Strategic Implications of Declining Growth in Energy Consumption: As Yogi Berra Might Say…

During the latest EEI Strategic Issues Roundtable event, Stuart Pearman, partner and energy practice leader at ScottMadden, explored the strategic implications of declining growth in energy consumption. The presentation, “Strategic Implications of Declining Growth in Energy Consumption,” addressed the three key questions: What is happening? What causes it? What can you do about it?

Access this presentation to learn about the decline in energy consumption, what it means in conjunction with other macro trends, e.g., the duck curve, and what some utilities are doing about it.

Discussion Outline

What’s happening?

What’s causing it?

What are the implications?

What can you do about it?

What’s Happening?

Declining Demand Growth

Regional Demand Trends

Demand Trends

What’s Happening? Declining Demand Growth

Reading the headlines: Where’d the load growth go?

U.S. MWh sales growth was only 1.7% cumulatively from 2005 to 2015

Industry consensus forecasts continued sales growth decline

The good news: revenues per MWh have grown

What’s Happening? Regional Demand Trends

Growth sightings: All regions are not created equal

Regions with significant oil and gas resources (e.g., around TX, OK, ND) averaged >0.5% annual sales growth since 2008

27 states have averaged negative or no annual sales growth since 2008; 40 states have averaged <0.5%

What’s Happening? Residential Demand Trends

Residential demand has declined

Since 2010, total residential sales have declined 3%

Average sales per residential customer have fallen 6%

Real prices have increased nearly 3%

The decline in average consumption has occurred across all regions of the United States

The West, led by California, has witnessed consistent declines in average consumption, followed by states such as Alaska and Hawaii

What’s Happening? Commercial Demand Trends

Commercial demand has slowed

Since 2010, total commercial sales have increased 2.3%

Average sales per commercial customer have increased only 0.5%

Real prices have decreased by 1%

The mixed-consumption behaviors across regions have led to a near net-zero effect on U.S. average commercial consumption

The Southwest has experienced the most consistent growth

What’s Happening? Industrial Demand Trends

Industrial demand has recovered, but remains well below 2000s’ levels

Since 2010, total industrial sales have increased 1.6%

Average sales per industrial customer have decreased more than 9%

Real prices have decreased by 4.4%

Interestingly, regional declines in average consumption have slowed since 2005, though many regions are still negative

The West has seen the most dramatic declines in average consumption

What’s Causing It?

Likely culprits

Could it be price?

Energy efficiency?

Deindustrialization?

Likely Culprits

Decoupling of electricity growth from GDP and population is a myth. Slowing GDP and population growth aren’t helping, but they’re not the only cause

Slowing economic growth

~2.2% since the recovery in 2011

Slowing population growth

<1% since 2002

Price

Energy efficiency

Deindustrialization

What’s Causing It? Could It Be Price?

Real prices are near their all-time lows, increasing only modestly since 2000

Average real prices of electricity have increased 11% since 2000 compared to the core CPI’s 34%

While not “scientific,” the long-term trend line is intriguing and does suggest the possibility of long-term price elasticity punctuated by periods of anomaly

The 70s were weird

The last decade doesn’t seem too normal either

What’s Causing It? Energy Efficiency?

Buildings are replete with electric end uses, and there’s an increasing emphasis on efficiency

The penetration levels of household appliances are well above 90%, suggesting their aggregate annual electric consumption is at or very near its peak

Appliance standards, if continued, will only further increase the efficiency of these end uses

However, efficiency improvements are being mitigated by the growth rates of miscellaneous electric loads in both the residential and commercial classes

What’s Causing It? The Industrials Did It…

But not the way people think (i.e., deindustrialization)

In fact, industrial customer count has grown…dramatically

Instead, the industrial mix has changed to less energy-intensive industries

And we’re seeing declining end-use consumption across the board

What’s Are the Implications?

Duck Curve

Pressures on Rates

Some Observations

What Are the Implications? Duck Curve

2013 California Independent System Operator (CAISO) analysis predicted that renewable resources would impact grid conditions

Iconic “duck curve” predicting as variable generation grows, so too will the midday trough of load served by conventional supply

ScottMadden analyzed average hourly production data from CAISO from January 2011 through June 2016 to understand if actual results align with the original forecast and to see what new insights could be learned from the data behind the curve

But is it what most people think it is?

What Are the Implications? Duck Curve Is Real – and Growing Faster than Expected

What Are the Implications? Net Loads Shrinking and Ramps Increasing (2011–2016)

What Are the Implications? Driven by Utility-Scale Solar, Not Distributed Resources

What Are the Implications? The Duck Curve Can Happen to You

The duck could migrate to areas with high penetrations of utility-scale solar

States forecasted to have more than 3 GWs of utility-scale solar by the end of 2021 include:

North Carolina

Arizona

Georgia

Nevada

Texas

What Are the Implications?

