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Electric Utilities
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10.29.2018
NAICS CODES: 2211
SIC CODES: 4911
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Companies in this industry generate, transmit, and distribute electric power. Major companies include Duke Energy, Exelon, and Southern Company (all based in the US), as well as EON (Germany), EDF (France), Enel (Italy), and Tokyo Electric Power (Japan).
The global electricity industry generates about 24 trillion kilowatt hours (KWh) of electricity. Leading countries in electricity generation include China, the US, India, Russia, and Japan. Unmet demand in parts of India and Africa is helping to fuel industry growth.
The US electric utilities industry includes about 10,800 establishments (single-location companies and units of multi-location companies) with combined annual revenue of about $470 billion. Major segments of the electric utilities industry, including electric power generation and electric power transmission, are covered in separate profiles.
Competitive Landscape
Although deregulation has altered power markets in many nations, electric utilities often continue to operate as unofficial monopolies in a given service territory. A growing number of countries have deregulated or are moving to deregulate their energy markets, including Australia, Canada, France, Germany, Japan, India, Italy, Portugal, Russia, Spain, the UK, and the US. The intended purpose of moving toward a less-regulated electricity market is to decrease the cost of electricity by fostering competition among producers. One practical effect is the divestment of generation facilities by many investor-owned and government-owned utilities.
Profitability in the electric utility industry is determined by government regulations and fuel costs. Large companies have an advantage in negotiating fuel contracts. Small companies can compete effectively by exploiting market niches, such as offering green power in regulated markets.
In the US, the electricity industry for many years consisted of investor-owned utilities, municipal utilities, cooperatives, and government entities that owned the generation, transmission, and retail distribution facilities within a limited area and served all customers within that area as tightly regulated “natural monopolies.” Though “natural monopolies” still exist, the electric energy industry in the US underwent a restructuring driven by changes in federal and state laws in the 1990s. In restructured (or deregulated) markets, generation, transmission, and distribution operations are carried out by separate companies, and the owners of local distribution lines make their lines available to competitors.
Despite the popularity of restructuring activities initially, only about 15 US states have deregulated their electricity industries. Several other states, including California, launched restructuring initiatives before suspending them, in part because of concerns that restructuring caused electricity rates to rise. Many local electricity distributors are still owned by utility holding companies that also own power generation facilities, wholesale transmission lines, and wholesale power trading companies. The US electric utility industry is concentrated: the 50 largest companies generate about 75% of industry revenue.
Competitive Advantages
Investment in Renewables – Utilities are setting ambitious goals to incorporate more renewable energy sources into power generation portfolios. Companies that invested early and developed expertise in wind and solar facilities are reaping rewards as costs decline and demand grows from customers and government agencies seeking to cut greenhouse gas emissions. Global spending on new renewable power capacity totals about $300 billion annually, making up the largest area of worldwide electricity investment, according to the International Energy Agency (IEA).
Upgrading Infrastructure – In emerging economies, capital requirements for new power lines are high as demand for electricity skyrockets. In developed nations, companies must invest heavily in infrastructure upgrades and expansions to support new renewable generation assets and replace aging equipment. Smart grid investments help lower costs by improving reliability and efficiency. Government and commercial spending on power networks worldwide totals about $280 billion per year.
Strategic Marketing – In competitive markets, electricity generators and marketers gain the biggest advantage by offering lower rates. Companies may also cater to consumers who prefer to buy energy that comes from renewable sources such as wind and solar plants. Utilities may also offer special energy conservation or supply management services to commercial clients.
Companies to Watch
One of the largest utilities in the US, Duke Energy serves more than 9 million power and gas customers. The company has set goals to increase renewables from 4% to 9% of its power mix over the next 10 years, as well as to invest $11 billion in cleaner generation sources, including natural gas, to reduce use of coal. The utility is also investing heavily in grid modernization efforts.
