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A $1 Trillion Infrastructure Plan: Credit Perspectives For U.S. Investor-Owned Regulated Electric Utilities


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A $1 Trillion Infrastructure Plan: Credit Perspectives For U.S. Investor-Owned Regulated Electric Utilities

The U.S. Congress has passed legislation on an infrastructure spending plan, first proposed in July 2021 by President Biden and the bipartisan group from the U.S. Congress as part of the Infrastructure Investment and Jobs Act (The Biden Infrastructure Plan). The infrastructure plan aims to allocate about $65 billion of investment toward the electric transmission grid to accommodate growth of renewable energy, $50 billion to protect against physical risk such as drought, flood, and wildfires, and about $7.5 billion to build a network of electric vehicle (EV) charging stations across the U.S. Overall, certain aspects of the infrastructure legislation include provisions in several areas, including for U.S. regulated electric utilities that are potentially favorable for credit quality.

In general, we expect grants or other financial assistance provided under the infrastructure plan to offer temporary relief for affected utilities, modestly offsetting the funding needs for affected utilities who already face elevated capital spending (see chart).

Chart 1


In addition, among investor-owned utilities, we observe that many provisions under the infrastructure legislation affect regulated electric utilities more than they do compared with regulated gas and water utilities. This generally aligns with our view that investor-owned electric utilities in the U.S. account for the vast majority of the net property plant and equipment value among the regulated utilities (see chart), are disproportionately affected by the direct effects of physical risk such as severe storm, and hurricanes, and are a key part of the energy transition.

Chart 2


Select Provisions Of The Infrastructure Legislation Affecting Electric Utilities

Preventing outages and enhancing the electric grid's resilience.   This provision includes about $5 billion of grant funding available to a broad category of entities, including electric transmission and distribution (T&D) owners or operators, electric grid operators, distribution providers, electricity generators, and other entities deemed relevant by the U.S. Secretary of Energy. Under this program grants will be awarded to eligible entities to supplement their activities related to existing grid hardening efforts and reduce the risk of such entity's powerlines causing a wildfire, or that reduces the likelihood and consequence of a disruptive event. A disruptive event is defined as an event in which operations of the electric grid are disrupted, preventively shut off, or cannot operate safely due to extreme weather, wildfire, or a natural disaster.

Increasing demand-response activities, with prospects for timely cost recovery.  The plan calls for electric utilities to promote the use of demand-response and demand flexibility from its residential, commercial, and industrial customers to reduce electricity consumption during periods of high demand. Furthermore, each state regulatory authority (or public utility commissions) with ratemaking authority is tasked with establishing a rate mechanism to timely recover the costs associated with promoting demand-response and demand flexibility activities.

Matching grants to support smart grid investments.  Under this provision, sections of the Energy Independence And Security Act of 2007 will be amended to include additional clauses, enabling the Secretary of Energy to appropriate $3 billion in matching grants to support the deployment of technologies that enhance the flexibility of the electric grid. Some examples of such investments covered under this provision include utility communication networks that enable data flow between distribution system components, advanced transmission technologies such as dynamic line rating, flow control devices, advanced conductors, and others that increase the operational transfer capacity of the transmission network. In addition, the program covers grid investment activities aimed at minimizing blackouts during extreme weather, utilizing data analytics to provide more grid flexibility, and supports the integration of distributed generation energy resources to serve as assets for the electric grid. Furthermore, the program covers investment activities that help facilitate the integration of EV charging infrastructure onto the electric grid, with the ability to reliably meet increased demand from EVs.

Incentivizing investments in advanced cyber security technology.  Under this provision, several agencies, including the National Association of Regulatory Utility Commissioners (NARUC), will work together to identify incentive-based or performance-based rate-making treatments that could be used to encourage investment by public utilities in advanced cyber security technology, and for these utilities to participate in cyber security threat information-sharing programs.

Carbon capture, and storage.  The Infrastructure plan includes several programs aimed at removing carbon dioxide directly from the atmosphere. Overall, the plan includes approximately $300 million in grants from 2022-2026 to be available, to eligible entities, including utilities to purchase and use commercial and industrial products that use or are derived from anthropogenic oxides and that demonstrate significant net reductions in lifecycle greenhouse gas emissions compared to incumbent technologies, processes, and products. Regarding carbon storage, the plan establishes a large-scale carbon storage commercialization program where up to $2.5 billion in grants will be available to fund the development of new or expanded commercial large-scale carbon sequestration projects and associated carbon dioxide transport infrastructure, including funding for feasibility, site characterization, permitting, and construction stages of project development. Furthermore, the plan will provide grants of up to $3.5 billion to fund projects that contribute to the development of four regional direct air capture hubs, with each hub having the capacity to capture, sequester or use at least 1 million metric tons of carbon dioxide from the atmosphere annually.

The Build Back Better Framework Is Separate From The Infrastructure Plan, And Remains Pending

A parallel social-spending proposal (Build Back Better Framework) was not included as part of the infrastructure legislation just passed. It includes expanded tax credits for utility-scale and residential clean energy, and resilience investments to address extreme weather, including for wildfires, drought, and hurricanes. In addition, the Budget Reconciliation Committee (BRC) proposed a series of legislative recommendations in September 2021 (also not passed as part of the infrastructure legislation) related to energy. A budget reconciliation is a special process generally used in the U.S. Congress to advance certain legislation. Some questions are unanswered at this point. Specifically, will the Build Back Better Framework ultimately pass to become legislation? And how will details of such legislation affect regulated electric utilities given that some preliminary aspects of the proposals fundamentally seek to reduce greenhouse gas emissions, advance cleaner forms of energy among electric utilities, and enhance the resiliency of the U.S. electric grid? As such, we continue to monitor its developments.

What Will The Infrastructure Legislation Mean For Credit Quality Of Affected Electric Utilities?

Overall, we view proposals aimed at supporting the electric utilities' ability to withstand extreme weather events, effectively integrate more intermittent sources of generation onto the grid, and support the adoption of EV and the EV charging infrastructure onto the grid as supportive of credit quality. In addition, because we view service reliability as a component in our analysis of business risk for utilities, activities that strengthen a utilities' grid resilience and that enhance reliability will generally be viewed as favorable for credit quality. Furthermore, we think incentives that encourage the build-out of transmission provides an avenue for low-risk regulated transmission growth, and efforts to grow the EV charging infrastructure potentially provides new sources of load growth for utilities. Finally, advancements in carbon capture technology, and in cyber technology are also credit-supportive aspects of the plan for electric utilities. Nevertheless, the infrastructure legislation has broader ramifications for electric utilities that go beyond modernizing the electric grid, and that is somewhat linked to the Biden Administration's efforts to address climate change. For example, the Administration has signaled its intent to move the U.S. toward a 100% carbon-free electricity by 2035 and reach net-zero emissions by 2050. This likely means affected utilities could be faced with prospects of spending more capital to achieve their own net-zero or decarbonization objectives. As such, the longer-range implication for credit quality in our view, rests on how well affected utilities manage the pace of transition to a net-zero carbon future, while effectively managing regulatory risk, and ensuring that financial policy decisions remain commensurate with maintaining credit quality.

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Obioma Ugboaja, New York 1 (212) 438 7406;
Secondary Contacts:Pawel Dzielski, New York;
Minni Zhang, New York;

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