U.S. optimism has been restored by reports of abundant, reasonably priced natural gas to fuel most new generation; however, huge gaps in the fuel delivery system (thousands of miles of pipelines are needed) will soon challenge gas plant development. Meanwhile, the cloud of sovereign debt hangs over all major capital projects in Europe, where the UK moves ahead with new nuclear projects while many of its neighbors shut the door on nuclear and struggle to finance their commitment to renewables.
“It’s the economy, stupid.” That pungent phrase coined by legendary politico James Carville guided the successful 1992 presidential campaign of Bill Clinton. Today, 20 years later, Carville’s dictum might well serve as the guidepost for another presidential campaign and for the nation’s energy future.
In the past four years, the U.S. has seen an uneven recovery from a deep recession to no or extremely slow growth, with 2011 shaping up as a disappointing year, but one with real economic growth. Goldman Sachs Inc. has estimated 2011’s gross domestic product (GDP) growth at a rather anemic 1.5%. Third-quarter GDP growth was just 1%, and Goldman predicted the final quarter will be only slightly higher. Electricity production growth for the year looks to be a meager 0.3%.
The shape of the economy for 2012 is unclear, although few economists predict boom times. Last summer, the great fear was a steep decline in the economy, a “double-dip” recession, with a return to the economic downturn of 2007–2008. Wall Street odds makers were pegging the chances of a double dipper at about 35%. However, that has not happened, and anxiety about a return to recession has receded. In November 2011, the U.S. Federal Reserve Bank lowered its forecast for economic growth through 2013 but did not predict economic decline ahead, only more slow growth. As a result, the Fed said it would take no new steps to stimulate growth in the world’s largest economy. The U.S. central bank predicted economic growth of 2.5% to 2.9% in 2012, considerably below its 3.3% to 3.7% forecast in June last year.
Private forecasters are also predicting slow but positive economic growth for the U.S. economy. JP Morgan is pegging growth at 0.5% for the first quarter of 2012. Citigroup is projecting 2012 GDP will increase by 2.1%.
Defining Our Times
The National Bureau of Economic Research, the recorder of U.S. economic growth, defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” In concrete terms, the generally accepted rule of thumb for a recession is two consecutive quarters of declining GDP. In a recent survey of 39 economists by USA Today, only one predicted a drop in GDP in any of the coming five quarters. “Recession is not our base case, but you have to consider other outcomes,” investment analyst Janney Montgomery Scott told the newspaper.
Last April, in its Annual Energy Outlook, the Department of Energy’s Energy Information Administration (DOE’s IEA) noted that 2010 economic growth “partially offset the decline in 2009.” The EIA’s best estimate of 2011 economic growth was 2.7%; its low estimate was just over 2%, and its high case was over 3.0%. Since then, the EIA has scaled back its growth assumptions even further. In its September short-term outlook, the statistical agency said it is now assuming that “U.S. real gross domestic product grows by 1.5 percent this year [2011] and 1.9 percent next year.”
The EIA notes that the economy drives energy use: “Energy consumption per capita declined from 337 million Btu in 2007 to 308 million Btu in 2009, the lowest level since 1967. In the [Annual Energy Outlook 2011] Reference case, energy use per capita increases slightly through 2013, as the economy recovers from the 2008–2009 economic downturn.”
Many economists posit a direct relationship between economic growth and the growth in demand for electric power. Although the one-to-one relationship that characterized earlier periods no longer exists, it does seem to be the case that more economic activity demands more electric power. The current conventional wisdom is that a percentage increase in economic growth yields an increase in electric demand of roughly 0.6%.
Demand growth has real consequences in the electricity business. The Tennessee Valley Authority (TVA), for example, is justifying its decision to resume work on the long-mothballed Bellefonte nuclear plant with an estimated long-term growth in regional electric demand of around 1%. If the economy continues slow growth during the next several years, or if a double-dip recession occurs, TVA’s Bellefonte decision could be costly to the region’s electric customers. A recent Nashville Tennessean article noted that the Electric Power Research Institute is projecting annual long-term electricity demand growth that’s only half what TVA projects.
The notion of a lock-step relationship between economic growth and electric demand has skeptics. One is Jim Rogers, the long-time industry executive now in charge of North Carolina’s Duke Energy. Rogers told an industry conference recently that the past 50 years’ trend of economic growth driving electric sales growth is changing. Rogers said at the Edison Electric Institute’s financial conference in Orlando in November that structural changes in the U.S. economy are altering the relationship between the economy and electricity. “I do not see the manufacturing base coming back. Our economy is becoming less energy intensive, by 3% each year,” he said (Figure 1).
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| 1. Electricity consumption is fairly flat. Total U.S. electricity consumption grew only 0.3% in 2011, and the EIA expects 2012 electricity consumption to decrease by 0.6% compared to 2011. Last year, the EIA predicted that electricity growth would be stagnant in 2011 and then resume long-term growth of about 1.5% per year. Historical data show that from 2000 to 2009, demand grew by 0.5% per year. Source: EIA, Short-Term Energy Outlook, November 2011 |
Due to slow economic growth and recent changes in the economy and the electricity industry, the overall capacity of the electricity system in the U.S. and Canada is in good shape, according to the North American Electric Reliability Corp. (NERC). NERC’s 2011 summer estimate, for example, found a 25.1% reserve margin in the U.S. and a 35.9% margin in Canada.
The EIA notes that summer 2011 was somewhat warmer than usual, with cooling degree-days through August about 2.8% higher than the same period in 2010. That put no real strain on the U.S. power system, except in Texas, whose grid is isolated from the rest of the country, where a prolonged heat wave and drought caused some outages and voltage reductions. For 2012, the EIA says it expects total consumption of electricity to shrink by 0.6%, compared to projected 0.3% growth for 2011 (Figure 2).
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| 2. Future electricity growth is flat. The EIA predicts that electricity growth will be a negative 0.6% during 2012 but will recover and grow at 1% per year in following years. Source: EIA, Short-Term Energy Outlook, November 2011 |
If electricity demand continues to grow slowly in the future as it has for the past few years, then the NERC assessment of reserve margins seems to be spot on. The weak link, according to NERC’s 2011 Long-Term Reliability Assessment of system reliability, consists of recent and expected Environmental Protection Agency (EPA) regulatory actions. NERC believes the EPA’s regulatory onslaught will cause a significant number of coal-fired plant closures (see sidebar “NERC Points Finger at EPA for Risking System Reliability”).
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