What is energy efficiency doing to power demand? Maybe something real

Macquarie Equities Research said in a client note several days ago that energy efficiency measures really do seem to be having an impact on electricity demand, and the effect is likely to continue. It’s not just theoretical or wishful, the analysts said. “Unfortunately for investors,” the firm said, “utilities expect this demand destruction to continue or even accelerate.”

A couple of electric utilities said pretty much the same thing.

According to a Macquarie survey of utilities, to which 43 responded, most expect slow demand growth, less than 1% a year, significantly less than the historical rate of about 2%. The economy is partly to blame for flat or small growth in demand over the last several years — and some respondents see the economy as the bigger driver — but “more than half of utilities estimate that energy efficiency has reduced their load growth by up to 1% per annum, with nearly an additional quarter estimating a reduction of up to 0.5%.” Eighty-one percent see efficiency’s impact having picked up since about 2007.

(Conservation is another matter, Macquarie notes. Efficiency measures are things that get built into systems; conservation is behavior, and utilities see conservation behavior being strongly driven by the economy, and thus only temporary.)

By coincidence, Xcel Energy and American Electric Power executives talked about the same thing in presentations at Merrill Lynch’s Power and Gas Leaders Conference last week. According to them, improved appliance efficiency and new building codes are making a dent in load growth.

Ben Fowke, Xcel’s chairman and chief executive, said that while economic issues may be weighing down commercial and industrial sales, major improvements in home appliances may be holding down residential power sales. “Technology is really getting better. I think it’s a trend we’re really going to watch,” he said. According to Fowke, Xcel’s efficiency programs are dampening demand about 0.7%.

Likewise, Brian Tierney, AEP’s CFO, said stricter appliance and building code standards are having an impact. And changes that have been made by the industrial sector are beginning to appear in the commercial and residential sectors, he said.

“It’s a very difficult time to forecast load growth,” said Art Beattie, Southern Company’s CFO. His utilities have seen sluggish commercial-sector growth, which Beattie suggested could be affected by the growing amount of online commerce (not energy efficiency … though some might well say so.)

Separately, Glenrock Associates analyst Paul Patterson, talking about Maryland and what he describes as its extremely aggressive demand-reduction goals, said the state’s utilities “may not be able to achieve the goals, but even if they are partially successful it has huge ramifications for the power sector.”

“It is unclear if we’re in a new paradigm or not,” Patterson said, “but it doesn’t bode well”  for the industry. “It has the potential to change the profit trajectory.”

The upshot for the power sector, the Macquarie analysts said, is postponement of the need for new supply. “Slow load growth should hurt near-term earnings and may drive more frequent rate case filings and/or postpone the need for generation/transmission capex for regulated utilities.” Regulated companies may have rate programs that protect them from sales declines attributable to efficiency measures. But for merchants–unregulated power companies–the weak load growth would be continued bad news. Macquarie says it could delay the tightening of power markets that would otherwise be expected to happen as lots of coal plants retire because of environmental regulations and the continuing low price of natural gas.

Patterson agreed. “It might be a bad cold for utilities, but for merchant generators, it could be a heart attack.”

Macquarie sees annual load growth of only 0.4% to 0.6% over the long term,  less than most companies’ projections, the analysts said.

Another conclusion Macquarie draws from the load growth figures is decreasing correlation between power demand and GDP.  These two historically have fallen and risen roughly in tandem, but started to “decouple” sometime last year, and energy efficiency is contributing to that. And although 58% of utilities have at least tried to adjust their weather-normalization models for energy efficiency and conservation, “comments indicate that the process is ‘very difficult’,” Macquarie said.

Share this:
Facebook Twitter Email

All blog comments are moderated before being published.


  1. jenny smith at February 20, 2014 5:40 am

    Changing the thermostat just two or three degrees can significantly reduce energy costs. Ac service pearland

  2. wd at November 21, 2012 12:05 am

    As an uninformed observer, I’m a bit surprised to see no mention of possible demand for electricity for transportation. I’d agree the draw today is minimal but the potential demand to displace current liquid fuels could be large. Yes? No? It takes a while to build generating capacity. I’m glad no one is asking me to forecast future electricity demand and a capacity plan to match it.

