As the economy begins to grow again, the banking industry continues to stabilize, and lawmakers work on finalizing climate change legislation, the decisions made in 2010 will lay the foundation for the power industry for decades to come.
Year 2009 began amid one of the worst economic environments in many decades. U.S. industrial production collapsed, financial markets were in disarray, asset prices shrank, and we witnessed real demand destruction across most sectors of the economy, including the electric power industry. According to Energy Information Administration (EIA) data, total power generation was down 5.4% (the latest figures, year-to-date July 08/July 09), and industrial power consumption was down 11%. The nation spent most of 2009 wondering if, and when, a bottom would form under a free-falling economy. The decline in power generation for 2009 will be the greatest drop going back to 1949 — the earliest year for which the EIA collected data. In fact, 2008 and 2009 were the first time power generation declined in back-to-back years. The only other years net power generation declined in the past 60 years were during the recessions of 1982 and 2001 (Figure 1).
1. Reducing rates. Annual change in U.S. net power generation for the period 1950–2009. Source: EIA Annual Energy Review, Table 8.2a: Electricity Net Generation, Total 1949–2008
Slow Economic Growth
As 2010 gets under way, it appears the economy has stabilized, financial markets are lending again, and industry is ready to begin a new growth trajectory, albeit at a slower pace than before.
After collapsing in the first half of 2009, U.S. GDP grew at a reasonably strong rate of 3.3% in the second half of the year, although this growth was largely supported by the federal stimulus and depletion of inventories. Stripping out these effects, U.S. GDP grew in the second half at an anemic 1% rate on an annualized basis. As federal stimulus wanes and inventories stabilize, we expect U.S. GDP to be fairly weak in 2010, especially in the first half of the year. For the full year we expect 2010 U.S. GDP to grow roughly 2%, followed by stronger growth rates of 2.5% to 3.0% in 2011 and beyond.
As most readers know, GDP growth is a strong predictor of power generation demand. Considering the steep falloff of GDP in 2009 and the weak recovery expected in 2010, demand for power generation this year will likely be flat to slightly higher when compared to 2009. Based on our GDP growth expectations, it will likely take two to three years before total electrical generation reaches the level it was at prior to the economic meltdown. This temporarily alleviates the need to add new generation capacity.
The recession was so severe that the North American Reliability Corp.’s (NERC) "2009 Long-Term Reliability Assessment" indicates that most regions in the U.S. are expected to have adequate capacity reserve margins through 2018 (when including adjusted potential reserves). However, it is important to recognize that the recent economic slump was not caused by overinvestment in industrial capacity; it was caused by extreme leverage in the residential and commercial sectors.
The point is that when demand reaches the level it was at prior to the current recession, we will quickly begin to see the same capacity constraints we saw then. Even though utilities are not experiencing capacity constraints now, they need to continue to plan for new capacity to meet future growth and replace retirements.
This pause in economic growth provides an opportunity for the industry to reassess its business and prepare for future demand growth as well as future regulatory requirements.
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