants EEI to disavow what TASC calls “APS’s underhanded behavior” and state whether or not EEI has used dark money.

“APS lied to regulators and the public for months,” said Bryan Miller, co-Chair of TASC. “EEI should give a firm ‘yes’ or ‘no’ on their own use of dark money, and whether or not they endorse APS’s tactics.” TASC advocates for maintaining distributed solar energy policies, such as retail net metering. Public policies to encourage net metering are in effect in 43 states and the District of Columbia. Three additional states have utilities with voluntary net metering programs.

Ruh roh.

WV Coal Association Chairman Files for Chapter 11 for Coal Company and Longview Power Plant

I don’t usually post about the WV coal industry, unless there is a connection to electricity issues.  In the past week, just such a story dropped into my lap.  WV Coal Association Chairman James Laurita, Morgantown coal baron, filed for Chapter 11 reorganization in federal bankruptcy court.  Here is a link to Ken Ward’s post about the situation, including some very interesting links to the bankruptcy filing, in particular an affidavit filed by Longview CEO Jeffery Keffer.

I’ll let you draw your own conclusions about the situation after you read Mr. Keffer’s affidavit.  To me, the whole Longview project looks like one big charlie foxtrot from start to finish.  Laurita is the current scion of the family that has owned MEPCo, a coal company that operates in the Morgantown area.  It appears that MEPCo had no experience with operating a coal-fired power plant, but that is just what they contracted for in the 2000s.

Remember that the 2000s were the go-go years of deregulated electricity.  Suckers were pulled into the market by hucksters like Enron’s Ken Lay and Jeffrey Skilling.  It appears that the Laurita family took the bait and ventured into a quagmire.  They contracted with Siemans and Foster Wheeler, to international power plant giants, to build them a $2 billion plant with a rated capacity of only 695 megawatts.

Those numbers alone indicate how crazy the scheme must have been.  Laurita, of course, blames the contractors for all his problems.  But that is just like a coal industry executive.  And now everyone is suing everyone else.

Throughout the bankruptcy filing, Laurita continues to claim that if the plant were working perfectly, his companies would be making money.  Meanwhile, here in the real world, things are different.

Here’s how Mr. Keffer explains the current situation:

31. The Debtors’ ability to manage through the challenges arising from the Contractors’ Failures have also been affected by the current economic environment. Wholesale electricity prices have fallen significantly since construction on the Power Facility began in 2007 as a result of, among other things, the broader recession that commenced around that time, resulting in reduced electricity demand and substantial reductions in natural gas prices. Lower natural gas prices have been caused, at least in part, by the rapid expansion of natural gas production and natural gas inventories arising from the discovery of new shale deposits and the development of new extraction techniques. The presence of low-price natural gas reduces the variable costs of natural-gas fired power facilities and reduces the wholesale market price for all generators. Year-to-date, the average price per megawatt for electricity sold into the PJM on a day-ahead basis was approximately $33 per megawatt-hour—approximately 52 percent of the average power price forecasted for 2013 when construction began on the Power Facility in 2007.

32. Wholesale coal prices have also continued to fall as global markets face oversupply and as U.S. power generators have continued to shift away from coal fired technologies. The Debtors believe this shift results from, among other things, increased costs associated with environmental and regulatory compliance and pressures resulting from fierce industry competition with natural gas-fired power facilities.  The coal industry as a whole has idled mines and reduced production in order to compete.

33. Moreover, the power generation and coal production industries are highly competitive on both a regional and national level. For example, Mepco does not compete solely with other regional mines, but also competes against national and international competitors that transport coal into the region. Similarly, Longview Power competes to deliver electricity to PJM against other coal-fired power generation stations as well as natural gas-fired power, nuclear power, and renewable energy, among other sources. This competitive environment has added anadditional layer of complexity to the Debtors’ existing challenges.

Translation: “We drank the kool-aid in the early 2000s and thought that Cheney would kill renewable power forever and that the Cheney administration would create the perfect environment for coal-fired generation.”  Instead of taking responsibility for making a $2 billion mistake, Keffer starts the next paragraph this way:

34. The Debtors, however, believe they can compete effectively once they are no longer hamstrung by the Contractors’ Failures. As noted above, the Power Facility uses designs, equipment, processes, and technology that have made it one of the most efficient coal-fired power plants in the country—when the Power Facility can operate at full capacity.

Note that “when” in the last sentence.  That should be an “if.”  And we know that “if” is fantasy.  The drop in demand is not the result of “the recession,” but a long term trend, something acknowledged by everyone in the electricity business (except Mr. Laurita and Mr. Keffer).

Early in his affidavit, Mr. Keffer states: “the Power Facility has only had a capacity factor of 68 percent since Longview Power took possession [in December 2011].”  Hey, compared with other coal fired merchant plants in PJM, that 68% capacity factor looks pretty good.

The current capacity factor for “steam” generators, almost entirely coal fired plants, in the most recent quarterly report by the PJM market monitor is 48.5%.  The market monitor lists the Jan-June 2012 capacity factor for PJM steam generators at 41.4%.  If Longview can’t make money with a capacity factor significantly higher than other coal fired generators, the company’s prospects for the future look grim, contractor problems or not.

Flat Demand Killing US Nukes

In recent months, four nuclear powered reactors have announced permanent shut downs.  All of these shut downs are considered “early” because they are taking place before the end of the planned lives of these units.

