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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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Huge Capital Investment Required for U.S. Electric Industry's Decarbonization

  • The industry needs to significantly increase capital spending, by 50% to 250%, depending on the resource mix.
  • Replacement of aging infrastructure and increased electricity demand necessitates this financial surge.
  • Potential outcomes include continued reliance on fossil fuels, forced action due to climate change, or a shift towards off-grid solutions by consumers.
Electric Grid

When the COP 28 conference adjourned a short while ago, we concluded that the world’s electric industry would not decarbonize fast enough to make electrification the sure route to decarbonization. The principal culprits? Fast-growing Asian economies continue to build coal-fired power plants. Don’t get the idea, though, that American electricity producers will win any environmental stewardship prizes soon, either. They hope to get fossil fuel-produced electricity down from around 57% in 2022 to around 27% in 2050. All the S&P 500-type corporations are boasting of their goals to reach 0% carbon by 2050, however, they define it and whether anyone believes it. The electric industry, however, has to put capital-intensive assets into place ahead of demand, big projects that are hard to fake. Furthermore, electricity suppliers face two expensive challenges at the same time: rapid growth in electricity demand while operating in an increasingly hostile physical environment. Three challenges if we include decarbonization. The real question, then, is from a capital allocation perspective: what are utilities spending in relation to what they will soon need to spend (and likely finance). Also, when will they come to that realization and share it with the public? If they are not prepared, the whole decarbonization via electrification strategy goes out the window. 

We estimate below the required spending to reach or not reach decarbonization goals over 20 years (rather than the standard 2050 endpoint) because of our expectation that climate events will accelerate the need for faster action. Due to the age of existing utility assets, virtually all assets will require replacement by 2042.  Demand is assumed to grow 2% per year, up from the current rate of 1%, due to accelerated electrification of the economy. All generation and storage costs are based on government estimates (from EIA and NREL). Transmission and distribution expenditures are calculated using current levels adjusted for 2% growth. Ranges bracket low and high-cost estimates and assume that all power sources simultaneously register high (or low) costs. Relative capital spending does not indicate the relative price of output because non-fossil fuels have minimal or no fuel purchase expense. (See Table 1.)

Table 1.  Average Annual Capital Spending over 20 Years Required to Finance Scenario (2023 $ Billions)

ScenariosCommentAverage annual capital spending  ($ billions)
1. No change in generating capacity mix. Nuclear plants  built using current technology.    $290-381
2. No change in generating capacity mixNuclear plants built as small modular reactors$262-318
3. All fossil fuels replaced by renewables, balance of capacity nuclear. Nuclear plants built as small modular reactors.$316- 481


Twenty-year projections, at best, provide clues to problems and opportunities, based on current knowledge. Technology and the market will change over time, eventually rendering the projections obsolete. But large capital intensive businesses like utilities have to make plans, finance them, and ultimately build them. In short, putting infrastructure in place requires a long lead time. They often have to start work and modify plans as they go along rather than sit tight until everything becomes certain.

In 2023, we estimate that US capital spending to supply electricity came in at around $202 billion. Our numbers in the above table imply that electricity suppliers' future capital spending will need to increase by either 50%, 100%, or 250%, depending on the resource mix chosen. The point here is that all of these percentages are big. And this current $202 billion annual capital expenditure level is way below our number to reach any key goals, whether to replace old plants without eliminating carbon emissions (scenarios 1 and 2) or to reach carbon zero (scenario 3). Note, too, that cost estimates are affected by whether nuclear power will be produced by conventional gigawatt-scale plants or by small modular reactors. Note, too, that no small modular reactors operate commercially in this country so their estimated costs may be shaky. (On the other hand, we do know the costs of renewables and storage, which appear competitive to or better than the small modular nuclear capital costs, so substituting one for another may not make a big difference on a capital basis.) As for transmission and distribution spending, we would expect that preventative or remedial spending will skyrocket from the levels used in the projections to improve the survival rate of facilities facing more violent weather and rising sea levels. (We also think the concept of coastal facility abandonment due to rising sea levels will soon be incorporated into future financial forecasts, perhaps as a footnoted contingency.)

The numbers tell us that the existing electricity suppliers will not provide the infrastructure needed to achieve decarbonization through electrification based on what they are spending now. Basically, the managers and owners of the US’s electricity supply have decided to talk the talk but not walk the walk. Does anyone really believe a promise like “I wIll be really good (carbon wise) by 2050, but in the meantime, please be patient?” What would Santa Claus think after getting a note like that? From this pathetic picture of lost opportunity, declining reliability, and timid incrementalism, we would draw one of three conclusions:

1. Electricity suppliers will continue to prattle on about an orderly transition to net zero and concern for consumer electric bills while working to preserve fossil assets, praying for the return of a Republican President like Donald Trump and, in effect, sabotaging decarbonization via electrification—their biggest opportunity of the century. This is the likely outcome over the short term. 

2. Climate change and severe weather force action, which leads to a precipitously sharp rise in utility capital spending. This also means long-lasting boom times for businesses that produce and sell services and equipment to electricity customers and suppliers. This is event-driven, so the timing is uncertain. 

3. Consumers (both residential and commercial) who can afford and want clean, reliable electricity turn to sources off the conventional grid. This exodus of the best (i.e. biggest) customers weakens the grid, creates energy inequity, and a two-tiered service that turns the public grid into a supplier of the last resource—possibly government-owned. This “death spiral” scenario is more likely to play out if industry capital investment stalls while reliability erodes.

Our advice? Ignore the PR, the smooth talk and the confidence that all will go smoothly. A relatively complacent utility industry has to gear up big time to confront both rapid growth and an increasingly hostile operating environment. Something big or something bad will eventually happen to disrupt continuity. And when it does, some people will make a lot of money. 


By Leonard S. Hyman and William I. Tilles

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  • EdBCN Ayers on December 27 2023 said:
    If you want to do it cheap and easy, stay away from nukes.
  • George Doolittle on December 27 2023 said:
    Long $ibm International Business Machines strong buy

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