By John Suter, Vice President, Capital Market Funding

With the market outlook continuing to look tame for both short- and long-term interest rates, corporate bond issuance has gained momentum. Traditionally, September is heavily laden with bond issuance, and this year will be no different as corporations emerged from black-out earnings periods.

Companies are looking to solidify their balance sheets and lower their interest cost, which will help prop up profits and stimulate economic activity and hiring down the road. Large corporate issuers like Kimberly Clark, McDonald’s, IBM and Wal-Mart launched issuances at (or near) all-time lows. Interest rates on investment-grade corporate bonds recently averaged just 4 percent, according to Barclays Capital, the lowest in more than six years, and just 1.7 percentage points above relatively risk-free Treasury debt.

Our current economic environment is ideal for this kind of a bond rally. The Federal Reserve continues to be on hold with no immediate adjustment to the fed funds rate in sight; investors continue to be leery of the stock market; and the economic outlook continues to be weak with little fear of inflation.

An unexpected move by the Fed in early August only added to the pace of issuance. At its August meeting, the Fed pledged to keep the amount of assets it holds unchanged at $2 trillion rather than allow this level to taper off over time. The Fed has been weaning the weak economy off its monetary stimulus programs.

While this move is expected to keep long-term rates a bit lower, the real importance was the signaling effect of the Fed’s willingness and ability to provide additional stimulus if economic conditions worsen. Treasuries three years and out rallied by roughly 25 basis points, causing all-in corporate borrowing costs to sink even further.

Investors continue to be flush with cash, and new issuance deals are heavily oversubscribed for investment-grade credits. CFC has full access to the market and is continually monitoring these attractive conditions, looking for opportunities to pass along interest cost savings to our members.

A recent report by the U.S. Department of Energy’s Idaho National Laboratory found security holes in computer networks controlling the electric grid. Hackers could access the systems and potentially steal data, deny service or otherwise take control. Many of the vulnerabilities are basic problems such as a failure to install software security patches or poor password management.

The report, which did not list any individual companies, locations or software applications by name, catalogs results from 24 assessments of grid-related industrial control systems (ICS) performed from 2003 through 2009. “Well-known unsecure coding practices account for most of the ICS software vulnerabilities,” the report said.

Grid applications increasingly are connected to the Internet and other third-party software. “An attack could potentially start from any point between the Internet and the physical equipment that the ICS is monitoring,” the report said.

A “defense in depth approach” to securing the grid is needed, including identifying and remediating existing vulnerabilities in current ICS products, developing secure new products, and supporting patching and secure configurations of ICS components. “Common Industrial Control System Cyber Security Weaknesses” is available for download from the Federation of American Scientists website.

The consumer price index (CPI) rose 0.3 percent in July—the first jump since March—meeting economists’ expectations.

Higher energy costs helped lift consumer prices: Energy prices increased 2.6 percent, on the heels of a 2.9-percent drop in June and a negative streak dating back to January. Food prices fell 0.1 percent, which was mainly the result of continued weakness in fruit and vegetable prices.

Source: Bureau of Labor Statistics

Year-over-year, CPI rose from 1.1 percent in June to 1.3 percent in July. Overall, inflation at the consumer level remains in check. There are, however, risks of deflation going forward as sluggish job and income growth will discourage businesses from raising prices. Deflationary expectations are likely to hold if the economy remains weak or worsens.

Producer Price Index Rises

Producer prices for finished goods rose 0.2 percent in July as prices for food and energy goods climbed 0.7 percent, easing deflation concerns. July’s producer price index (PPI) gain matched expectations and follows two consecutive declines of
0.5 percent and 0.3 percent in June and May, respectively.

Prices for finished energy goods fell 0.9 percent in July, marking the fourth consecutive decline. The main driver for the price decline was the gasoline index’s 2.2-percent fall. Home heating oil fell 3.5 percent. Eggs, up 19.4 percent, and vegetables, up 9.8 percent, buoyed prices for finished consumer foods, up 0.7 percent in July. Prices are expected to rise as demand is stimulated by the bad weather continuing to plague major grain exporters such as Russia.

Core producer prices for finished goods, which excludes volatile food and energy prices, rose 0.3 percent in July, the largest month-over-month gain since January. On a year-ago basis, core producer prices have gone up 1.5 percent. Core prices for crude products and for intermediate goods declined in July by 1.4 percent and 0.4 percent, respectively. Compared to the beginning of this year, core prices for crude and intermediate goods have fallen significantly—an indication of weakening growth.

