Something very unusual has been happening to the U.S. electricity sector over the past three years.
The U.S. economy keeps growing. People are buying bigger homes and plugging in ever more electronic gadgets. And yet power companies have been selling less and less electricity since 2011:
That may not look like a particularly steep drop, but it's a massive break from the past. Ever since World War II, electricity sales in the United States have, for the most part, gone up and up and up. They've only ever declined in a handful of years associated with nasty recessions —1974, 1982, 2001, and then again in 2008 and 2009.
But the last three years have been a striking exception: After a predictable bounce-back in 2010 — something that usually happens after economic downturns — electricity sales declined in 2011 and 2012. And they're expected to decline again in 2013, says the U.S. Energy Information Administration (EIA). And next year. And the year after that.
Perhaps this is just a random blip. Yet some analysts think we really could be entering a new era in which Americans buy less and less electricity — either because they're becoming more efficient or they're finding ways to generate their own electricity, through solar panels and other means. And if that's true, it's a huge problem for many electric utilities.
Why U.S. electricity sales are dropping
In the past, electricity sales have risen and fallen in lockstep with economic growth. But that relationship has disintegrated since 2011. The EIA lists four reasons why:
-- Homes have been using less electricity. In 2011 and 2012, residential electricity use declined by 5 percent, despite the fact that more houses were being built and homes were actually getting larger. The EIA chalks this drop up to the fact that household appliances are getting steadily more efficient and newer homes are often better insulated. Also, a spate of warmer winters has reduced demand for heating in some regions.
-- Office buildings are getting more efficient. "[S]tandards to improve efficiency for lighting and space heating have helped keep commercial building energy demand flat in recent years," the EIA says. So have the weather patterns mentioned above.
-- Industry has yet to rebound from the recession. The agency notes that electricity use in the industrial sector is still below 2007 levels. Part of that is due to the lingering effects of the recession and part due to "efficiency improvements in production processes."
-- Solar power and distributed generation is starting to catch on. This is the most intriguing factor. If people (or companies) are putting up solar panels and generating their own electricity, then they don't need to buy as much from the local utility. The EIA isn't sure how big this effect is — it's likely small right now — but it's one to keep an eye on.
For its part, the EIA is betting that this slowdown in electricity sales is just a blip. It expects sales to stagnate until 2015 and then start rising again at their usual 1 percent rate.
Some analysts aren't so sure. In recent years, a number of reports have come out suggesting that we may be entering an era of stagnating electricity sales (see here and here). Which is something to worry about, if you're in the business of selling electricity.
The threat to electric utilities
Electric utilities make more money by selling more power. They don't usually benefit if people start buying more efficient washing machines or installing solar panels on their roofs. If these trends are accelerating, that's a real problem for power companies.
The doomsday scenario for utilities goes like this: Solar power keeps getting cheaper and more people start installing panels. In the meantime, overall electricity use grows slowly or stagnates. That means utilities are selling less and less electricity. In order to recoup their costs for things like maintaining the grid, they have to hike rates on their remaining customers. That pushes even more people to install solar panels, hurting sales further. Commence the death spiral.
Sound far-fetched? This exact scenario was laid out by an industry trade group, the Edison Electric Institute, in a report back in January. Even though solar power currently provides just 0.2 percent of U.S. electricity, prices are dropping fast, and even a small amount of distributed solar generation could prove disruptive. David Crane, CEO of NRG Energy, has called these trends "a mortal threat to the existing utility system.”
Indeed, this scenario is already playing out in Germany, where rooftop solar panels have become increasingly common, and traditional utilities like E.ON and RWE have seen their market value plunge 56 percent over the last four years.
Now, a utility "death spiral" is hardly inevitable. Perhaps plug-in electric vehicles will catch on in a big way, which would massively expand the market for electricity.
Or: Perhaps utilities will manage to curtail the rapid growth in solar power. Earlier this year, Arizona Public Service tried to levy a $50 per month surcharge on rooftop solar owners, arguing that the panels were imposing high costs on grid operators (after all, solar-panel owners still use transmission lines for backup or to sell power back to the grid). Regulators knocked this fee down to $5 per month, but this won't be the last fight on this front.
Industry observers are watching all of these trends closely. One article last year by Ahmad Faruqui and Eric Shultz, two consultants at the Brattle Group, argued that "the drop in electricity demand growth appears to be permanent, not transitory."
They suggested that this shift will call for "new thinking, such as initiatives in many states to decouple a utility's earnings from its sales volumes." (That's already happening: Some 63 utilities in 25 states are now regulated under plans in which they're actually rewarded for promoting efficiency and selling less electricity — an arrangement that's expanded rapidly in recent years.) And others think the growth in distributed generation could force even more radical changes in the years ahead.
--Earlier this year, David Roberts had an excellent series in Grist on electric utilities and the threat they're facing from distributed solar generation. There's much more detail there. (I also wrote about this issue back in 2009 for The New Republic.)
-- Liam Dennings has a good piece in The Wall Street Journal on how these dynamics could weigh heavily on utility stocks, which were once considered some of the safest around.