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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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Electricity Consumption Continues To Fall

Electricity

Electricity sales in 2016 fell, the sixth year in the past ten in which America’s electricity users managed to do with less. Industrial firms made the sharpest cuts in their electricity usage. Their consumption fell in seven of the past ten years.

The 1.3 percent drop in total consumption in 2016 looks small but it comes despite economic growth and lower real price of electricity. Okay, economic growth has not been robust and the real decline in price small, but electric sales always used to go up when the price of electricity declined and the economy grew.

In economic parlance, electricity had a negative price and positive income elasticity. In the old days a 1.6 percent improvement in real gross domestic product (GDP) and a 2.5 percent real price decrease together should have spurred consumers to use at least 1-2 percent more electricity. But, with similar conditions in both 2015 and 2016, kWh sales declined in both years.

Figure 1.

Index of total electricity sales, real GDP and real price of electricity (2014 = 100)

(Click to enlarge)

The picture for industrial usage is even more puzzling. Industrial users consumed 5.1 percent less electricity in 2016. Industrial users have been cutting back for years. Admittedly, the industrial production numbers have been weak, but sales of electricity to industrial customers has been far weaker as seen in Figure 2.

Figure 2.

Index of industrial electricity sales and Industrial Production Index (2014 = 100)

(Click to enlarge)

Almost fifty years ago, during a previous Energy Crisis, price of electricity shot up and demand for it fell. But industry people associated the sales drop with a patriotic fervor and a desire to limit our dependence on Middle Eastern oil (even though electricity doesn't come from the Middle East and domestic coal was the main electric boiler fuel).

Eventually, the utility industry got the message. Sharp price increases have consequences. We have no doubt that a competent econometric analysis would tease out the impact of price and economic condi-tions on the past year’s electricity sales and show that price and income still matter, but we suspect that other factors are presently swamping the orthodox explanations for growth or the lack of growth, such as changes in population mix (the over 65 cohort is the fastest growing sector of the population), the increas-ing efficiency of lighting and appliances and the decline of domestic manufacturing. Related: Is The U.S. Becoming Overdependent On Natural Gas?

Newer control devices will determine consumption patterns, using algorithms that take into account cur-rent price and conditions on the grid. Consumers will not have to think about what they want to do, which will make it easier to adjust usage more frequently.

That brings up the question whether the old elasticity patterns, which require human thought and action, will change when they do not. But the meager rise in electricity sales since the bottom of the Great Reces-sion, in one of the longest economic upturns since World War II, raises the suspicion that the old elasticity patterns have already broken down, and what comes next might be worse for the industry. Unless, of course, the entire auto industry converts to the electric car. But with electric car sales now less than 1 per-cent of total car sales, we would not expect an industry turnaround soon from that source in the near term.

Weakness in domestic electricity sales does not bode well for prospective sales of coal or natural gas to the electricity industry. In addition, renewables will continue to take a small but growing slice of the Amer-ican kilowatt-hour pie.

The possibility that devices will automatically control demand does not bode well for electric generators, either. The electric utilities hope to salvage their situation by investing in providing more reliable service. This includes the smart devices on customer premises that will reduce the demand that helps to sell fuel, power in bulk and capacity. Unless sales begin to pick up again, the component parts of the electricity in-dustry may end up at each other’s’ throats fighting for pieces of a shrinking pie. If so, the company with the customer contact may prove the winner.

By Leonard Hyman and William Tilles

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  • JHM on March 06 2017 said:
    I suspect this analysis fails to account for distributed solar. With solar ratepayers finally have an alternative to paying monopoly prices to utilities. Moreover, gains in distributed solar diminish both sales volume and price of utility power. Also batteries will have dramatic impact on price sensitivities in the coming years.
  • Bill Simpson on March 07 2017 said:
    Millions of solar panels making electricity, along with much more efficient LED lighting and energy efficient new appliances all add up. Buildings are better insulated. People are installing millions of insulated windows and attic insulation in older homes. They save a lot of energy especially in colder climates with longer winters. Heat pumps are replacing the old resistance electric heat, like I still have. On the Gulf Coast, it seldom gets below freezing for more than a few hours during the night. But the central AC runs nearly continuously during summer afternoons.
  • Russ Ramey on March 07 2017 said:
    Why would you use 2014 GDP as your baseline? Seems too short of a chart to be of any utility.
  • Leonard Hyman on March 08 2017 said:
    To JSM's comment, the numbers do take into account the impact of distributed solar . Admittedly distributed renewables of all sorts account for less than 2% of electricity production, but in a stagnant market, that small but growing sliver of production does make a difference. To Bill Simpson' s comment, all of the factors mentioned have cut into electricity sales and made projections based on former usage patterns less reliable. To Russ Ramey's comment, we had already written about demand in former periods, showing that electricity usage per capita and per dollar of real GDP had been falling for a while, and that electricity usage has been essentially flat since the depths of the Great Recession, despite a substantial increase in economic activity and population. What struck us about 2016 was that sales fell, despite favorable conditions, the fall in price of the product and the improved economy. All indications that something is changing.
  • sharonsj on March 09 2017 said:
    Perhaps it is due to the soaring cost of electricity (thanks to deregulation) and the increasing number of middlemen/companies between the consumer and the generator? Using electric heaters made my home heating bills jump hundreds of dollars so I switched to propane. And you need to take into account the increasing costs of every utility, including television and internet, which leaves less money to spread around.

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