NextEra is one of the world’s largest generators of renewable energy, with about 20,000 MW from wind and solar power plants. The company operates in the US, Canada, and Spain and has energy marketing operations.
NextEra plans to build between 10,000 MW and 16,500 MW of wind and solar projects between 2017 and 2020.
Enel delivers electricity and gas to 64 million customers in 35 countries, primarily in Europe and the Americas. Enel is investing heavily in alternative energy sources and in modernizing its grid network. The utility is working to improve digitization and distribution mobility by implementing smart grids, digital meters, EV charging stations, and remote connectivity systems.
Products, Operations & Technology
Major services include electric power transmission, control, and distribution (about 70% of US industry revenue); and electric power generation (30%). The electric power generation segment can be further broken down by power source. Most commercial power comes from turbine engines powered by steam produced by burning fossil fuels, mainly coal and natural gas. Other power sources include steam from nuclear reactors; conventional hydroelectric conversion; and renewable sources such as solar, wind, and geothermal. Natural gas was the top fuel source for US power producers in 2017, representing 32% of the fuel mix compared to 30% for coal. Other sources and shares for 2017 included nuclear, 20%; hydroelectric, 7%; wind, 6%; biomass, 2%; and solar, about 1%.
The output of the generation plant is stepped up to a high voltage at the transmission substation for connection to the wholesale power transmission lines (the transmission grid), and then lowered at smaller power substations or transformers to feed local power distribution systems for delivery to homes and businesses.
Transmission lines are generally of a higher voltage than distribution lines, and often follow major highways. Distribution lines run above or below city streets and to individual consumers. Long-term storage of electricity is not feasible, creating the need for real-time balance between power generation and consumption.
The primary operations of retail electricity distributors include acquiring wholesale power (often under long-term supply contracts), maintaining and extending a line network, and billing and collections. Distributors may purchase from affiliates or buy power in the wholesale market. If local utilities can’t meet demand through their own generation facilities, extra electricity may be bought from another utility with spare capacity. Utilities may also purchase from independent power producers. Power marketing companies are intermediaries in the wholesale market, buying power from generators and selling to distributors through short- or long-term contracts.
Fuel costs are a significant portion of annual operating expenses for power generation companies, and associated environmental pollution controls are also a major consideration in selecting a power source. Petroleum and natural gas emissions can be controlled at reasonable costs, but prices for these fuels are often volatile.
Coal prices are the most stable of potential fuels, but emission controls can be expensive. Design challenges, extensive environmental regulation, and waste storage challenges make the costs of nuclear power plants higher than that of conventional plants. Hydroelectric plants are the most thermally efficient and least polluting generation method, but the number of suitable locations for dams is limited and long-term downstream effects are a growing concern. A number of state initiatives, particularly in the western US, are aimed at increasing the proportion of commercial electric power generated from renewable sources to between 10% and 30%.
Technology
Utilities continue to invest in smart grid technology, which is expected to enhance the capabilities of transmission and distribution networks, potentially boosting margins long-term. Smart grids gather information about power production and consumption to improve reliability and efficiency. Smart meters monitor in-home demand and feed information back to the electricity grid. Other technologies allow transmission infrastructure to adjust to local power demands in real-time.
Power plants are highly automated with monitoring equipment sensing and measuring all operations, from burning fuel to controlling plant output voltage, frequency, and amperage. Monitoring equipment senses load changes in milliseconds and adjusts output accordingly. In nuclear power plants, monitoring is highly sophisticated and includes reactor performance and radiation monitoring. The control systems at nuclear power plants can sense dangerous conditions and automatically shut down the reactor.
Renewable portfolio standards are compelling energy providers to replace fossil fuel-powered plants with facilities that use alternative technologies. Tax credits, efficiency enhancements, and falling equipment prices have made solar and wind increasingly popular. Increasing solar capacity via utility-scale projects and panel leasing programs could help utilities meet the competitive challenge posed by distributed solar power generation, such as on-site rooftop systems that operate off the grid.
