In the past few days, I have come across three different articles that reveal that major US media outlets and power company managers are beginning to realize how fragile the apparently solid US electrical system really is. The earth under WV PSC Chairman Albert’s “steel in the ground” appears to be shifting.
The first story I saw comes from Energy Manager Today, an industry Web site. The story’s title says it all: “Electricity Sales Continue Downward Trend.” Readers of The Power Line know all about these trends in electricity demand. Here is what Energy Manager Today says:
The US Energy Information Administration reports that total US electricity sales have declined in four of the past five years, with that trend expected to continue in 2013. The EIA’s Monthly Review says the only year-over-year rise in electricity use since 2007 occurred in 2010, at the end of the recession.
The flattening of total electricity sales has been driven by declining sales in the industrial sector and flat sales in the residential and commercial building sectors, despite growth in the number of households and commercial building space.
Distributed generation: Growth in solar photovoltaic capacity and other types of distributed generation is another factor contributing to the recent slower growth in electricity sales in the residential and commercial sectors.
Which gets us to the next article, from the Washington Post’s Wonkblog, titled “Americans are buying less electricity. That’s a big problem for utilities.” Author Brad Plumer starts with this:
The U.S. economy keeps growing. People are buying bigger homes and plugging in ever more electronic gadgets. And yet power companies have been selling less and less electricity since 2011:
That may not look like a particularly steep drop, but it’s a massive break from the past. Ever since World War II, electricity sales in the United States have, for the most part, gone up and up and up. They’ve only ever declined in a handful of years associated with nasty recessions —1974, 1982, 2001, and then again in 2008 and 2009.
But the last three years have been a striking exception: After a predictable bounce-back in 2010 — something that usually happens after economic downturns — electricity sales declined in 2011 and 2012. And they’re expected to decline again in 2013, says the U.S. Energy Information Administration (EIA). And next year. And the year after that.
The EIA graph is the same graph highlighted in the Energy Manager Today story. Plumer expands on the reasons that the EIA gave for declining demand:
— Homes have been using less electricity. In 2011 and 2012, residential electricity use declined by 5 percent, despite the fact that more houses were being built and homes were actually getting larger. The EIA chalks this drop up to the fact that household appliances are getting steadily more efficient and newer homes are often better insulated. Also, a spate of warmer winters has reduced demand for heating in some regions.
— Office buildings are getting more efficient. “[S]tandards to improve efficiency for lighting and space heating have helped keep commercial building energy demand flat in recent years,” the EIA says. So have the weather patterns mentioned above.
— Industry has yet to rebound from the recession. The agency notes that electricity use in the industrial sector is still below 2007 levels. Part of that is due to the lingering effects of the recession and part due to “efficiency improvements in production processes.”
— Solar power and distributed generation is starting to catch on. This is the most intriguing factor. If people (or companies) are putting up solar panels and generating their own electricity, then they don’t need to buy as much from the local utility. The EIA isn’t sure how big this effect is — it’s likely small right now — but it’s one to keep an eye on.
Ah, “Solar power and distributed generation is starting to catch on.”
Which gets us to the third, and best analysis of the three stories, Liam Denning’s recent story in the Wall Street Journal. Mr. Denning connects the dots that the other articles only begin to lay out.
What if the stock market’s safest sector was doomed?
Utilities seem indispensable. Yet suddenly there is talk on Wall Street of a looming “death spiral” for the business, with solar power being the culprit.
Hyperbole? Yes, but only up to a point. Back in May, the Dow Jones Utility Average came within a whisker of its pre-crisis all-time high set early in 2008. High dividends sell well with investors when interest rates are so low, especially when such payments are backed by something as solid as the electricity grid.
But danger can come out of a clear blue sky or even a cloudy one. Take a look at Germany. Generous subsidies there caused solar panels to sprout all over what is hardly a tropical paradise. As traditional utilities E.ONEOAN.XE +0.79% and RWERWE.XE +0.55% have struggled to adapt, their combined market value has slumped 56% over the past four years in a rising German stock market.
The death-spiral thesis runs thusly. Subsidies and falling technology costs are making distributed solar power—panels on roofs, essentially—cost-competitive with retail electricity prices in places like the southwestern U.S. As more people switch to solar, utilities sell less electricity to those customers, especially as they often have the right to sell surplus power from their panels back to the utility.
The result: Utilities must spread their high fixed costs for things like repairing the grid over fewer kilowatt-hours, making solar power even more competitive and pushing more people to adopt it in a vicious circle.
Of course, we have seen this fixed cost, “free rider” story before. It comes directly from the power companies’ strategy to strangle solar power before it becomes a real threat. Denning points directly to the power companies’ real problem: widespread solar generation forces electricity prices down when reaches a critical mass:
As a rival power source, solar takes market share from traditional generators. And once panels are installed, the sun’s energy is free, so it will displace more expensive sources such as gas-fired plants. This serves to reduce prices overall, so solar power cuts both volume and price for traditional generators. [emphasis mine]
So solar power development reduces electricity prices for everyone. Mr. Denning points to NRG’s solar/natural gas systems as an example of a fossil fuel generation company that is making smart investment decisions. I have been writing about NRG’s project for 9 months now.
I’ll conclude with a section from Mr. Denning’s story that speaks directly to the WV PSC’s “steel in the ground” fetish. I’ve added a bold typeface, in case you can’t see it:
Distributed power will keep eating away at the traditional utilities’ share of an electricity market that is barely expanding anyway. U.S. electricity consumption this year is forecast by the Energy Department to be 2% below the peak in 2007. Efficiency efforts keep eroding electricity requirements.
“Essentially, we do not see the recent slowdown in electric load growth as cyclical anymore; it is a new and permanent feature of modern life,” says Julien Dumoulin-Smith of UBS.
That structural element is why, even if the sound of bells tolling is faint, the impact on utility stocks will be felt much sooner. Greg Gordon and Jon Cohen of ISI Group point out that absent expected growth in demand, regulators may be reluctant to approve regulated utilities’ investment plans. Why saddle bill payers with the cost of an asset built to last 40 years if it might only be needed for 15 or 20? And in this business, less investment means less allowed return—and, therefore, earnings.
Yup. The Harrison bailout. And that is exactly what Commissioners McKinney and Albert did by saddling WV rate payers with the Harrison plant.