The electricity challenge of the 21st century

When tackling a problem, engineers bring both skepticism and optimism to the task. As the nation’s electric power engineers look to fill America’s looming capacity gap, they will need to apply healthy doses of both.

The U.S. Department of Energy’s Energy Information Administration (EIA) projects a 50% increase in electricity demand over the next 25 years. Supply must increase to meet it.

Tomorrow’s supply, from traditional or nontraditional sources, will likely cost much more than today’s. Increased dispatching of renewable energy plants could raise or lower average regional prices, depending on their siting and subsidy. States’ only sure way to curb rising costs is to try to reduce demand, by encouraging consumers to participate in utility demand response programs.

Upward pressure on electricity production costs will come from many directions. For example, capital investment in new plants will serve to accelerate the retirement of lower-cost capacity. In traditionally regulated jurisdictions, those assets will be fully depreciated. For new plants, construction costs will be higher due to pricier equipment and material, higher labor costs, and new environmental requirements. The O&M costs of new units will likewise rise with higher salaries for increasingly scarce experienced operators and with skyrocketing fuel and fuel transportation prices.

Demand elasticity in practice

Higher retail electricity prices give consumers more reason to reduce their consumption. If they conserve enough, the drop in total demand could send its own, compensating price signal to wholesale markets.

Whether forced to or not, utilities continue to try to make their ratepayers better-educated energy consumers. Most consumers now realize that changing consumption habits pays off—in the form of a smaller electric bill—and many have changed their behavior accordingly. But even more would follow suit if they had a better idea of how much they would save by reducing their demand.

"Smart" meters will play a key role in helping to close the supply-demand gap. Once deployed, the meters will enable time-of-day pricing. But for the scheme to work, tariffs must become smart, too, by incorporating real-time prices. Regulators can make that happen, just as they can mandate sales of more energy-efficient appliances cumulatively capable of shaving both peak and average demand. The reductions in demand will reduce the size of users’ current bills, and future bills as well.

Both the EIA and the International Energy Agency consider "energy efficiency" an alternative to building additional "supply." The lowering of demand will eliminate or delay the need to build new baseload nuclear and clean-coal plants that each cost billions.

Regulators’ to-do list

Consumers are obviously responsible for their own electricity consumption and the size of their bills. But state and federal regulators could help them lower consumption, and lower electricity production costs, by taking the following steps:

  • Continue to make energy education the highest priority. Consumers must know how much energy they use, when they use it, and what it costs at the time of use. Modern meters can communicate real-time prices to computer-enabled appliances. The technology is proven, so there’s no reason—other than deployment costs, which utilities should be able to recover—to delay giving consumers the means to save energy.
  • Remove the disincentives for electric utilities to introduce and promote end-use efficiency and conservation. Many states are already doing this, by redesigning regulated rate structures to decouple returns on fixed investment from variable energy consumption.
  • Adopt true performance-based ratemaking to give regulated utilities explicit incentives to make their generation, transmission, and distribution of electricity more efficient.
  • At the federal level, boost consumer confidence in the fairness and efficiency of wholesale electricity market regulation. U.S. electricity production is increasingly traded in wholesale markets, even in states that have not instituted retail choice.

Public-private partnership

At the end of the day, America’s investor-owned utilities are responsible for ensuring that electricity supply and demand are balanced, and that T&D systems can deliver this economic lifeblood to end users. Federal and state energy policies must help to solve, rather than exacerbate, the problem by fostering investment in electricity infrastructure.

Governments have the advantage of being able to cull the demand-reduction solutions that have worked elsewhere from those that have not. Government regulators don’t need new laws to promulgate policies that create the right incentives for infrastructure investment. All they need is the political will to act.

For U.S. power engineers, the challenge of the 20th century was to build a supply and delivery system efficient enough to guarantee affordable and universal service. They did it, and their challenge in this century is to keep it that way. Engineers are right to be skeptical that policy makers will support them in this effort. But as engineers, they also are right to be optimistic that, if policy is done right, the challenge will be met.

Branko Terzic is the global regulatory policy leader at Deloitte Services LP. His experience includes a stint as a utility CEO and positions with the Federal Energy Regulatory Commission and the Wisconsin Public Service Commission. He can be reached at bterzic@deloitte.com.