    As to the blaming exercise, I tend to view the State Utility Commissions and the Utilities as partners in the monopoly they manage. The Commissions need to look at the strategic needs for electricity (and gas, etc.) and put in place rules that help guide us to accomplishing those goals. Historically, the strategic needs were to meet demand with reliable, affordable energy. No brown-outs. Appropriately, the rules now should be more sophicated reflecting supply, cost, efficiency, environmentally sound, and perhaps others. The accountability line to me is through political leaders who should ensure the Utility plans and energy strategy are appropriate. Politicians then ought to explain their conclusions to the voters who ultimately support the preferred plans and candidates. Realistically, the Commissions seem to operate with considerable autonomy so we must hope for qualified and competent custodians of this public trust.

    • Kathy Larsen at November 21, 2012 9:13 am

      WD: Thanks for your thoughts. Re transportation: One of the basics of thinking about plug-in vehicles with respect to the power system is that much vehicle charging would take place in off-peak hours, thus not adding to the need for power capacity but instead allowing utilities/generators to sell more power in those hours — a nice benefit for them, and at least theoretically, no need to build more power plants. Certainly, if an enormous deployment of EVs were to materialize, it could change the outlook, but so far that doesn’t appear to factor in. Complicating the long-term thinking about this, many smart-grid promoters see electric vehicles, when plugged in, as a power source for brief times when the system would find it necessary or economically sensible. Then the system would be smart enough to send power back into the vehicles.
      As for the appropriate role of utility commissions with respect to utilities: I wish there was a simple construct. It did seem simpler some years ago, though it was also fraught with unbalanced resources (utilities have a lot, commissions not so much) and undue political influence. The last decade or more has brought industry-structure changes that have added complexity to the relationship, and actually there’s some amount of what one might call soul-searching going on among state regulators nowadays as they try to determine just how their piece fits with regional structures and national policies.

  3. Jen at October 9, 2012 4:02 pm

    All I care about is NOT having oil in our waters, OUR land is for animals and farmers, NOT oil companies. OIL destroys our food source! Can’t EAT oil. YOU can’t clean up butane scientifically.
    IF you all care about is having MORE money in your POCKET, have solar and wind energy (If you understand the basic’s then you can build your own). Its only the smart and moral people go in that direction!

  4. Tom Conlon at September 27, 2012 2:41 pm

    Mr. Orlick is correct. This story merely underscores the fact that most regulatory agencies have failed to create a level playing field for demand-side energy services. While this has slowed the industry’s rate of adaptation, it hasn’t altered the fundamentals. So the risk of investing in new big generation continues to increase. But what I think will be most interesting is the wave of creative destruction we are about to witness as high tech completely revolutionizes this heretofore cozy industry. Stand by.

  5. Rborlick at September 27, 2012 11:45 am

    It’s unfair to smear the IOUs with the perjorative comment. “showing their true colors….” An IOU has to play by the rules set forth by its state regulators. The problem with those rules is that they financially penalize the utility for less sales of energy because retail tariffs typically require the utility to recover most of its fixed costs through variable energy (KWh) charges. Thus, the less KWh they sell, the more costs they don’t recover.

    This problem has existed for decades and was also solved decades ago in California when the CPUC “decoupled” the utilities’ revenues from their KWh sales. If the rest of the states followed California’s lead lower KWh sales would not adversely impact the utility’s bottom line.

    So who really are the culprits???

  6. James at September 26, 2012 11:46 pm

    Amazing to see the industry so blatantly showing its true colors that it sees energy efficiency as ‘bad news’. Wasn’t it supposed to be a good thing? Something we should all be encouraging? No wonder we are still so grossly inefficient in our energy use. Don’t worry guys, if you can just manage to pump enough co2 into the atmosphere climate change will surely boost air conditioning demand. Why is the energy industry, despite the greenwash, so reckless with such little regard for our planet’s (ie your own grandchildren’s) future?


Your Comment