Capital spending by U.S. investor-owned electric utilities has steadily increased over the past decade, a trend expected to continue. Actual capital expenditures rose from $96.1 billion in 2014 to $171.9 billion in 2023, marking a 78.9% increase over 10 years. Projections for the next three to five years indicate further growth as many utilities announce significant spending plans to support load growth from data centers and artificial intelligence, modernize the electric grid, add generation capacity, and enhance resiliency and reliability through new or upgraded infrastructure.
As of September 16, 2024, 72 electric and 71 gas rate cases were pending across 41 states and the District of Columbia. Nearly all reflect substantial increases in requested capital expenditures. The aggregate net rate increase proposed in these cases totals $21.1 billion, excluding adjustments for later steps in multiyear rate plans.
The significant increase in capital spending presents challenges for utilities striving to achieve desired outcomes from such large investments. Deploying substantial volumes of capital is often more complex than anticipated, as the saying goes, “easier said than done.” Based on extensive work with multiple U.S. electric utilities, ScottMadden has identified key insights to help utilities navigate these challenges. These insights aim to provide practical considerations to enhance their readiness and ability to successfully execute their capital deployment strategies.
Capital Planning
Effective deployment of capital investments and achieving desired outcomes require a strong emphasis on project planning, prioritization, and execution sequencing. Adopting a structured methodology for capital planning is essential, particularly one that integrates emerging and smart technologies that will pave the way for a more resilient and reliable grid.
PMO Structure
Setting up a centralized Project Management Office (PMO) is crucial for maintaining oversight and ensuring consistency across all capital projects, particularly when managing a surge in expenditures and complex project portfolios.
Resource Demand Planning
The exponential increase in capital spending places significant demands on the personnel needed to execute various functions, such as engineering, procurement, project management, and health & safety. Effective planning ensures that workforce and resource gaps are identified and addressed in advance.
Workforce Strategy
Deciding whether to rely on in-house personnel or third-party resources directly impacts project execution. A robust oversight structure and targeted performance metrics are essential for ensuring vendor accountability and meeting project goals efficiently.
Effective Procurement Process
A well-defined procurement process is critical to supporting large-scale capital projects. Without it, organizations risk delays and inefficiencies; establishing and initiating this process early ensures effective sourcing and supplier management.
Long-lead Items
Proactively planning the procurement of long-lead items is critical to avoid delays, particularly in competitive markets where multiple jurisdictions compete for the same resources.
Systems and Processes
Large-scale capital deployment requires robust systems and processes, such as project management tools and knowledge management systems, to enable effective project tracking and documentation, decision-making, and risk management.
Warehousing and Laydown Yards
Large infrastructure projects often require additional real estate for warehouses and laydown yards. Planning for these needs in advance ensures smooth logistics and material handling during project execution.
Financial Planning
Capital spending can significantly impact a utility’s financial health by influencing cash flow, debt levels, and credit ratings. To maintain financial stability and mitigate risks, it is essential to closely monitor key financial metrics and manage the financial implications of large capital expenditures.
Planning for these critical elements lays the foundation for utilities to navigate the complexities of their capital deployment strategies with precision and confidence. By proactively addressing challenges, such as resource allocation, vendor management, procurement, and logistics, utilities can maximize the value of their investments while meeting regulatory and customer expectations. Successfully executing such large-scale plans requires a blend of strategic foresight, operational discipline, and practical expertise, ultimately enhancing the likelihood of achieving desired outcomes in an increasingly dynamic energy landscape.
