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Feature Article

What’s Working Now

By Roger S. Conrad on Aug. 10, 2015

Earlier this month, the US Environmental Protection Agency (EPA) issued final rules designed to limit carbon dioxide (CO2) emissions from power plants.

As with the proposed rules released a year ago for public comment, the new regime establishes specific reduction targets for CO2 emissions in each state. Utilities and state regulators have considerable latitude in developing a course of action for achieving these goals. The final rules require states to submit and start to implement a plan by 2022; the draft that circulated last year contemplated a 2020 deadline.

Utilities and states that rely heavily on coal-fired power plants have the most work to do.

Other changes to the proposed rules include a safety-valve provision whereby states can take action to prevent disruptions to the power supply; the elimination of energy-efficiency requirements; the inclusion of nuclear power as a qualifying source of clean energy; and new incentives to promote renewable energy.

Whether these regulations survive to 2022 depends on which party occupies the White House after the 2016 election. Democratic front-runner Hillary Clinton and the party’s other candidates have either endorsed the EPA rules or suggested beefing them up even more. Republicans appear to be universally against the new rules, with some going so far as to urge states to refuse to comply.

Even if these rules don’t survive, they’ve already started to shape capital expenditures in the utility sector. Renewable-energy developers received a boost, which helps to offset the expiration of solar-power tax credits at the end of 2016 and the potential overbuilding of intermittent renewable-energy in some states. These rules are also bad news for coal producers.

Electric utilities and the pipeline owners that transport natural gas to power plants are the big winners.

The recent boom in solar-power deployment has suckered all too many investors into SolarCity Corp’s (NSDQ: SCTY) vision of a future where customers cut the cord and opt for rooftop solar-power installations, sending electric utilities into a death spiral.

In this self-serving view of the future, rising adoption of solar power reduces demand for traditional sources of electricity, saddling utilities’ remaining customers with higher costs and spurring more defections.

But SolarCity appears to be the only company locked in a potential death spiral. For several quarters, the solar-power evangelist has lost more money with each incremental dollar of revenue.

The company’s most recent 10-Q filing shows operational losses of 128.8 percent of revenue, compared to 121.1 percent in the second quarter of 2014. And these figures don’t include interest expense, which increased 59 percent year over year. Meanwhile, SolarCity’s operational cash losses have ballooned by more than five times.

In contrast, solar power has emerged as a major source of earnings growth for traditional utilities, primarily through investments in large-scale installations. But Southern Company (NYSE: SO) and other utilities have also launched their own businesses focused on developing and leasing rooftop solar panels.

And weather-adjusted demand for electricity has started to tick up in areas around the country, driven by customer additions and rising consumption. Bottom Line: US electric utilities don’t appear to be trapped in a death spiral.

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