Coping with Sub-One Percent Growth
The Great Recession ended in 2009. The economic recovery from the recession has been anemic at best. Some have even argued that there has been no recovery.
This is particularly true for electric utilities. Some 41 months later, electric sales have not bounced back to their pre-recession levels. According to Dr John Caldwell of the Edison Electric Institute, electric sales have bounced back on average within five months during the post-war period. The longest they have ever taken has been twelve months. So something different is going on this time. What could that be and what does it mean for the future of electric utility industry?
At the national level, the U.S. Energy Information Administration (EIA) is predicting growth in the sub-one percent range, down from the pre-recession average of two percent. Last year I did an informal survey of load forecasters around the country. The consensus was that sales growth would range between 0.7 to 0.9 percent over the next several years. One utility stated recently that it did not expect to get to pre-recession levels by 2019; another stated by 2024.
I believe three primary causes underlie the slowdown in growth. First, there has been a shift in consumer psychology. A new generation of consumers armed with new values and new technologies is consuming less. And the older generation has become more cost-conscious due to continued economic uncertainty.
Second, many utilities are increasing their spending on energy efficiency technology, prompted by governmental directives. Third, states and the federal government continue to push ahead with aggressive revisions of codes and standards, driven in most part by environmental concerns.
And two new forces are emerging on the horizon. First, distributed generation, led by rooftop solar and supplemented by micro-turbines. Second, fuel switching away from electricity, driven by the fracking revolution which has dropped oil and gas prices.
A few years ago, Brattle estimated that the electric utility industry will need to invest $1.3 trillion on upgrading and modernizing its transmission and distribution infrastructure. Additionally, power plants that burn fossil fuels and notably coal-fired generation units will have to make modifications to reduce the emissions of carbon dioxide. Where will the money come from to pay for all this investment at a time sub-one percent growth?
The challenge is daunting. Utilities will have to consider many strategies for dealing with it, and once they have agreed on a strategy, they will need to develop the tactics for carrying it out. While several strategies come to mind, four stand out. First, stay the course and hope that the slowdown is an aberration. This runs the risk of standing still at a time of momentous change. Second, focus on electrifying the economy. This has been tried before with limited success. Third, retreat to the safe haven and become a wires-only company. But unless rate designs change, this too has its limitations. Most revenue is recovered through volumetric charges. As sales decline, revenues will decline, even for wires companies. And, fourth, go on the offensive and become a provider of distributed energy and energy efficiency services to customers. Since utilities have limited experience in this area, this is also a high risk strategy. Choosing the optimal strategy will require careful thinking about the future and laying out one’s attitudes toward risk.
Regardless of which strategy is chosen, new tactics will have to be developed. Three come to mind. First, change rate designs so that fixed costs are properly reflected in them. This will represent a sea-change since rate designs have been largely volumetric. Second, redesign forecasting models so they capture changing consumer preferences. And, third, reinvent the load and market research functions so they can provide the necessary data to run the new forecasting models and support the design and evaluation of a new range of products and services.
Additional information is contained in my paper in Electricity Policy which can be downloaded at this link: