Capital Allocation: Building to Serve a High-Growth Energy System

**Marc Miller** (0:12)
Welcome to the ScottMadden Energy Exchange, conversations with leaders shaping the future of the energy industry. I'm your host, Marc Miller, partner and energy practice leader at ScottMadden. In this podcast, we explore the most important issues facing utilities and energy companies, from infrastructure and regulation to operations and strategy. We focus not just on what's changing, but on what it takes to execute in a complex and evolving environment.
Today's episode is titled Capital Allocation, Building to Serve a High-Growth Energy System. Utilities are entering a new capital cycle. Across the industry, we're seeing more than a trillion dollars of planned investment, driven by load growth, resilience needs, aging infrastructure, and the energy transition. But this isn't just about investing more. Utilities are being asked to deploy capital more deliberately and more effectively than ever before. So this creates a dual challenge. Are we investing in the right things? And can we actually deliver them? Getting one right without the other doesn't create value, and increasingly, both are under scrutiny. To explore that, I'm joined by Gerardo Morales and Tony Gonzalez, partners at ScottMadden who work closely with utilities on capital allocation and execution.
Welcome, Gerardo and Tony. We're hearing a lot about the scale of investment across the industry. How would you describe the capital cycle utilities are entering right now?

**Gerardo Morales** (1:50)
Well, thank you, Marc. Appreciate the opportunity. Very excited to join the conversation here today.
And I think it's fair to say that we're entering one of the most significant investment cycles the utility industry has seen in decades. So as part of some of the research that we recently completed, we analyzed capital plans of the largest electric utilities in the country. And by just looking at the publicly announced plans, we found that more than 1.2 trillion in planned capital investments over the next several years. And what's interesting is that this number already exceeds many of the industry-wide estimates that are commonly referenced. But what makes this cycle unique, it isn't about the amount of money being invested. It's basically the number of forces that are converging at the same time.
Utilities are responding to large low growth, particularly from data centers and new industrial customers. I think we've all heard the news and seen all the different headlines.
But at the same time, they're also responding to modernizing and aging infrastructure, strengthening the grid for more resilient responses, especially after string weather events. They're also integrating new generation resources, supporting electrification and meeting evolving regulatory expectations. And all of these are converging and being investment drivers on their own and happening simultaneously. And I think that's an important distinction because sometimes the conversation becomes this is all about data centers. And data centers are certainly an important driver, but they're only one piece of a much broader story. And to me, that's what makes this period so different. Utilities aren't simply building infrastructure. They're being asked to transform the grid while continuing to deliver safe, reliable, and affordable service.

**Marc Miller** (3:54)
So that's a tremendous amount of investment. And you described a lot of the factors at play.
Maybe a little more color on what makes this cycle different from previous periods of investment.

**Tony Gonzalez** (4:10)
Well, Marc, I'll jump in on that one. Great to be here.
To your question, I think two things stand out. First, all of these investment drivers are happening at the same time. In the past, utilities might have gone through a very focused period on environmental compliance, generation expansion, or improvement on the transmission grid. Today, they're managing all those at the same time. And while dealing with load growth, digital modernization, great expectations from for resiliency, I should say. That's a level of complexity that we've not seen in a very long time or, quite frankly, maybe never before. The second big difference is probably the bigger one of the two, is that utilities aren't just capital constraint anymore. They're becoming more execution constraint. Getting the funding approved is just one part of the equation. You still have to engineer those projects, you still have to buy critical equipment, you still have to secure permitting, you got to get those outages, you got to line up contractors, and you got to do this work all safely.
Each one of those steps is competing for the same limited resources. We're seeing that across the industry. Lead times for critical or key equipment is getting longer.
Skilled labor is very tight. Contractors in some regions or jurisdictions are booked for years out.
And inside the utilities, many of the same teams built the same way are being asked to handle a much larger volume of work than they ever did before. So I think the conversation is starting to shift. Like a few years ago, the big question was, do we have the financing? Can we actually pay for this project? Now it's more, can we actually deliver on it? Which are two very different things.