Squeezing out sparks

Facing tight credit and diminished demand for power,
utilities see themselves between a rock and a hard place.

Three months before panic hit the financial industry, Charlotte-based Duke Energy Corp. started seeing demand for electricity soften. With industrial customers cutting production, unemployment rising, disposable income falling and homeowners paying more attention to energy costs, 2009 might be another light year for energy producers. Meanwhile, they’re laying plans to meet a state mandate that 12.5% of electricity come from alternative energy sources and operating efficiencies by 2021. Duke CEO Jim Rogers says it won’t be easy.

BNC: What part of your business will be hit hardest?

Rogers: Where we might see a steeper decline is with industrial customers, where they’re going from three shifts to two or two shifts to one or they’re shutting down their operations. We’ve seen a continuous decline for many years in the textile industry in North Carolina. One of the toughest projections we have to make is whether this recession will be a short one. Virtually every recession in this country since 1980 has been two to three quarters. And I think that’s tied to the globalization of financial markets. The flow of capital has been smoother and quicker, and it allowed economies to bounce back more quickly. This recession could last four to six quarters or longer.

How will your industry deal with it?

We’ll probably focus more on internal costs. When the economy’s softer, you’re not getting the growth in earnings from growth in demand, so you have to focus on cost more. What makes this more complicated is that we have very tight credit markets. Our company is projected to spend $4.7 billion this year, and we are expected to raise roughly $2 billion from financial markets, primarily in debt. There are only two other industries in America that have to access capital as often as we do, and that’s the government and financial institutions, so the state of the credit markets is critical. One other observation: If this turns out to be a longer recession, what we’ve seen historically is a huge rebound in the demand for electricity at the end of the period. So we have to plan carefully for that pent-up demand as people go back to work and businesses crank up.

What effects will the latest election results have?

National energy policy will change significantly. There will be more emphasis on renewables, more emphasis on energy efficiency. Our company is in step with that. We have created a wind-energy business. We have 500 megawatts of wind operational and 5,000 megawatts under development. So we’re positioned to ride this public-policy wave that will push the development of wind energy. You’ll see more emphasis on solar energy. We have invested in a program to put solar on rooftops in North Carolina. It’s been remarkable to me the number of people that have called us wanting that. Gov. Perdue also has an emphasis on green jobs and on technology development, so we appear to be in step with what she’s contemplating.

What happens to rates if utilities are required to buy carbon dioxide credits in a government-run auction?

Under the Lieberman-Warner bill, rates would have gone up, depending on the price of the credits, somewhere between 13% and 30%. We need some kind of legislation soon, though. A lot of what it takes to come out of a recession is confidence and opportunity. If we have certainty about moving to a low-carbon world, that confidence will allow us to make investments, create jobs and, at the end of the day, reduce the carbon footprint of our power business. In a low-carbon world, our prices will go up. Most politicians don’t like to talk about it that way, but we need to be honest. This is not going to be cheap. It’s not going to be easy, and it’s going to be a long transition.

Do you expect rates to rise or fall this year?

We just had a reduction in our base rate, and we have a fuel clause that tracks fuel prices. We just had huge increases in coal prices, and we see them coming down, but because of the delay in the recovery of the costs, the prices of electricity might not come down until 2010.

Longer term, what economic trends will affect the energy industry in North Carolina?

One of the state’s top priorities should be to attract jobs and investments, to get companies to build new businesses here and to create an environment where companies can grow. One of my jobs is to keep our rates low, so that becomes an advantage. In Charlotte, we’re in an uncertain time because we don’t know what the Wells Fargo acquisition of Wachovia is going to mean. Bank of America has been very successful, but we’re seeing some downsizing there, so it’s probably too early to tell.

How do you plan to meet state mandates on alternative energy?

We’re going to have to look at biomass, energy efficiency and, over time, solar. Solar is the most expensive of all the alternatives. That price has to come down. With our proposal, we are in a unique position to drive the price down, because 50% of the price of solar on the rooftop is in installation. We have the trucks. We have the warehouses. We have the logistic capability.

The expected cost of your proposed nuclear plant more than doubled in two years. Is building nuclear plants still a cost-effective option?

It is, because it is the only technology today that can produce power 24-7 with zero greenhouse gases. When the wind blows, you can get wind power. When the sun shines, you can get solar power. But our customers want electricity 24-7, so if we’re going to have reliable electricity when they want it, we’re going to have to have nuclear, especially if we’re going to be in a low-carbon world. That’s why I say it’s not going to be cheap or easy to build a bridge and create a low-carbon economy.