Retail Sales Rise

Retail sales rose in July after two consecutive months of declines. Sales rose 0.4 percent in July following an upwardly revised 0.3-percent drop in June. The increase was driven by boosts to auto dealers and gas stations: Motor vehicle and gasoline sales increased 1.6 percent and 2.3 percent, respectively. Excluding autos and gas, sales declined 0.1 percent. On a year-ago basis, retail sales are up 5.5 percent, which is a relatively strong showing but still below the level of two years ago.

The increase in retail sales indicates consumer spending may begin to improve. Consumers are still facing major economic headwinds including weak income and job growth, high levels of debt, and a weak housing sector. But while income growth remains weak, it has improved in recent months, and the outlook is positive.

Home Construction Improves

Housing starts rose 1.7 percent to a seasonally adjusted annual rate of 546,000 in July, down 7 percent from a year ago.

Homebuilders are limiting construction after a short surge of building prompted by the extended and expanded federal homebuyer tax credit. The decline is apparent in all three components of the housing sector: permits, starts and completions.

Single-family home starts fell 4.2 percent to a seasonally adjusted rate of 432,000, the lowest rate in a year and the largest month-over-month drop since January 1991. Building permits, a dependable gauge of future home construction, dropped to 565,000. It is expected that residential construction will not necessarily weigh down the nation’s economy this year, although it is far from driving growth.

U.S. Trade Gap Widens

The U.S. Census Bureau reported that the June trade deficit in goods and services unexpectedly widened to $49.9 billion from $42 billion in May.

Exports fell 1.3 percent, while imports jumped 3 percent. The trade gap in non-petroleum products was $40 billion in June, up from $32.2 billion in May. The petroleum goods gap narrowed to $21.2 billion from $21.5 billion in May. With the drop in exports, U.S. manufacturers are increasingly concerned about the strength of the global economy.

ZBB Energy received special attention this week when President Barack Obama paid a visit to tout stimulus investments in its Menomonee Falls, Wis., battery manufacturing plant. ZBB Energy secured $1.3 million in state funding in June, which it will use to renovate its plant and triple capacity to make zinc bromide batteries and power management systems. The systems are used in grid-tied and grid-independent applications.

DOE Charges up Storage R&D

The U.S. Department of Energy (DOE) flagged $27.8 million for energy storage research and development as part of a total of $92 million in stimulus funding through the Advanced Research Projects Agency–Energy. The funds went to a dozen recipients, developing an assortment of storage technologies: flywheels; superconducting magnetic energy storage, where electricity is stored in the magnetic field of a coiled wire; zinc-manganese oxide batteries; metal-air batteries, powered by oxidizing metals; compressed air energy storage; fuel cells; and flow batteries.

According to DOE, the end results should be modular while exhibiting “energy, cost and cycle life comparable to pumped hydropower.”

Xcel Energy recently announced positive news from its Minnesota wind-to-battery storage project: The technology works. Xcel began experimenting with the 1-mw sodium-sulfur battery—made up of 20 50-kw modules—in 2008. The installation is connected to an 11-mw wind farm in Luverne, Minn., and has proven its ability to shift wind energy from off-peak to on-peak availability, reduce the need to compensate for wind’s variability, provide voltage support and boost system reliability, and respond to imbalances between generation and load.

The battery weighs 80 tons and is roughly the size of two tractor trailers. It can store 7.2 mwh of electricity, enough to power 500 homes for seven hours, Xcel said.

Beacon Power Corporation secured a $43 million DOE loan guarantee for a 20-mw flywheel plant under construction in Stephentown, N.Y. The flywheels, housed in cylinders buried upright, act as a mechanical battery. Excess electricity accelerates the rotating flywheels, which then slow when switched to generator mode. The New York plant will be used for grid frequency regulation, ramping output up or down to meet rapid changes in demand.

A new best practices guide for designing and implementing feed-in tariffs (FITs) has been released by the National Renewable Energy Laboratory.

Worldwide, FITs are the most popular mechanism for accelerating renewable energy deployment—more successful than tax incentives or renewable portfolio standards, according to the guide. In the European Union, FIT policies led to the deployment of more than 15,000 mw of solar photovoltaic power and more than 55,000 mw of wind power between 2000 and the end of 2009. More than a dozen U.S. states and municipalities have adopted or are considering adopting FITs.

FITs are rate-based incentive programs that guarantee long-term payments to renewable energy generators at standardized levels specifying prices, terms and conditions. Utilities are obliged to buy the power, and the payments help encourage renewable energy development by reducing risks and financing costs for project developers. The tariff costs are typically passed on to ratepayers.

“The success of FIT policies has been attributed to the stability and certainty they offer for renewable energy investment,” the guide said.

