Power and Demand

Over the long term, electricity use has been closely correlated with the general growth in the economy. Due to the fact that building power stations, transmission lines and siting locations for distribution facilities has a long lead time (sometimes measured in decades), utilities have to plan ahead.

One of the major pillars of electricity demand is industry. Many facilities use large amounts of electricity, such as steel & aluminum, paper and pulp making, and manufacturing plants for autos. Some facilities use so much electricity that they build their own power plants, and / or locate their facilities near cheap power (which is why a lot of the aluminum industry and aircraft manufacturing is in the Northwest, where cheap hydro power was available).

This latest recession has caused industrial usage to plummet to an unprecedented degree. The article above was in the Wall Street Journal titled “Weak Power Demand Dims Outlook“. Per the article:

Electricity sales remained weak in the third quarter, prompting speculation that the sluggishness could persist even after the U.S. economy rebounds. Some utilities don’t expect power sales to recover to pre-recession levels until 2012 — if at all — because so many factories have closed.

Some of the major utilities, such as AEP out of the midwest and Southern Company in the Southeast are seeing demand reductions for industrial use in the 15-20% range. These types of reductions are out of the historical norm for a recession.

While industrial demand is falling primarily because of a decline in industrial activity, consumer and household demand has been falling (at a much slower rate) due to a heightened customer awareness of electrical usage and also the recessionary impact on individuals.

Both of these trends will effectively put a halt on any major new generation investment in the short and medium term, I predict. If the utilities were able to run before, and 20% of their industrial capacity is gone, this will buy them a lot of time to defer costly improvements. It is true that a reduction in industrial demand doesn’t necessarily translate into a corresponding reduction in “peak” demand, since many industrial users are on “interruptible” contracts already which allow them to cycle down on peak residential days (i.e. the hottest or coldest days of the year, depending on how the local market is configured), but it does represent a significant reduction.

Thus I would say that the recession has helped us to dodge a bullet as far as electricity supply goes. Companies will be able to linger on without new generation for a while longer since incremental demand has evaporated.

Along with recent reductions in the price of natural gas caused by new drilling technologies, which makes comparatively easy-to-site natural gas plants even more cost competitive with coal and nuclear plants, it seems even more remote that new coal or nuclear base load will be built except in rare circumstances. Whatever is built is unlikely even to make up for what is going out of service due to age and obsolescence. Without significant increases in demand projected, and with the prices of electricity down as a result, new capacity coming on line will likely be severely limited.

Cross posted at LITGM

3 thoughts on “Power and Demand”

  1. I’ve heard stories via friends in the electric utility business that all employee travel is cancelled and the purse strings are closed tight.

    Besides industrial demand being down, a cool summer reduces consumption from air conditioning loads.

    A regulated utility will make up a short year with what is called a balancing account. If sales don’t meet the expected amortization levels, the rates will recapture the missing moneys next year.

  2. Yes, mainly that’s true, but it depends on how the utility is regulated. In California they mainly have moved away from “usage” based rates, so the utility doesn’t have to sell more kwh in order to make the same $ (which is a bad incentive). However, that is for distribution / transmission.

    For the generation side, it is brutal. The market / marginal price for power has plummeted and they are doing “economic stoppages” of coal plants where they don’t run them because of market conditions. You will see a serious shakeout in this type of generator should these low rates continue.

    But generally for everyone in utility-land low demand causes less need for expansion which limits construction which also has a multiplier effect thru the community.

  3. In California they mainly have moved away from “usage” based rates, so the utility doesn’t have to sell more kwh in order to make the same $

    Funny, I was just going to post on how, in New York State, the new energy buzzword is “decoupling”. The newspapers report it with a straight face, but the truth is that, in the face of ever-greater political pressure to reward consumers for cutting back energy usage, the power companies are striking a deal to allow their revenues to increase while supplying less electricity.

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