What Does Falling Demand Mean for the US Electrical System?

Last week, Keryn did a post over at StopPATH WV on the Wall Street Journal reporting falling US electricity demand as news.  Of course, the long term trend in US demand for electricity has been developing since the 1970s.  Amory Lovins at the Aspen Institute is the only major US analyst who has really investigated the impacts and opportunities created by this trend.  I don’t necessarily agree with all of Lovins’ conclusions, but his analysis of what is going on the US electricity system is thorough and compelling.

I certainly don’t pretend to have any answers, but I would like to present a list of observations as background for a lot of what we see happening in WV and the US electricity system.

  • For its entire history, the US electrical market has been a pie that has gotten bigger every year because demand increased dramatically every year.  This meant that power companies could grow without having to compete with each other, because the market as a whole was growing.  All they had to do  was generate more electricity and customers would buy it.  In the early 20th century, as Phillip Schewe explains in his book The Grid, power companies actually gave away electric irons to attract more customers who would use more power so that they could spread the costs of their new power plants over more kilowatt hours and actually reduce electric rates.
  • As I showed in my earlier post, linked above, the US electrical demand pie has stopped growing.  Because the market is no longer growing, the only way that power companies, new technologies, and new generation sources can grow is at the expense of others.  The biggest enemy of all to the status quo is any system that reduces electrical demand even further, by using efficiency improvements or simple energy conservation.
  • Every generation source, no matter how renewable or “green”, is threatened by falling demand.  Particularly because investment in efficiency and conservation is the cheapest source of new power resources.  This fact is true now only because the US economy is so wasteful with electricity.  If efficiency improves, the marginal cost of further improvements will rise.  But until then, efficiency investments will remain our best choice for meeting power needs.
  • WV is seeing the result of the cutthroat competition caused by stagnant demand.  Both AEP and FirstEnergy are dumping high cost coal fired generation on WV rate payers because their coal generated power cannot compete in other unregulated markets.  Only in WV and KY, where rate payers are forced to pay for power company generating plants, can AEP and FE make high profits from their coal-fired plants.  30 years ago, cheap gas fired power could have been accommodated in the US power market, and coal fired plants would not have been threatened, because demand for electricity was growing for everyone.  Now, with no or low demand growth, cheaper gas fired power has cut heavily into coal’s generation share.
  • As demand shrinks, the high capital costs of big generating plants must be spread over fewer and fewer kilowatt hours sold.  This means that the cost for each kilowatt hour, that is, the rate charged for electricity, will rise steadily.  This happened suddenly and permanently to WV’s APCo customers when Century Aluminum’s huge demand for electricity dropped out of APCo’s rate base in 2009.  Coal plants are particularly prone to causing these increases, because they represent huge capital investments which have only grown with pollution controls needed to protect the health of their neighbors.  Big coal plants also burn massive amounts of coal and limit the flexibility of power companies to respond to lower cost sources of power in a more competitive marketplace.

There are two other trends that serve to magnify the impacts of stagnant demand.  One is the overall age of power generating plants in the US, particularly coal-fired and nuclear plants.  The other trend is the age of the centralized distribution system in the US.

Here is a great graph of showing the relative age and size of existing coal and gas plants in the US.

Lovins graphAs you can see, most of the coal-fired plants in the US are very big and more than 25 years old, many of them more than 50 years old.  Most of those plants will be closed in 20 years.  If demand remains the same as it is today, new sources of power, in large amounts, must be built in a relatively short amount of time.  The dinosaurs like AEP and FirstEnergy will try to stave off this inevitable change, largely by dumping their coal-fired plants on rate payers in regulated states, but they are destined to fail.  The cost of investing in large new power plants cannot be spread over a growing number of kilowatt hours sold.  That means that rate increases for new plant construction will become much more common, particularly in regulated states like WV.  It also means that smaller scale, renewable power sources will become more and more competitive with fossil fuel systems as their production ramps up and installation costs continue to fall.  Even higher costs for efficiency investments will remain competitive when compared with rate increases caused by new plant construction.

The impacts of recent major distribution system blackouts such as the ones in the NY/NJ area and throughout WV in the past few years will cause major investment in distribution systems OR ever rising emergency repair costs.  We have already seen that power company propaganda claiming the lack of new transmission capacity will cause blackouts was simply false.  The real blackout threat comes from a spoke and hub distribution system that is old and suffering from decades of neglect.  The power companies and regulators who grew up in the bygone age of rapidly expanding demand, just want to do more of the same, if they want address the problems at all.  They just want to rebuild or add to a system that has clearly outlived its usefulness.

Falling demand and the aging of existing electrical infrastructure are leading us to tremendous opportunities.  We can start now rebuilding our system from the ground up, as the Germans are doing, or we can drop our electrical system into a death spiral and lurch from crisis to crisis.

The choice is ours, and the time to do something is now.

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