The shortfall in funding for total energy infrastructure (electricity, natural gas, petroleum and other fuels) in Arizona is estimated to be a $109 billion issue, according to a report released last month by the Arizona Investment Council. The state faces “important and difficult decisions,” L. William Seidman Research Institute at Arizona State University’s business school wrote in the report.

During the next 25 years, electricity demand from a growing population will increase 85% and natural gas demand will nearly double, said the report, which was pulled together by the institute with the help of Elliott D. Pollack & Co.

“In the last 10 years, electricity demand has increased about 41%, and the state managed through this period of rapid growth by building a large number of gas-fired plants — enough to quadruple gas-fired capacity in the state,” the report said.

Nevertheless, the report contends that current funding for electricity is insufficient, citing a “total funding gap for energy, without any change in the current funding regime” that is likely to grow to around $109 million in 2032.

“Overall, in the electricity and natural gas, petroleum and other fuels sectors, the total capital investment in energy infrastructure required to serve Arizona’s growing population to 2032 is likely to be $74-86.5 billion.” The state faces this challenge in a time when the costs of building new infrastructure are rising rapidly, and the report said that is likely to continue in the next few decades.

“Arizona’s ability to bridge the $109 billion funding gap may be more limited. Arizona is in the precarious position of having major utilities with poor bond ratings and, at the same time, a sluggish regulatory process that results in periodic (typically large) rate changes rather than smooth rate [patterns]. When market investors doubt the ability of a utility to recover costs in a timely fashion, ratepayers must absorb higher interest costs for the utility’s debt financing.”

Recognizing what the authors called “a new era of electricity prices,” the report said an optimal portfolio of infrastructure investment should make sense both financially and environmentally. It suggests new regulatory mechanisms, a transmission infrastructure authority and better means of “smoothing” future price increases.

Another part of the report’s wake up call is to declare that the “era of declining electricity prices is over.” Arizona has seen a downward trend in retail power prices since the 1980s, but higher costs of fuels and more expensive methods of generation will characterize the sector in the years ahead. “Specifically, the prices of electricity [in Arizona] will have to rise at or above the rate of inflation over the next 25 years.”

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