Changes in regulatory requirements, market structures, and operational technologies have introduced complexities that traditional ratemaking approaches can’t address. Poorly designed rates lead to...
Demand Growth and the New Normal
Five forces are putting the squeeze on electricity consumption.
Demand for electricity has plummeted since the onset of the recession in December 2007. And while the recession ended 18 months later, the slowdown in growth has persisted. It’s tempting to attribute the slowdown in growth to the recession, but that would be wrong.
The distribution of electricity sales growth—two-decade intervals—presented in Figure 1 shows that demand growth has been declining since 1950, from an average annual electricity sales growth rate of 9.86 percent during the ’50s to an average annual growth rate of 0.85 percent in the first decade of the 21st century. To some extent, a slowdown in population growth since 2009 might be blamed for a slowdown in demand growth. However, after rising in the 1990s from around 11,000 kWh to 12,000 kWh, per-capita consumption has flattened off. On an aggregate basis, according to the U.S. Energy Information Administration, total delivered electricity use in the all sectors is predicted to increase at an annual growth rate of 0.7 percent per year from 2010 through the year 2035.
The agency also expects electricity consumption per U.S. household to decline in this time frame. The commercial sector will lead growth through 2035, mirroring the de-industrialization of the economy. As shown in Figure 2, cumulative growth will come in at 18 percent in the residential sector, 28 percent in the commercial sector, and 2 percent in the industrial sector.Long-term forecasts of peak demand growth are also on a downward trajectory. In the last decade, according to the North American Electric Reliability Council (NERC), the projected growth in summer peak demand has declined each year, from 1.79 percent in 2002 to 1.23 percent in 2011. After the recession in 2008, we experienced the biggest absolute decrease in growth, from 1.5 percent in 2009 to 1.23 percent in 2008. But the recession isn’t the only main force behind this decrease in growth. Five primary forces are creating the new normal: the weak economy; demand-side management; codes and standards; distributed generation; and fuel switching all play major roles. In addition, there are secondary forces such as other energy efficiency policies— i.e., state-specific energy efficiency portfolio standards; and natural competition between manufacturers, which further boosts energy efficiency of products. Such forces dampen demand growth as well.
A Weak Economy
While the 2008 and 2009 economic recession was met with an expected drop in electricity demand, the subsequent tepid recovery has been paired with a slow growth in demand. Electricity demand is specifically tied to economic recovery, as the “pace and shape” of economic recovery will dramatically influence electricity demand. As stated in NERC’s 2011 Long-Term Reliability Assessment: