Monetizing Energy Efficiency
Utilities, regulators, and environmentalists all agree that improving our nation’s energy efficiency is imperative. Where they disagree is over how those who invest in energy efficiency projects are reimbursed or earn a reasonable profit.
Ralph Izzo, CEO of New Jersey – based Public Service Enterprise Group, noted that everyone wants higher efficiency, but nobody likes a 10-year payback. Izzo’s solution: Utilities should replace the customer as the investor in energy efficiency. Not a surprising viewpoint for an investor-owned utility that is facing a shrinking market and limited upside in earning potential, but here are his reasons:
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Only 30% of Americans today consider climate change a priority and are more focused on the economy.
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Utilities are more informed technologically about efficiency.
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Utilities have a lower cost of capital.
Izzo’s rationale for utilities entering the energy efficiency market avoided mentioning the fact that utilities do not have experience in this market, heretofore served by any number of private firms with expertise across industrial and commercial industries. The question is this: Should utilities have the opportunity to invest in energy savings projects that benefit particular customers, yet have those investment dollars added to their ratebase, which determines their annual earnings? In essence, some customers are being asked to subsidize energy conservation projects that do not directly reduce their home utility bill. You can’t blame Izzo for trying to stake out areas where he can grow his business, but the idea isn’t getting much traction in local public utility commissions.
Other speakers representing electric utilities expressed concern about the economy’s nosedive and have cut their capital budgets by 15% or more for 2009 and deferred many projects from one to two years. The surviving projects are generally related to transmission and distribution system improvements, which are considered safer investments by utilities.
The discussion also revealed that many utilities still have plenty of cash available for investment — up to six times their current capital budgets — if consistent and appropriate regulatory reforms are made that will ensure an adequate return on their investment. Freezing rates, as some states have done, is a sure path to reduced infrastructure investment. Here’s the point: Finding financing for projects is tough these days, but the U.S. utility industry is relatively healthy and can fund (or raise funds) for investment in infrastructure if the regulatory climate ensures a realistic rate of return.
Electricity Use Flat or Falling
Electricity use in the U.S. has risen every year except 1974, 1982, 2001, and 2008. Each of these years coincided with an economic recession; usage immediately rebounded and grew the following year. The current economic recession seems to be more severe than the three previous ones, and the Energy Information Agency (EIA) is predicting that consumption of electricity will fall by 0.8% in 2009 and then rebound by 1.3% in 2010 (Figure 2). If this occurs, it will be the first time in history that U.S. electricity consumption has fallen two years in a row.
2. U.S. total electricity consumption, 1998–2010. Source: Energy Information Agency
Utility executives attending the CERA conference were less optimistic than the usually overly optimistic EIA reports. Most utility executives surveyed predicted that 2010 consumption would be less than 2009’s. If they are right, electricity usage would fall for an unprecedented three consecutive years.
Let’s put these numbers into a more global perspective. The rest of the industrialized world is experiencing an even greater drop in electricity consumption. Why? Because residential customers consume more than 40% of all kilowatt-hours produced in the U.S. — a higher fraction than in any other industrialized nation, where the largest usage reductions are in the industrial sectors.
Take China as an example of a developing nation. In China, industrial customers consume nearly 80% of all electricity. During the last three months of 2008, total consumption of electricity in China was down 6% (versus 2007) driven by a double-digit fall-off in industrial consumption. Likewise, in Russia, where industry consumes about 50% of electricity, total consumption in 2008 Q4 was off 3%. In Italy, overall consumption was down 10% in January 2009 compared to December 2008, after a fall of 0.7% for 2008 — the first annual decrease since 1981. In France, industrial customers used 18% less electricity in December 2008 than in December 2007. German mega-utility RWE predicts that energy-intensive industrial customers will consume 10% less electricity in 2009 than in 2008.
--Mark Axford (maxford@attglobal.net) is a principal of Axford Turbine Consultants LLC and a POWER contributing editor.
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