Bernstein expects slow demand growth through 2015

Residential power demand sensitive to price

Wayne Barber | Jan 03, 2013

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Increased efficiency in the residential power market could temper demand growth through 2015, Bernstein Research said in an industry analysis.

For example, the Energy Independence and Security Act of 2007 (EISA) will effectively end the sale of traditional incandescent bulbs in the United States at the end of 2013.

In addition, rising electricity rates, high unemployment and flat wages have residential consumers hunting for ways to economize, the research firm said.

As a result, regulated utilities will require more frequent rate relief to preserve returns on invested capital, which should heighten their regulatory risk, according to the review led by Bernstein Senior Analyst Hugh Wynne.

Since the recession in 2008-2009, electric demand growth has been near historic lows. Over the decade of the 1980s, power demand growth averaged 2.9%, Bernstein said. Over the decade of the 1990s, the rate was 2.3%; and over the ten years through 2010, 0.8%, according to the research firm.

“Measured on a rolling five year basis, the deceleration in power demand growth since the 2008- 2009 recession is particularly marked. Over the five year period ending in 2007, U.S. power demand increased at a compound annual rate of 1.5%. Over the five years ending in 2011, power demand grew at only 0.2% p.a.,” Bernstein said in December.

This slowdown in power demand growth closely tracks the deceleration in power demand growth in Gross Domestic Product (GDP).

Residential power demand sensitive to price

Bernstein Research says, however, that economic growth might not necessarily go together with increasing residential power demand.

“This analysis suggests that, over the last 25 years, growth in industrial and commercial power demand is indeed strongly linked to economic growth. The connection between residential demand growth and GDP growth, on the other hand, is difficult to establish in the historic data,” Bernstein said.

“Over the 1986-2012 period, we find no historical linkage between the rate of growth of the economy and residential demand,” Bernstein reported. “However, residential demand does show a statistically significant, negative correlation with the real price of electricity,” the firm said.

At the same time, commercial and industrial power demand accounted for 62% of total U.S. power consumption in 2011 – so there will continue to be some degree of connection between the economy and power demand, the firm said.

There is also a “flat trend” of industrial power growth at play. This would imply that U.S. industry has become “much less power intensive over time,” Bernstein said.

“This likely reflects the migration of certain electricity-intensive industries abroad (e.g., textiles, aluminum and steel) as well as increased efficiency in electricity use by those that remained,” according to Bernstein Research.

In 1997, U.S. goods producing industries consumed 0.50 kWh of electricity for every dollar of value added; by 2007, this had fallen by almost half to 0.40 kWh, a 20% decline in ten years.

“By contrast, electricity use per dollar of value added in the service sector has not changed over the last 20 years,” according to the firm’s report.

Power demand has also “clearly slowed” in the residential sector. “We believe that the slowing in residential demand growth since 2007 in large part reflects the rising price of electricity,” Bernstein said.

“The five year growth rate in average residential electricity rates over 2007-2009 averaged 5.1% p.a. Over the prior ten years, by contrast, the average five year rate of increase in residential electricity rates was only 1.0% p.a.,” the firm said.

“A second contributing factor, we believe, was the financial distress among residential consumers caused by a doubling in the rate of unemployment,” Bernstein said. The rise in unemployment with the downward pressure on wages has restrained the demand for electricity.

The bottom line is that stagnant sales of electricity create financial challenges for utilities. The fact that power demand is weak won’t relieve electric utilities of having to retrofit or replace existing coal plants.

“Without rising power sales, the continuous growth in invested capital requires commensurate annual increases in base electricity rates,” Bernstein Research said. “Over time, these continuous increases will test the patience of both ratepayers and regulators, raising the regulatory risk of the industry.”

Best positioned to face this risk, although not immune to it, are utilities in regulatory jurisdictions that have decoupled utility revenues from power sales, the firm said.

Wayne Barber is chief analyst for power generation at GenerationHub, now a unit of PennWell.

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