Efficiency gains, if not properly managed, can quietly take away most of the present market for electricity. But they also offer alert utilities an unprecedented opportunity to control risk,...
Saving Gigabucks with Negawatts (1985)
In an age of costly electricity and cheap efficiency, smart utilities will sell less electricity and more efficiency.
purposes (two-thirds of it for office equipment) is under $320 per year, or 8 cents per square-foot-year — about 5 percent that of a normal office building. The net marginal cost of our energy saving measures, 1 percent of construction cost, pays back in one year. The building produces more than $19 per day worth of saved energy — economically equivalent to a 0.7-barrel-per-day stripper well. That saving should pay off the entire building in about 40 years. Our 2,500 visitors have also remarked on how the building combines efficiency with beauty and a very high quality of life.
Even if technological development were instantly arrested at its present stage — rather than continuing to evolve so quickly that takes a looseleaf mind to keep up with it — the technical and economic potential for saving electricity is already immense. It will greatly widen the two-to-one margin by which present U.S. generating capacity saturates the premium, nonthermal markets — the uses which can give us our money’s worth from a form of energy as costly as electricity. The new electricity saving technologies of which I have given a few examples are relatively so cheap, and collectively so large, that:
- The long-run supply curve for electricity is so flat and slopes so gently that the market-clearing price will never be high enough to justify building more central thermal power stations. The era of big plants is over.
- The long-run own-price elasticity of demand for electricity is extremely large; so large that higher prices will probably reduce utility revenues. A utility which raises its rates will probably lose more on the number of kilowatt-hours it sells than it makes up by charging more per kilowatt-hour. If so, new construction will require more revenue but yield less — a recipe for bankruptcy. Long-run revenue can be increased only by lower price, not by higher price.
- Higher prices — in other words — will make electricity even more uncompetitive with efficiency by pricing it further out of the market: Rate hikes make electricity even less able to compete with weatherstripping. Electricity is already priced, in general, above a monopolist’s profit maximizing level, and must be sold at lower prices if it is to recapture market share. (Higher subsidies do not help either: They must encourage and enable utilities to build more plants than can be amortized from their revenues.)
- There will be fierce competition for shares of a shrinking fuels and power market — yet whether the real price of electricity is more stable than that of fuels is irrelevant because neither can compete with efficiency.
- A rising electric share of end-use energy does not mean rising electrical demand: Many international analyses foresee a rising electric share of a dwindling end-use market (just what has happened in the U.S. lately).
These long-run conclusions are not just theoretical: They are what the market is doing. Since 1979, the United States has gotten more than 100 times as much new energy from savings as from all net expansions of energy supply combined. The energy content