DALLAS – Demand for electricity is easing, in part, due to increased efficiency and alternative sources of power, industry experts say. But some mystery remains as to where the slack is coming from.

Powering Down: Electric Surge Slows

“We found that no single factor can explain the change in electricity use over the 1993-2012 period,” Steven Nadel, executive director of the American Council for an Energy-Efficient Economy wrote in a recent report. “While the economic recession is an obvious explanation for the decline in sales in 2008 and 2009, it is much less clear why sales have continued to decline since then, even as the economy began to recover.”

Except for a surge in 2010, electricity consumption has fallen since 2008 and is expected to grow at an annual average rate of 0.9% through 2040, according to the U.S. Energy Information Administration.

The trend coincides with passage of the federal Energy Independence and Security Act in 2007 that created incentives for renewable energy and increased efficiency of buildings and vehicles.

In addition, most states have adopted their own renewable portfolio standards requiring a certain percentage of power from renewable sources. Colorado was the first state to do so by popular vote in 2004 after several failed legislative attempts. California’s standard, one of the nation’s most ambitious, calls for 33% power from renewable sources by 2020.

“I think that most analysts would attribute the recent sales picture primarily to energy efficiency and distributed generation, with some macro-economic influence as well,” said Jim Cater, director of economic and financial policy for the American Public Power Association.

“The last piece would be the addition of some customer-side generation – which is captured as lost kilowatt-hour sales,” said Mike Hyland, senior vice president of engineering and operations for APPA.

Distributed generation, which allows power to enter the grid from any source, represents a major shift from the traditional model of centralized power with transmission lines running from a generation station to the local utilities and then to the end users. Even small wind or solar generators can feed power to the grid, earning income for the providers.

The downside of distributed generation is that utilities must pay for the power regardless of whether it’s needed at the time. It may also be absent when the grid experiences peak loads.

The ability to store the excess power is one of the biggest challenges for the industry.

Analysts at Morningstar have identified distributed generation as the “largest disruptive threat to utilities’ business models and financial health.”

“Distributed generation leads to the so-called death spiral,” wrote Travis Miller in the March 4 Morningstar report. “Ultimately, utilities’ earnings and cash flows will shrink, making interest and dividend payments less certain. This death spiral ends when investors — equity and credit — are left holding a purse of dormant power plants and copper wires.”

Electricity generated by wind power has more than tripled since 2008 not only due to significant growth in new wind projects, but also to more productive turbines, according to the American Wind Energy Association.

Between the end of 2008 and the end of 2013, eleven states more than doubled their operating wind power, increasing their capacity by 116%.

The 11 states that produce more than 7% of their electricity from wind energy have seen also their electricity prices fall by 0.37% over the last five years, while all other states have seen their electricity prices increase by 7.79% over that time, according to the U.S. Department of Energy.

Petroleum-centric Oklahoma generated 15% of its electricity from wind in 2013, lifting the state to seventh place nationally, according to rankings released this month.

The combined growth of wind power and lower natural gas prices have reduced earnings on traditional power plant investments, experts said.

Even in rapidly growing Texas, the energy stampede is slowing to a trot.

Investor-owned El Paso Electric reported that sales fell 1% in 2013 to $558.7 million. Among the factors were milder weather and the addition of a major solar installation at Fort Bliss, the world’s largest Army post.

El Paso Electric’s experience is not an isolated event.

“It looks like economic growth, which was always used to project increased demand for electricity, does not seem to be as significant an indicator as it once was,” said Terry Hadley, spokesman for the Texas Public Utility Commission. “With all the economic growth, the demand for electricity does not seem to be growing as fast.”

The new outlook has brought a significant shift in perspective in the Lone Star State, which largely relies on its own electric grid. Instead of voicing fears of rolling blackouts this summer, the Electric Reliability Council of Texas (ERCOT) is reassuring local utilities that the Texas grid will have sufficient capacity.

Peak demand for this summer is expected to exceed 68,000 megawatts statewide. One megawatt is enough electricity to power about 200 homes when demand is highest. ERCOT’s all-time record peak of 68,305 MW occurred on Aug. 3, 2011, during the hottest summer on record.

“Weather is very significant,” Hadley said. “Do you look at things thing through the intense heat and drought of 2011 or do you use a more moderate forecast?”

Texas will be adding new generation this summer as four gas-fired power plants come online by Aug. 1, said Warren Lasher, ERCOT director of System Planning.

“While we anticipate sufficient generation for summer, conditions may become tight, potentially requiring conservation measures to protect the grid,” Lasher said.

San Antonio’s CPS Energy is bracing for summer with a system called “demand response” that allows it to power down air-conditioners, heaters or pool pumps when demand peaks. Demand response is part of the municipal utility’s plan to save 771 megawatts of power by 2020 through conservation, the equivalent of a large power plant.

The Texas PUC, which was ready this year to consider a new economic model called “capacity pricing” to provide excess power, now says the issue can wait until the Texas Legislature convenes in 2015.

“At this point, the commissioners have decided to step back a bit and let the Legislature weigh in if it desires during its next session,” Hadley said.

State Sen. Troy Fraser, R-Horseshoe Bay, who chairs the Senate Natural Resources Committee told the Fort Worth Star-Telegram that he does not expect shortages in Texas until 2020.

In a capacity pricing scheme, generators are paid upfront to keep surplus capacity available. Currently, Texas uses an “energy only” model, where generators are paid only for the power produced.

“The energy-only electricity market is working and will continue to deliver reliable and competitively-priced power for all Texans,” Tony Bennett, president of the Texas Association of Manufacturers, said in a statement praising the PUC for retreating from the capacity pricing model.

A positive side of slower growth in electricity demand has been a delay in the need to finance new generation facilities or to procure additional power resources, according to Moody’s Investors Service.

“The public power electric utility sector experienced a low point in new generation financing in 2013,” Moody’s noted in its outlook for 2014. “Less new debt to finance generation projects should over time moderate a utility’s debt ratio.”

Nationwide, bond issues for electricity, including generation and transmission, fell 19% from 2012 $11.8 billion in 2013. Over the past five years, issuance has averaged $16.7 billion, with a peak of $29.5 billion in 2010 when Build America Bonds were available.

About 5% of annual municipal bond issues go toward power generation, distribution, reliability, demand control, efficiency, and emissions control, according to the APPA.

Among public utilities, big money continues flowing into renewable energy sources and the transmission lines needed to bring that power to market.

Austin, Texas in February agreed to pay $31 million per year for up to 300 megawatts of wind energy from Lincoln Renewable Energy over 18 years and is reported to be closing on a solar deal that would be one of the world’s cheapest at less than 5 cents per kilowatt hour. That price for energy from two West Texas solar farms would be less than a third of what the city paid for a smaller solar array east of the city in 2009, according to the Austin American-Statesman.

In addition to growing supplies of renewable energy, utilities must project the price of natural gas, which Standard & Poor’s predicts will remain low through 2018.

Another issue that could sway decision-making about power generation is the Environmental Protection Agency’s new emissions rules, S&P said.

“Some utilities are deferring capital spending until the rules become clearer,” note S&P analyst Jeffrey Panger in a Jan. 9 report. “However, although many electric service providers are having to grapple with the new rules, we believe that public power utilities have been effectively responding, with little impact to credit quality.”

 

 

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