During the latest EEI Strategic Issues Roundtable event, Stuart Pearman, partner and energy practice leader at ScottMadden, explored the strategic implications of declining growth in energy consumption. The presentation, “Strategic Implications of Declining Growth in Energy Consumption,” addressed the three key questions: What is happening? What causes it? What can you do about it?

Access this presentation to learn about the decline in energy consumption, what it means in conjunction with other macro trends, e.g., the duck curve, and what some utilities are doing about it.

Discussion Outline

• What’s happening?
• What’s causing it?
• What are the implications?
• What can you do about it?

What’s Happening?

• Declining Demand Growth
• Regional Demand Trends
• Demand Trends

What’s Happening? Declining Demand Growth

Reading the headlines: Where’d the load growth go?

• U.S. MWh sales growth was only 1.7% cumulatively from 2005 to 2015
• Industry consensus forecasts continued sales growth decline
• The good news: revenues per MWh have grown

What’s Happening? Regional Demand Trends

Growth sightings: All regions are not created equal

• Regions with significant oil and gas resources (e.g., around TX, OK, ND) averaged >0.5% annual sales growth since 2008
• 27 states have averaged negative or no annual sales growth since 2008; 40 states have averaged <0.5%

What’s Happening? Residential Demand Trends

Residential demand has declined

• Since 2010, total residential sales have declined 3%
• Average sales per residential customer have fallen 6%
• Real prices have increased nearly 3%
• The decline in average consumption has occurred across all regions of the United States
• The West, lead by California, has witnessed consistent declines in average consumption, followed by states such as Alaska and Hawaii

What’s Happening? Commercial Demand Trends

Commercial demand has slowed

• Since 2010, total commercial sales have increased 2.3%
• Average sales per commercial customer have increased only 0.5%
• Real prices have decreased by 1%
• The mixed-consumption behaviors across regions have led to a near net-zero effect on U.S. average commercial consumption
• The Southwest has experienced the most consistent growth

What’s Happening? Industrial Demand Trends

Industrial demand has recovered, but remains well below 2000s’ levels

• Since 2010, total industrial sales have increased 1.6%
• Average sales per industrial customer have decreased more than 9%
• Real prices have decreased by 4.4%
• Interestingly, regional declines in average consumption have slowed since 2005, though many regions are still negative
• The West has seen the most dramatic declines in average consumption

What’s Causing It?

Likely culprits

• Could it be price?
• Energy efficiency?
• Deindustrialization?

Likely Culprits

Decoupling of electricity growth from GDP and population is a myth. Slowing GDP and population growth aren’t helping, but they’re not the only cause

• Slowing economic growth
  • ~2.2% since recovery in 2011
• Slowing population growth
  • <1% since 2002
• Price
• Energy Efficiency
• Deindustrialization

What’s Causing It? Could It Be Price?

• Real prices are near their all-time lows, increasing only modestly since 2000
  • Average real prices of electricity have increased 11% since 2000 compared to the core CPI’s 34%
• While not “scientific,” the long-term trend is intriguing and does suggest the possibility of long-term price elasticity punctuated by periods of anomaly
  • The 70s were weird
  • The last decade doesn’t seem to normal either

What’s Causing It? Energy Efficiency?

Buildings are replete with electric end uses, and there’s an increasing emphasis on efficiency

• The penetration levels of household appliances are well above 90%, suggesting their aggregate
  annual electric consumption is at or very near its peak
•  Appliance standards, if continued, will only further increase the efficiency of these end uses
•  However, efficiency improvements are being mitigated by the growth rates of miscellaneous electric
  loads in both the residential and commercial classes

What’s Causing It? The Industrials Did It…

But not the way people think (i.e., deindustrialization)

• In fact, industrial customer count has grown…dramatically
• Instead, the industrial mix has changed to less energy-intensive industries
• And we’re seeing declining end-use consumption across the board

What’s Are the Implications?

• Duck curve
• Pressures on Rates
• Some Observations

What Are the Implications? Duck Curve

• 2013 California Independent System Operator (CAISO) analysis predicted that renewable resources
  would impact grid conditions
• Iconic “duck curve” predicting as variable generation grows, so too will the midday trough of load
  served by conventional supply
• ScottMadden analyzed average hourly production data from CAISO from January 2011 through June
  2016 to understand if actual results align with the original forecast and to see what new insights could
  be learned from the data behind the curve
• But is it what most people think it is?

What Are the Implications? Duck Curve Is Real – and Growing Faster than Expected

What Are the Implications? Net Loads Shrinking and Ramps Increasing (2011–2016)

What Are the Implications? Driven by Utility-Scale Solar, Not Distributed Resources

What Are the Implications? The Duck Curve Can Happen to You

• The duck could migrate to areas with high penetrations of utility-scale solar
• States forecasted to have more than 3 GWs of utility-scale solar by the end of 2021 include:
  • North Carolina
  • Arizona
  • Georgia
  • Nevada
  • Texas

What Are the Implications?

