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Demand Growth and the New Normal

Five forces are putting the squeeze on electricity consumption.

Fortnightly Magazine - December 2012

to be reached by 2015. Nevertheless, 156,000 customers would amount to only 0.1 percent of total electricity sales in the United States.

Growth in distributed generation depends primarily on four factors: the retail cost of electricity; the cost of on-site generation; net metering regulations; and storms and outages. While the retail cost of electricity has been increasing, the cost of on-site generation has decreased, making DG a more attractive option for customers. Most notably, the average price for solar panels continues to fall, decreasing overall by 97.2 percent from $30 per watt in 1975 to $0.84 per watt in 2012.

Net metering regulations vary by state, because each state’s generation mix is different, and so are such policies as renewable energy portfolio standards. But in general, major storms are becoming more frequent, often resulting in outages—sometimes with extended consequences, such as those in the wake of Superstorm Sandy in the fall of 2012. Estimates for U.S.-wide customer cost of power outages range from $20 billion to $150 billion per year.

The 2003 U.S. blackout in the Northeast alone resulted in $7 billion to $10 billion in economic losses. In an August 2012 report, the Congressional Research Service stated that “data from various studies lead to cost estimates from storm-related outages to the U.S. economy at between $20 billion and $55 billion annually. Data also suggest the trend of outages from weather-related events is increasing.”

Generating power on-site through the use of reciprocating engines, PV, or wind turbines provides consumers an opportunity to hedge the cost of power outages. With distributed generation, net-zero energy homes can become a reality. In Austin, Texas, the Zero Energy Capable Homes program seeks to have all new single-family homes be net-zero energy capable by 2015. The largest community of net-zero homes in the United States is rising in West Village at UC Davis in California. The California Energy Commission has called for all new residential construction to be zero net energy by 2020 and for all new commercial construction to be zero net energy by 2030. However, policy makers and utility executives are still grappling with the question of who will pay for the grid if all of this comes to pass.

Fuel Switching

The final primary factor explaining the projected decreased growth in U.S. electricity demand is fuel switching. Due to technological innovations in hydraulic fracturing, the United States has a glut of natural gas. This outward shift in natural gas supply has been met with an expected plummet in gas prices, making natural gas an even more attractive option for heating; consequently, more customers might switch away from electricity to natural gas for heating in the near future. According to the EIA, “Henry Hub spot prices for natural gas rise by 2.1 percent per year from 2010 through 2035 in the Reference case, to an annual average of $7.37 per million Btu (2010 dollars) in 2035.” The average electricity price to all users, in 2010 dollars, would rise from $28.68 to $29.56, an increase of 0.1 percent. However, when accounting for greenhouse gas standards in