The confluence of increasing intermittent resources and lower demand will lead to duck curves.

Pressures on Rates

Grid investments are accelerating

T&D capex is at an all-time high

And generation investments are at a high point primarily due to renewables

“If your outgo exceeds your income, your upkeep will be your downfall”

What Are the Implications? Some Observations (from the Best Magazine in the World)

Public policy is increasing supply when the markets don’t want it – we are adding supply when demand growth is stagnant

The wholesale market is centered around short-run marginal cost, originally designed to determine dispatch order, not to govern entry and exit

The confluence of these effects is tanking wholesale prices so that the price signal for entry and exit becomes distorted

As a result, renewables are eating coal and will soon be cannibalizing themselves

What Can You Do About It?

Target the Customer Mix

Rate Structure and Design Alternatives

Differentiated Pricing

PPAs Are Ripe for Innovation

New Services and Strategic Alternatives

New Markets

What Can You Do About It? Target the Customer Mix

Combo utilities look at multi-fuel incentives

Growth in residential gas customers, though declining usage

Opposite is true for industrial gas customers

Economic development to bring high-intensity industries back/in

What Can You Do About It? Rate Structure and Design Alternatives

In the short run, many costs are fixed; however, in the long run, all costs are variable. Deciding which perspective to take comes with a series of tradeoffs.

What Can You Do About It? Rate Structure and Design Alternatives – What Does MIT Say?*

Ensure that all prices and charges are technology neutral and symmetrical

No longer homogenous classes – network utilization patterns more diverse

Injections and withdrawals by time, voltage level, and location important, not device (e.g., EV)

Progressively improve the granularity of price signals with respect to both time and location

Efficiency gains with signals based upon time and location

But carefully balance against implementation costs and considerations, complexity, and volatility

Apply forward-looking peak-coincident network capacity charges and scarcity-coincident generation capacity charges

Charges should reflect the contribution of network users to the incremental future cost of transmission and distribution network expansion

These charges should incentivize flexible demand, DER at right times and locations

Allocate residual network and policy costs without distorting efficient incentives

Volumetric charges don’t necessarily induce network savings

Fixed charges are better approach, but how to allocate fixed charges in an equitable and acceptable manner

What Can You Do About It? Differentiated Pricing

Differentiated/segmented pricing can require some differentiation of products, as illustrated by the classic demand curve illustration of General Motors’ segmented pricing strategy below:

Pricing can be segmented along many lines, such as:

Buyer characteristic

Time of purchase

Purchase location

What Can You Do About It? Updating Terms of Solar Power Purchase Agreements

Standard PPAs are quickly becoming inadequate

Overproduction by solar resources, especially during low-demand periods, is leading to curtailment

A few states experiencing this effect already are realizing the shortcomings of their solar PPAs

Hawaii is exploring how to effectively curtail solar output

California is exploring options to address negative midday pricing

North Carolina is in the midst of figuring out how to address PURPA’s QF model

These problems may be resolved by pursuing alternative PPA structures

Capacity and Energy

Time-of-Day Pricing

Renewable Dispatch Generation

Some key questions:

Can solar provide ancillary services?

Will energy prices be tied to market prices?

Are alternative PPAs too complex?

What Can You Do About It? New Services and Strategic Alternatives

Shifting focus back to the core business, increasing grid investments, and testing expanded customer-centric offerings.

What Can You Do About It? New Services and Strategic Alternatives

What Can You Do About It?

Distributed ledger technology (DLT) provides a single shared system of record that enables unprecedented coordination in competitive environments and the creation of new markets

Example: Corda – a DLT product made by the R3CEV consortium – allows banks, regulators, and other interested parties to automate the business logic that connects them and their customers

The platform is private, meaning all participants are known and the details of transactions are kept confidential

The platform is secure as a result of well-established cryptographic techniques and its distributed architecture

The platform is efficient, allowing competitors to coordinate without worrying about reconciling disparate ledgers and conflicting interpretations of legal agreements

The platform fits within the current regulatory framework by utilizing existing legal agreements and providing regulators with increased transparency across the network of transactions

The platform could enable new revenue streams for participants that leverage the shared architecture and data to provide value-added services

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May we suggest:

The Energy Industry Update - Volume 16 - Issue 2

The energy industry is changing, and its regulatory and financial moorings are shifting. Competitive markets combined with other factors may lead to early nuclear unit retirement. Continuing changes in energy supply and demand patterns create a complex operation environment for electric utilities. Federal and state policy lines are beginning to blur as states have been increasingly intervening in FERC domain seeking favorable outcomes for their citizens and other local constituencies. In our Update, themed “As Yogi Berra Might Say…,” we look at the unusual picture drawn by the juxtaposition of these changes.
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