The confluence of increasing intermittent resources and lower demand will lead to duck curves.

Pressures on Rates

Grid investments are accelerating

• T&D capex is at an all-time high
• And generation investments are at a high point primarily due to renewables
•  “If your outgo exceeds your income, your upkeep will be your downfall”

What Are the Implications? Some Observations (from the Best Magazine in the World)

• Public policy is increasing supply when the markets don’t want it – we are adding supply when
  demand growth is stagnant
• The wholesale market is centered around short-run marginal cost, originally designed to determine
  dispatch order, not to govern entry and exit
• The confluence of these effects is tanking wholesale prices so that the price signal for entry and exit
  becomes distorted
• As a result, renewables are eating coal and will soon be cannibalizing themselves

What Can You Do About It?

• Target the Customer Mix
• Rate Structure and Design Alternatives
• Differentiated Pricing
• PPAs are Ripe for Innovation
• New Services and Strategic Alternatives
• New Markets

What Can You Do About It? Target the Customer Mix

• Combo utilities look at multi-fuel incentives
  • Growth in residential gas customers, though declining usage
  • Opposite is true for industrial gas customers
• Economic development to bring high-intensity industries back/in

What Can You Do About It? Rate Structure and Design Alternatives

In the short run, many costs are fixed; however, in the long run, all costs are variable. Deciding which perspective to take comes with a series of tradeoffs.

What Can You Do About It? Rate Structure and Design Alternatives – What Does MIT Say?*

• Ensure that all prices and charges are technology neutral and symmetrical
  • No longer homogenous classes – network utilization patterns more diverse
  • Injections and withdrawals by time, voltage level, and location important, not device (e.g., EV)
• Progressively improve the granularity of price signals with respect to both time and location
  • Efficiency gains with signals based upon time and location
  • But carefully balance against implementation costs and considerations, complexity, and volatility
• Apply forward-looking peak-coincident network capacity charges and scarcity-coincident generation
  capacity charges
  • Charges should reflect the contribution of network users to the incremental future cost of
    transmission and distribution network expansion
  • These charges should incentivize flexible demand, DER at right times and locations
• Allocate residual network and policy costs without distorting efficient incentives
  • Volumetric charges don’t necessarily induce network savings
  • Fixed charges are better approach, but how to allocate fixed charges in an equitable and
    acceptable manner

*With some poetic license

What Can You Do About It? Differentiated Pricing

• Differentiated/segmented pricing can require some differentiation of products, as illustrated by the classic demand curve illustration of General Motors’ segmented pricing strategy below:
• Pricing can be segmented along many lines, such as:
  • Buyer characteristic
  • Time of purchase
  • Purchase location
  • Purchase of quantity
  • Value of end use
  • Product design
  • Product bundling
  • Tie ins
  • Value-based metering

What Can You Do About It? Updating Terms of Solar Power Purchase Agreements

Standard PPAs are quickly becoming inadequate

• Overproduction by solar resources, especially during low-demand periods, is leading to curtailment
• A few states experiencing this effect already are realizing the shortcomings of their solar PPAs
  • Hawaii is exploring how to effectively curtail solar output
  • California is exploring options to address negative midday pricing
  • North Carolina is in the midst of figuring out how to address PURPA QF model
• These problems may be resolved by pursuing alternative PPA structures
  • Capacity and Energy
  • Time-of-Day Pricing
  • Renewable Dispatch Generation
• Some key questions:
  • Can solar provide ancillary services?
  • Will energy prices be tied to market prices?
  • Are alternative PPAs too complex?

What Can You Do About It? New Services and Strategic Alternatives

Shifting focus back to the core business, increasing grid investments, and testing expanded customer-centric offerings.

What Can You Do About It? New Services and Strategic Alternatives

What Can You Do About It?

Distributed ledger technology (DLT) provides a single shared system of record that enables unprecedented coordination in competitive environments and the creation of new markets

• Example: Corda – a DLT product made by the R3CEV consortium – allows banks, regulators, and other interested parties to automate the business logic that connects them and their customers
  • The platform is private, meaning all participants are known and the details of transactions are kept confidential
  • The platform is secure as a result of well-established cryptographic techniques and its distributed architecture
  • The platform is efficient, allowing competitors to coordinate without worrying about reconciling disparate ledgers and conflicting interpretations of legal agreements
  • The platform fits within the current regulatory framework by utilizing existing legal agreements and providing regulators with increased transparency across the network of transactions
  • The platform could enable new revenue streams for participants that leverage the shared architecture and data to provide value-added services

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