Low-Carbon Electricity Can be 20% Less Costly with New Models of Finance

SAN FRANCISCO – Over the last six years, utility company shares have underperformed the general market by around 30% in the U.S. and 40% in Europe. These troubles come at the same time that leaders are calling for greater investments in energy efficiency, low-carbon electricity, and grid and distribution systems. In a new study, “Roadmap to a Low Carbon Electricity System in the U.S. and Europe” Climate Policy Initiative (CPI) shows that new finance models, combined with a set of other adjustments to electric utility business models, could help the electricity industry manage the transition to a lower-carbon electricity system while reducing the cost of low-carbon electricity up to 20%.

“The world is headed toward a lower-carbon electricity system. Today’s decisions will determine whether that transition is affordable for taxpayers and electricity consumers. It’s up to policymakers and regulators to make the adjustments needed,” said David Nelson, Senior Director at CPI and lead author of the study.

The study points out that today’s industry has developed around fossil fuel generation. Whereas small levels of low carbon investments have been easily absorbed into the existing system, as these investments grow, incompatible financing mechanisms, rate design, and market structure threaten to raise costs substantially. To deal with these pressures and support a lower-carbon energy transition, each of the five utility business segments – generation, transmission, system balancing and market operation, distribution, and customer management – must adapt.

Finance Models that Work for Institutional Investors

Several new investment vehicles are already emerging in both the U.S. and Europe with potential to decrease large scale low-carbon electricity costs by up to 20%. For example, YieldCos bundle renewable energy and other infrastructure-type assets into an investment vehicle that offers steady dividend yields. These vehicles can be appealing to institutional investors, a set of investors who manage over $71 trillion of assets, and can offer the high upfront capital required to finance low-carbon electricity at low cost. Prominent examples of YieldCos include NRG Yield, Greencoat Energy, Pattern Energy, and the recently announced Nextera YieldCo. However, wider adoption and further improvements are needed to unlock the full value.

Customer-Driven Generation and Flexible Demand

Customers are emerging as active participants in the electricity system, with the increased deployment of rooftop solar and other distributed generation, as well as energy storage. Their demand for electricity is also becoming more flexible with the growth of electric vehicles and sophisticated energy management systems. While utilities may view customers buying less energy off their grid as a threat, customer generation and flexibility has the potential to save the system billions of dollars, enabling greater penetration of low carbon energy and increasing system reliability. New business and financing models, improved pricing structures and the integration of energy management systems will help unlock the value, sharing value between utilities, consumers and new, innovative companies, while lowering cost and improving the reliability of the system as a whole.

To read the full report, visit: www.ClimatePolicyInitiative.org

Climate Policy Initiative (CPI) is a team of analysts and advisors that works to improve the most important energy and land use policies around the world, with a particular focus on finance. CPI works in places that provide the most potential for policy impact including Brazil, China, Europe, India, Indonesia, and the United States.