By analyzing different policy practices around the world, the guide provides an overview of FIT policy options while highlighting several elements of success, including:

• long-term policy stability;
• payments based on the costs of renewable energy generation;
• differentiating the tariff prices to account for different technologies, project sizes, locations and resource intensities;
• guaranteed grid access;
• eligibility for all end-users and project developers; and
• a reliable, must-take provision for the electricity generated.

The 144-page report, “A Policymaker’s Guide to Feed-in Tariff Policy Design,” is available for download from NREL’s website.

A federal task force has released a report outlining obstacles and next steps for making carbon capture and storage (CCS) technology viable in the United States. The group, pulled together from 14 executive departments and agencies led by the U.S. Department of Energy (DOE) and Environmental Protection Agency (EPA), said a lack of comprehensive climate change legislation is the key barrier to widespread use of CCS.

Without a carbon price and appropriate financial incentives for new technologies, there is no stable framework for investment in low-carbon technologies such as CCS,” the report said.

Even if legislation does lead to financial support, specifically from the private sector, uncertainties like long-term liabilities for storing carbon dioxide underground remain. Over the next two years EPA plans to finalize a series of rulemakings aimed at providing some legal clarity for how stored carbon dioxide should be regulated, according to the report.

Research and development can reduce uncertainties, and several short-term demonstration projects are already under way—10 supported by DOE are on track to begin operation by 2016. Research also is ongoing, with recent rounds of funding going toward exploring underground storage ($21.3 million to 15 projects) and methods of capturing carbon dioxide at coal-fired power plants ($67 million to 10 projects) (see “DOE Funds Capture (and Use) of CO₂,” Solutions News Bulletin, July 16, 2010).

The task force recommended creating a federal agency “roundtable” to act in an advisory role as technical, economic or policy issues arise, which also could serve as a point of contact for project developers seeking assistance. Other recommendations include fostering international cooperation and evaluating public opinions of CCS. The full 233-page report is available for download at EPA’s website.

The long-running FutureGen project began a new chapter last week, as U.S. Department of Energy (DOE) Secretary Steven Chu announced plans for a re-envisioned “FutureGen 2.0.” The carbon capture and storage (CCS) demonstration project, first announced in 2003 but shelved after five years due to escalating costs, has received $1 billion in Recovery Act funding, a new site plan and fresh opposition from key players.

FutureGen 2.0 will retrofit an existing Ameren Corp. coal- and oil-fired power plant in Meredosia, Ill., according to Chu. The resulting 200-mw oxy-combustion plant would burn coal with pure oxygen instead of air, and capture carbon dioxide emissions for transport and storage 150 miles east in Coles County, Ill.

Coles County—specifically Mattoon, Ill.—was selected as the site for the original incarnation of the project, which would have tested CCS technology at a 275-mw, integrated gasification combined-cycle coal plant built from scratch. The revamped FutureGen 2.0 plant would pipe more than 1 million tons of carbon dioxide to Mattoon for storage every year, according to DOE.

But on Wednesday, following a request for feedback from project supporter Sen. Richard Durbin (D-Ill.), Coles County officials rejected its role in the revised project. “A number of communities throughout the state” have expressed interest in playing a role, according to a response from Durbin.

The U.S. Department of Energy (DOE) approved a $33.9 million matching grant to NRECA last week, essentially firing the starter pistol for a nationwide smart grid demonstration project. The project involves 19 electric cooperatives that will deploy more than 153,000 smart grid components and test their value to cooperative members.

The smart grid research grant is part of $3.4 billion in awards made available by the American Recovery and Reinvestment Act of 2009, representing a potential joint public-private investment of more than $8 billion in smart grid technology.

The Electric Power Research Institute estimates the widespread implementation of smart grid technologies could reduce electricity use by more than 4 percent by 2030. That would save U.S. businesses and consumers roughly $20.4 billion, according to DOE.

The cooperatives’ demonstration project will serve as an unprecedented nationwide pilot, testing end-to-end connectivity from power plants to homes. A portion of the project will expand MultiSpeak®—a utility software standard developed by NRECA to facilitate system interoperability—and address cyber security.

Funds will go to cooperatives in 10 states: Illinois, Wisconsin, Iowa, New York, Georgia, Hawaii, Kentucky, Indiana, Louisiana and New Hampshire (see “Stimulus Grants to NHEC Fund Smart Grid Technology, Demonstration Program,” Solutions News Bulletin, May 14, 2010).

