Electricity CurrentsA survey of current industry news and developments

Why Demand Growth May Be History

June 2013, Vol. 26, Issue 5 1040-6190/$–see front matter 1

Except for occasional hiccups, historically the electric

power sector could count on continuous demand

growth. Among the mature economies, the rate of

growth has been steadily declining over the years, yet

there has always been growth. If not 9.8 percent annual

growth experienced in the U.S. between 1949-59, at least

0.9 percent per annum, as in the latest projection by the

Energy Information Administration for the period to

2040. In developing economies, high-single-digit rates of

growth are still common, assuming the supply is able to

keep up with growing consumption.

But there are telltale signs that electricity demand

growth in the mature economies of the world may be a

thing of the past. The OECD economies are certainly

not growing as fast as they used to – as in the Euro

zone – and even if/when they do, there will be less

manufacturing and less energy-intensive industry.

Moreover, electricity-using appliances, lights, and

cooling and heating systems all are becoming more

efficient, as are buildings, where virtually all electricity

is consumed.

Making matters worse for demand growth, with few

exceptions – among them the current U.S. shale gas

In Electricity Currents This Month:

Why Demand Growth May Be History . . . . . . 1

PJM Market: Good, And Getting Better . . . . . 1

Renewables Are Setting, Breaking New

Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Electricity Currents is compiled from the

monthly newsletter EEnergy Informer pub-

lished by Fereidoon P. Sioshansi, President

of Menlo Energy Economics, a consultancy

based in San Francisco. He can be reached

at fpsioshansi@aol.com.

PJM Market: Good,

And Getting Better

The PJM market has always been, and

continues to be, a source of fascination to

anyone interested in competitive wholesale

electricity markets:

� First, it is by far the largest such organized

market operating in North America, among the

largest anywhere in the world, with 182 GW of

installed capacity and a large geographical

footprint;

� Second, PJM was among the first to

introduce a number of features, such as

locational marginal pricing (LMP), now

commonplace in other markets;

� Third, PJM has introduced and

successfully operates a number of markets,

including capacity markets, that are extensively

studied by other market operators who believe

such a feature may be an improvement to their

own; and

Continued on page 4

45 percent of total 2012 U.S. capacity additions and

exceeded capacity additions from any other fuel

source, including natural gas.

Of all existing capacity at the end of 2012, wind

made up 5.5 percent. However, wind provided

only 3.5 percent of U.S. electricity generation

during 2012, reflecting a capacity utilization rate

that is limited by the intermittent nature of the

wind resource.

Not all this can be dismissed as hype generated

by the renewable lobby. The global energy system

is large and long-lasting, which means it will take

several decades for renewables to become

dominant players. Yet if the trends of the past two

decades can be maintained for the next two, it will

have a pronounced effect.&

http://dx.doi.org/10.1016/j.tej.2013.05.014

bonanza – retail electricity prices are broadly rising

and are projected to continue to rise – e.g., in

Germany with the phaseout of the nukes. Aging

and declining populations – as in

Japan – suggest lower economic growth and lower

electricity consumption. Buildings are not only

getting more efficient and better-insulated but are

increasingly generating some of their electricity

needs from rooftop solar PVs and the like,

generously assisted by subsidies, feed-in-tariffs, or

net energy metering (NEM) laws.

The continuously falling price of PVs and other

forms of distributed generation (DG) coupled with

rising retail tariffs in many regions of the world is

turning a growing percentage of consumers into

prosumers, who produce some of what they

consume. The result is lower net volumetric

consumption.

In its latest quarterly report on Europe’s

electricity markets, the European Commission

points out that electricity consumption continues

to fall in EU, adding, ‘‘Annual consumption in EU

has fallen every year since 2008, by 1.2 percent on

average. The main reason is lower demand from

energy-intensive sectors such as manufacturing

and construction.’’

Many attribute the fall in electricity consumption

to the current economic and financial crisis

afflicting Europe, and that certainly does explain

most of what has been experienced since 2008. But

even after the economies of Europe rebound and

resume their growth, historical growth rates are

unlikely to be repeated. Even China, long used to

high growth rates, has been experiencing lower

growth figures, a fate that is likely to afflict other

developing economies. With lower growth rates in

the OECD, demand for Chinese goods is likely to

diminish. Another key driver is structural changes

in the economies of the West away from energy-

intensive industries, fortified by continued

improvements in energy efficiency.

While opinions vary, some observers of the

power industry believe that the phenomenon of

lower, and possibly no, demand growth may be a

new reality. That reality initially is afflicting a few

mature and slow-growing OECD economies where

retail prices are already high and rapidly rising, as

in Japan or Italy. The pattern could be replicated

in other economies as they reach similar stage of

maturity and demand saturation.

Australian retail prices, now among the highest

in the world, provide another example of what

may be behind falling demand. German electricity

tariffs, expected to rise due to the nuclear phase

out, are likely to dampen future demand growth

in that country, no one can tell by how much.

The evidence to date is spotty and limited to a

few countries – and it is not clear if it is entirely

due to the recent economic downturn or more

permanent. In the case of Australia, virtually

Why Demand Growth May Be History

Continued from page 1

4 1040-6190/$–see front matter The Electricity Journal

unaffected by the global financial crisis, the

downturn clearly cannot be blamed on lower

economic growth or declining population. The fact

that there are at least a million solar roofs in

Australia today with millions more to follow, and

significantly higher retail tariffs, offers a more

convincing explanation. Australians are not

necessarily using less electricity, merely buying

less from the grid, because a growing proportion is

self-generated.

The recent experience of declining demand in

New Zealand and the UK also suggests that a

future with little or no demand growth may be a

realistic scenario beyond just Australia. There are

clearly other factors at play in different parts of

the world. It cannot be blamed solely on rooftop

solar PVs.

