The “E” in ESG is Working Great! How to Mitigate the Budget Impact?
Main Points - “E” (from ESG) success can lead to budget modifications due to DERs - this is a good thing, but how to smooth the budget?
The “E” in ESG is for environmental. The approach is to reduce emissions and replace traditional power supply resources (fossil fuels) with renewables.
Distributed energy resources (DERs) are customer-generated power from renewable sources - solar, wind, and bio-mass. A successful DER strategy will help the “E” factor in your ESG approach.
The success in “E” can lead to a missed revenue budget if not forecasted accurately.
Accounting tools can mitigate the budget impact and provide information to recover missed revenue targets.
It is important to focus on the “E” also, as the SEC issues requirements for financial statement disclosures of climate and ESG related risks and risk management.
What are DERs?
Distributed energy resources (DERs) are customer-generated power from renewable sources - solar power, wind, and bio-mass. DERs can throw a wrench into your electric co-op or utility budget if they are unplanned. It’s a great spot to be in, i.e. more generation from renewable resources, but a pickle when it comes to meeting budget targets.
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What is ES&G?
Environmental, Social, and Governance (ESG) and sustainable business practices are a key component of electric utility and cooperative strategy.
ESG stands for:
· E - Environmental - the impact of the company's activities on the environment
· S - Social - how the company provides for employees, pays attention to safety, is a good community steward, and contributes to the communities in which it operates
· G - Governance - how the organization conducts business and approaches diversity within its governing structure and board makeup
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The switch to greater renewable resources is moving quickly, but there are headwinds
A recent report by the American Public Power Association, details the public power plan for 8,300 megawatts of renewable energy to be in use or under contract to be built in the next few years. This level of renewable energy can power over 1.3 million homes.
As of the date of this article, there are some headwinds in the move away from coal-fired power plants to gas and renewables. As the price of gas closes in on $6.00 mmbtu, it is at a 13 year high. The economics of coal units now make their market pricing competitive with gas. Also, the pricing of solar panels are negatively impacting the economics of large scale solar installations. Grid parity of renewable resources will also be coupled with the development of larger scale battery storage. It will be interesting to see how the short-term trends develop. No predictions from this author. In fact, until recently it appeared to be an open door for renewables to quickly overtake traditional resources.
Decouple lost revenues for future recovery
Decoupling is a form of regulatory accounting used to record these lost revenues for recovery in future years. Keep in mind that if your utility is regulated by a state public regulatory commission that this process may or may not be allowable for rate recovery in your rates. For utilities regulated at the local level (such as municipal utilities and electric cooperatives), decoupling should be a consideration.
Decoupling takes the difference between revenues forecasted from DERs minus actual DER revenues. That difference is the unbudgeted amount that is deferred in the financial statements using ASC 980 or GASB 62 Regulated Operations accounting.
For example, if the utility budgets $10 million of revenues but sales are $9 million, that $1 million of “missing revenue” can be treated in one of two ways:
Accepted and thus the margin on this amount is not available for use in the business, or
Deferred as an asset with attempted recovery in the next rate case or as a cost adjustment recovery clause
Consider how “decoupling” might fit with your utility’s revenue strategy and fix your “E” miss in the budget
If your utility is missing revenue targets and budgets and the cause can be identified as a faulty forecast due to unexpected occurrences such as DERs, these accounting treatments provide options. As you move into a new budget season, decoupling may be a tool that fits your revenue strategy.
About Russ Hissom - Article Author
Russ Hissom, CPA is a principal of Utility Accounting & Rates Specialists a firm that provides power utilities rate, expert witness, and consulting services, and online/on-demand courses on accounting, rates, FERC/RUS construction accounting, financial analysis, and business process improvement services. Russ was a partner in a national accounting and consulting firm for 20 years. He works with electric investor-owned and public power utilities, electric cooperatives, broadband providers, and gas, water, and wastewater utilities. His goal is to share industry best practices to help your business perform effectively and efficiently and meet the challenges of the changing power and utilities industry.
Find out more about Utility Accounting & Rates Specialists here, or you can reach Russ at russ.hissom@utilityeducation.com.
The material in this article is for informational purposes only and should not be taken as legal or accounting advice provided by Utility Accounting & Rates Specialists. You should seek formal advice on this topic from your accounting or legal advisor.