Recently, the industry has seen the shutdown of four reactors — San Onofre (2 reactors) in California, Kewaunee in Wisconsin, and Crystal River in Florida – as well as the end of five large planned ‘uprate’ expansion projects — Prairie Island in Minnesota, LaSalle (2 reactors) in Illinois, and Limerick (2 reactors) in Pennsylvania.

Fierce Energy also reports that:

“The Duke decision to pull the plug on Levy follows by just one day the announcement that the French-subsidized nuclear giant EDF is pulling out of the U.S. nuclear power market due to the inability of nuclear power to compete with alternatives and the dramatic reduction in demand growth caused by increasing efficiency of electricity consuming devices,” Mark Cooper, senior fellow for economic analysis, Institute for Energy and the Environment, Vermont Law School. Cooper recently forecast that three dozen reactors are at risk of early retirement.

The new world of flat demand in the US has pulled the rug out from under the Cheney attempt to use the old bait and switch between nuclear power and coal generation.  Cheney pushed new coal plants, while at the same time pushing new nukes as a way to generate power without producing carbon dioxide, even though he led global warming deniers.  Some innocents, like Stewart Brand, Al Gore and even Jim Hansen, were taken in by this flimflam.

And who can forget the 1960s industry propaganda that nuke power would be “too cheap to meter.”  Yeah.  Tell that to the Florida Power and Light rate payers who have gotten stuck paying in advance for expensive electricity that they will never get from the Crystal River plant.

Instead of “too cheap to meter” nukes have proven to be too expensive to run.


Where Does AEP Make Its Money?

Pam Kasey has a concise summary over at Grounded of AEP’s current financial situation.

CEO Nick Akin is doing his quarterly conference call today, and Pam’s story must have come from AEP’s advance press release.  Here’s the heart of the story:

The company continues to experience load decline in parts of its service territory due to lagging industrial demand, said, AEP President and CEO Nicholas K. Akins.

There also was a slight decline in commercial demand in the second quarter, and residential load remains essentially flat year over year, Akins said.

“The strong results from our regulated businesses, including transmission, are offsetting some of the negative earnings impacts from the transition to competition in Ohio,” he said.

When AEP’s sales from industrial and commercial customers decline, the company still has to cover its overhead costs for generating and providing electricity.  Who gets stuck paying higher rates when there are fewer kilowatt hours sold to cover the same fixed costs?  You guessed it – residential customers in regulated markets.  In AEP’s case, that means us in West Virginia.

Note also that AEP’s transmission business remains profitable.  And why is that?  Largely because of the FERC boondoggle created by Congress in the 2005 Energy Policy Act that allows higher returns on equity for high voltage transmission projects.  Through the FERC cost recovery process, those guaranteed higher profits get passed on to rate payers.  Again, as demand from industrial and commercial customers falls, those costs fall more and more on residential customers.

In WV, we see the results of AEP’s current business strategy.  Fortunately, citizen resistance led to the killing of the PATH transmission line, but AEP is now trying to dump more fixed costs, namely Unit 3 of the John Amos plant and half of the Mitchell plant, onto WV rate payers.

Power Company War on Solar and Energy Efficiency Taking Off

Here is a story from BloombergBusinessweek about the threat of small scale solar power to power companies’ bottom lines.

I don’t put much store in ratings agencies any more after they colluded with investment banks to commit fraud in the real estate bubble, but corporate credit ratings matter to power companies.  Fitch is issuing this report as a warning of downgrades to come if power companies don’t step in and squash rooftop solar power soon.

Utility revenue is increasingly threatened by technology that’s reducing demand for electricity from the grid, including solar panels, smart meters and software that shuts down operations when power prices spike. As some customers’ bills fall, state regulators will let utilities shift some of their fixed costs to other customers who don’t use solar panels, Grabelsky said today from New York.

What is power companies main weapon?

Loss of demand from customers that go solar or reduce consumption in other ways will shift more and more grid costs onto customers that do nothing. Power supplied by U.S. utilities declined 3.4 percent last year, largely from energy efficiency and on-site solar generation, which reduces demand for electricity from the grid, Grabelsky said.

Unless utility rate structures change, that will reduce utilities’ abilities to invest in major new projects and upgrade their transmission systems, Grabelsky said.

“It will have a negative impact on their ability to raise capital,” Grabelsky said. “Regulators will ask, ‘Do you really need all that new transmission when there’s no demand growth?’ There’s the potential for stranding assets.”

There it is “unless utility rate structures change” to penalize the most innovative electricity users and producers, power companies will be in real trouble within 5 years.  This translates into: do away with net metering and charge higher rates to people who install solar panels and invest in efficiency.

Gosh, where have we heard this before?  Maybe here?

So now it appears that the electric power industry has “catapulted the propaganda,” in George Bush’s unforgettable phrase, into the business media.  As the Bloomberg article points out, Arizona’s utility regulators, recently taken over by industry-financed teabaggers, is in the process of instituting just the kinds of rate increases that the power companies want:

Utilities’ efforts to penalize customers that add rooftop systems were recently defeated in Louisiana and Idaho. Arizona regulators are now considering a proposal by its largest utility, Arizona Public Service Co., to reduce the price it must pay to buy solar power from customers.

So be forewarned.  This war will come to your state soon.