Aside from the expected growth of self-

generation, future homes and buildings are

increasingly subject to mandatory regulations to

become zero net energy (ZNE), passive or nearly

self-sufficient. The city of Lancaster, Calif., recently

passed an ordinance that will make the city of

160,000 virtually self-sufficient. Other communities

are expected to follow.

In summary, a confluence of three powerful

forces will make individual buildings and entire

communities self-sufficient:

� Low and falling costs of self-generation;

� High and rising grid-supplied retail electricity

tariffs; and

� Grass-roots support for stringent building codes

and rising appliance efficiency standards, including

mandatory ordinances for zero net energy (ZNE)

buildings and solar-equipped rooftops.

These trends, currently limited to a handful of

rich countries with high living standards, are

likely to spread elsewhere once a precedent is set

that they are technically feasible and not

outlandishly expensive.

The future of electricity demand growth, of

course, is influenced by economic growth,

structural changes in the economy, and energy

intensity, but also by efforts to manage

consumption by promoting energy efficiency. As

everyone knows, motivating electricity suppliers to

encourage their customers to use fewer kWh can

be a win-win-win strategy for consumers,

suppliers – assuming that they can gain from such

efforts – and the environment.

In the U.S., an increasing number of state

regulators are becoming supportive of initiatives

undertaken by utilities to encourage their

customers to use electricity more efficiently. A

recent survey of customer-funded spending on

energy-efficiency programs by Lawrence Berkeley

National Laboratory (LBL) expects such

expenditures to increase from $6.5 to $15.6 billion

by 2025, with a mid-range projection of $9.5

billion. Another study, by the Institute for Electric

Efficiency (IEE), concurs, projecting U.S. utility

customer-funded energy efficiency budgets to

exceed $14 billion by 2025. Whatever the numbers,

the budgets are rising and delivering results: lower

demand growth.

The LBL study says projected growth in

program spending is driven by policies in a

number of states that require utilities to obtain all

cost-effective energy-efficiency savings as well as

energy-efficiency resource standards (EERS), which

require minimum energy savings goals each year,

similar to renewable portfolio standards (RPS). ‘‘In

addition, we see some utilities turning to energy

efficiency as part of their strategy for reliable

delivery of electricity as older coal-fired generators

are retired,’’ according to Charles Goldman, a co-

author of the study and head of LBL’s energy

analysis and environmental impacts department.

What is significant about these budget

projections is their longer-term cumulative impact

on U.S. electricity consumption. The LBL study

points out that if states remain on their current

policy paths, annual incremental savings from

electric energy-efficiency programs could be

expected to reach about 0.8 percent of retail

electricity sales in 2025, compared to about 0.5

percent in 2010.

Electricity savings at that level would essentially

wipe out any projected load growth forecasted by

the Energy Information Administration (EIA),

which puts the reference case growth rate at 0.9

June 2013, Vol. 26, Issue 5 1040-6190/$–see front matter 5

percent per annum. Goldman cautiously notes

that, ‘‘So far, only a few very aggressive states

have come close to offsetting growth in electricity

needs through efficiency,’’ adding, ‘‘Our finding

that, in aggregate, U.S. energy-efficiency programs

could offset a significant portion of projected load

growth in the electricity sector over the next

decade is subject to some uncertainties but striking

nonetheless.’’

Goldman and his LBL colleagues may be

conservative in hedging their bets. Other analysts

are more bullish that electricity demand growth can

be a thing of the past in the U.S., and many other

parts of the rich world, only if the policymakers

take more proactive steps to encourage investments

in energy efficiency and managing the demand side

rather than in building more supply-side resources.

This will most likely be a cheaper option, with less

stress on the environment.

Numerous studies have shown what can

be achieved by simply pushing building

codes and appliance energy efficiency standards.

One such study by IEE shows the stunning

results of two alternative future scenarios

for U.S. electricity demand growth: in one

case, demand growth disappears, in the

other case, overall electricity consumption actually

falls from its current level. And by most estimates,

following such a path would be less costly than

building more plants, transmission and distribution

lines – the traditional means to meet customer

demand. It doesn’t have to be that way in the

future.

Nor does our use of electricity – or energy in

general – necessarily need to grow at the same rate

as GDP any more. Prior to the first oil crisis in

1973, U.S. energy – and electricity – demand grew

at a faster rate than GDP – the same situation

experienced in rapidly growing economies of the

world today. During the period 1975-1995, the two

growth rates were nearly equal. In more recent

years, however, GDP growth has been sustained

with relatively little growth in electricity use. There

is no reason why future economic growth cannot

be sustained at zero or negative electricity demand

growth.

This phenomenon, now happening in mature

countries, will eventually apply to the rest of the

world. Perhaps a short cut can be found so

developing countries, too, can sustain economic

growth without large increases in energy

consumption.

Take lighting, which consumes more than 20

percent of U.S. electricity. Efficient and long-lasting

light-emitting diodes (LEDs) can cut the lighting

load by up to 80 percent. Granted, LED lamps are

expensive, typically around $30 to replace a 60 W

incandescent bulb selling for less than a dollar. But

the prices for LEDs are rapidly falling (they’re now

in the $10-14 range). Given their long life, they

recover their initial cost within a couple of years,

depending on the prevailing tariffs. There are

many other examples.

The end of electricity demand growth is not only

within striking distance, but it can be achieved

with lower energy costs and increased comfort

levels. The environmental benefits are icing on the

cake.&

http://dx.doi.org/10.1016/j.tej.2013.05.012

6 1040-6190/$–see front matter The Electricity Journal