U.S. wind energy projects are using a growing percentage of domestically manufactured parts, according to a U.S. Department of Energy (DOE) wind market report authored by Lawrence Berkley National Laboratory researchers. The study also found that 2009 U.S. wind power additions shattered old records, although a number of factors could slow growth in 2010.

When measured as a fraction of total wind turbine equipment-related costs, domestically manufactured materials increased to roughly 60 percent in 2009, up from 50 percent in 2008. In 2004, General Electric was the lone utility-scale wind turbine manufacturer in the United States. Today, seven of the 10 wind turbine manufacturers with the largest share of the U.S. market have at least one domestic manufacturing facility; two others have plans for future stateside plants.

Roughly $21 billion was invested in 10 gw of new wind capacity last year, according to the report, compared to 8.6 gw in 2008 and 5.2 gw in 2007. Wind energy now makes up 2.5 percent of U.S. capacity, and provides more than 10 percent of electricity generation in four states: Iowa (19.7 percent), South Dakota (13.3 percent), North Dakota (11.9 percent) and Minnesota (10.7 percent). Texas led in total added capacity, installing 2.3 gw in 2009.

Expectations are for slower growth in 2010, the report notes, due to lower wholesale electricity prices, reduced demand for renewable energy resources and the continuing economic downturn. Capacity additions in 2009 were partly bolstered by a production tax credit extension and resulting carry-over projects from 2008, the report said, “somewhat masking the underlying challenges facing the sector.”

Job Losses Continue in July

The economy lost 131,000 net jobs in July, versus market expectations of a much lower loss of 63,000 jobs. The drop was driven by the layoff of 143,000 temporary census workers, and a net total of 202,000 displaced government employees.

The private sector added 71,000 jobs in July, bringing net private-sector job growth to 630,000 this year. Although better than the previous two months’ job figures, private-sector job creation in July still fell below the normal pace of growth.

The construction sector lost 11,000 jobs while financial services lost 17,000 jobs—a large chunk coming from the real estate sector. Growth continued in the manufacturing sector, which added 36,000 jobs, reaching a net total of 161,000 jobs so far this year, with 21,000 attributed to the auto industry. The production of motor vehicles has been increasing as the auto industry scrambles to replenish inventory following a sharp reduction in manufacturing last year.

The unemployment rate remained unchanged at 9.5 percent as many workers stopped actively looking for a job. When job seekers leave the labor force they are no longer counted in official unemployment figures. The unemployment rate is expected to rise to 10.1 percent in 2011 once those who have left the labor force start to re-enter it. Job growth is not expected to bring down unemployment until the second half of 2011.

Productivity Falls in Q2

Q2 non-farm productivity fell at an annualized rate of 0.9 percent, the first quarterly decline since Q4 2008. The latest reading comes on the heels of an upwardly revised 3.9-percent jump in productivity for Q1.

Along with the drop in productivity, Q2 also saw unit labor costs increase at a 0.2-percent annualized rate, less than the 1.5-percent increase many economists were expecting. Unit labor costs are a key indicator of inflation, but with the nominal increase in Q2, inflation is not much of a concern.

The number of hours worked increased at a 3.6-percent annualized rate, the fastest pace since Q1 2006. Some analysts said this suggests employers looking to increase output soon may need to hire more workers, which could stimulate the labor market. Others, however, see the weakening productivity numbers as being in line with broad overall signs that the economic recovery is starting to lose momentum, with some economists reading the data as a possible sign the economy is on the verge of a double-dip recession.

Service Sector Expands in July

The service sector, which accounts for about 90 percent of the economy, expanded more than expected in July. The Institute for Supply Management’s non-manufacturing index edged up to 54.3 from 53.8 during the month. Readings above 50 indicate expansion. July’s reading points to developing momentum in the service sector, which is timely given the slowdown in the manufacturing sector over the past three months.

July’s gain was driven by improvements in the employment index and in new orders. The improvement in employment is particularly encouraging since the index reading, at 50.9, was the highest since December 2007. Growth in new orders, along with stronger exports, point to higher levels of demand. Sustained growth in the labor market and even stronger demand will be necessary for continued economic recovery.

Consumer Credit Continues To Fall

Consumer credit fell for the fifth straight month in June, as weak consumer spending, high unemployment and limited credit availability affected how much debt consumers have outstanding.

According to the Federal Reserve, consumer credit outstanding fell by $1.3 billion, or 1.3 percent. Although June’s figure was considerably less than May’s drop of $5.3 billion, demand for credit continues to be low as households focus on increasing savings and reducing spending. The personal savings rate jumped to 6.4 percent in June, the highest rate since June 2009. Wall Street economists are projecting further declines in consumer credit in coming months.