[SSR Utilities] T&D Capex, Not the Transition to Clean Energy, Is Driving Rate Base Growth: Why Is This the Case, and What Are the Benefits and Risks?

The clean energy transition is expected to offer utilities a long term avenue for growth through major investments in renewable generation. Over 2017-2022, however, generation’s share of total electric rate base fell markedly, offset by growth in the shares of transmission and distribution. Over the five years from 2022 through 2027, growth in generation rate base will continue to lag the growth of rate base as a whole, while transmission and distribution rate base will continue to grow rapidly. Distribution, already the largest component of rate base, will be the largest single driver of utility capex and rate base growth over the next five years and its share of total rate base will continue to rise.

In this research report, we use utilities’ regulatory filings to identify those categories of expenditure that are driving the growth in distribution and transmission rate base. Based on this analysis, as well as corporate disclosures and our discussions with utility managements, we assess the primary drivers of distribution and transmission rate base growth to be upgrades in the quality of poles, conductors, and substations to harden grids against storms, floods, and wildfires.

Utilities’ prioritization of reliability-enhancing investments to harden distribution and transmission grids, and the longer term opportunities utilities face in renewable generation and associated transmission, suggest that the industry may enjoy more diversified sources of growth and a smoother growth trajectory than is commonly thought. We also see the rapid growth of distribution and transmission capex as a positive development in the business risk of the industry, not only because regulators will likely support grid-hardening capex, but because investments to upgrade existing distribution and transmission assets imply much lower permitting, construction, operation, and regulatory risks than do new power plants or long distance transmission lines. Utilities’ current focus on distribution and transmission capex, therefore, not only stabilizes the trajectory of the industry’s growth but reduces its risk.