Utilities Feel the Solar/Efficiency Heat
December 30, 2013
The financial services firm UBS is predicting a “difficult year ahead” for global investor-owned utilities.
In a recent research paper, UBS equities analysts outlined a combination of challenges for utilities: —
“We forecast year-on-year power demand growth to be negative in key developed markets in 2014 and beyond,” wrote the analysts. “Regulatory and consumer focus on energy efficiency initiatives will further erode the demand pie. Simultaneously, we expect renewables — especially solar and wind — to continue to gain competitiveness as cost structures improve, and renewables supply to further pressurize the demand curve and profitability of conventional generators.”
Aside from Indonesia, most key emerging markets will see considerable declines in electricity demand compared to traditional growth rates. A combination of emerging efficiency standards and increasing renewables deployment are causing the slowdown.
Total U.S. electricity sales have declined in four of the past five years, and are on track to continue to decline in 2013. The only year-over-year rise in electricity use since 2007 occurred in 2010, as the country exited the 2008-09 recession.
The flattening of total electricity sales has been driven by declining sales in the industrial sector and flat sales in the residential and commercial building sectors, despite growth in the number of households and commercial building space.
Residential: Electricity sales to the residential sector (blue line) accounted for 36% of all electricity use in 2012, up from 33% in 2000. In 2010, coming out of the recession, year-over-year residential sales increased 6%, and subsequently declined 5% over the following two years, despite growth in the housing stock and the trend of building larger homes. Weather patterns, which affect electricity demand for home heating and cooling, and efficiency improvements spurred by appliance standards are key drivers for declining energy consumption per household. Other trends such as shifts in population and changes in housing square footage and type (i.e., from single-family homes to apartments) have an impact on residential electricity use.
Commercial: Sales of power to commercial buildings (brown line) have increased about 1% annually since 2000 and accounted for 35% of electricity use in 2012. Demand has varied more than in the residential and industrial sectors. Weather patterns affecting energy needs for heating and cooling, as well as standards to improve efficiency for lighting and space heating, have helped keep commercial building energy demand flat in recent years.
Industrial: Total industrial electricity sales decreased by 9% between 2000 and 2012, and the sector’s share of total electricity usage fell from 30% to 26% in that period. Electricity use in the industrial sector has historically been sensitive to economic conditions as factories respond to declining demand for goods. The sector experienced a sharp 10% year-over-year decrease in electricity use during the 2009 recession, and sales have not yet returned to the 2007 level. Efficiency improvements in production processes have contributed to declining energy sales. However, since 2010 this trend has been offset by increasing production and exports, driven by low natural gas prices, among other factors.
Distributed generation: Growth in solar photovoltaic capacity and other types of distributed generation is another factor contributing to the recent slower growth in electricity sales in the residential and commercial sectors. The impact is difficult to measure because residential and commercial solar electricity generation data are not readily available. Growing installed capacity of behind-the-meter sources of generation (largely from rooftop solar) is displacing some electricity sales that would otherwise occur.
Renewables also continue their strong ascendance in America, aided by flat demand. According to the latest figures from the Federal Energy Regulatory Commission, renewables provided 99 percent of all electricity generation capacity in October, and 100 percent in November.
However, overall penetrations are still relatively low compared to Europe, and U.S. power providers have avoided many of the hardships that large European utilities have faced. Since 2008, the top twenty European utilities have lost half their value due to a confluence of conditions in deregulated markets: declining demand for electricity, an over-build of fossil plants, and slipping wholesale prices from renewables.
Along with efficiency, UBS predicts that distributed solar will have the most disruptive impact on utilities in the coming years — particularly in Europe.
“Over 2014, distributed, point-of-use solar should prove to be the most disruptive renewable technology. Distributed solar (rooftop solar panels at end-points of consumption) are becoming economical at a faster pace compared to utility-scale solar or wind installations,” concluded UBS. “In several liberalized power markets, rooftop solar panels are driving power prices at the margin; and given their zero marginal production costs, they are pushing thermal generation down the merit order.”