Wood Mackenzie

Press Releases: Energy

A Decade of Lost Electricity Demand Growth Forcing A New US Energy Landscape

HOUSTON, 21 August 2012 – A new future energy market landscape in the US is being primarily shaped by a decade of lost electric power demand growth, which has enormous implications on the power and fuels markets, as well as renewable and environmental legislation, according to a new report by Wood Mackenzie.

'A Lost Decade of Demand Growth', describes these radical changes in demand growth projections and how they, together with a growing list of uncertainties, are transforming the future of the power industry and complicating strategic and operational choices.

“On one hand, the gas industry has witnessed a dramatic change with the advent of new shale gas resources and their generous supply of low cost natural gas for the power sector,” explains Prajit Ghosh, Senior Analyst for North American Power Research at Wood Mackenzie. “The abundance of low cost gas supplies has transformed the supply side of the equation for the power sector, driving tight competition between coal and gas generators, and contributing to premature coal-fired plant retirement decisions.”

“Meanwhile, the major driver really underpinning much of this new state of the market is a significant shift in electricity demand growth expectations.”

According to the report, forward views for electric demand growth during the next two decades have changed dramatically since 2008. Wood Mackenzie currently forecasts US power demand to grow by slightly over 1 percent on average per annum in the next two decades, far below the historical average growth rate, which approached 2 percent per annum over the past two decades.

“The crystal ball seems to have not served us well in predicting the Great Recession or its severe impacts on energy demand,” notes Ghosh. “Given the recessionary impacts on gross domestic product, industrial activity, real estate and unemployment, all coupled with a possible behavioral drag on energy demand, demand growth expectations have been reduced to much lower levels.”

Another source of pressure on demand growth is energy efficiency. Wood Mackenzie notes that, since 2008, multiple state and federal policies have been introduced, motivating investment in energy efficiency programs, and further accentuating the loss of future demand growth.

In aggregate, more than a decade of future demand growth has been lost as a result of the combination of economic forces and energy efficiency initiatives. Demand levels that were previously forecast to be reached by 2019 are now not expected until 2030, according to Wood Mackenzie.

Lowering demand growth expectations to this extent has huge implications not only for the power and fuels sectors but also for renewable energy markets and carbon policy going forward. Renewable energy mandates in most markets are expressed as a share of energy requirements. Therefore, the current lower energy demand growth forecasts reduce future investment requirements compared to previous outlooks. Projections for carbon emissions from the power sector, are also significantly lower now, largely driven by the slower demand growth expectations.

Ghosh adds “The lost decade of demand growth effectively reduces the size of the future power generation pie. If one was to isolate the impacts of reduced load growth, other things being equal, natural gas burn would have been lower than previous forecasts by about 5 bcfd in 2013 and 15 bcfd by 2030. This would translated to almost a quarter (increasing over time to almost a half) of reduction in expected natural gas demand from the power sector going forward.

But other things are seldom equal, and certainly not in this case. While the power generation pie is expected to be much smaller than suggested in the past, natural gas has been claiming an increasingly larger market share primarily at the cost of coal generation. A combination of lower gas prices and stringent environmental policy is expected to maintain favorable conditions for natural gas generation in the future, thereby making up for the lost demand growth.”

Beyond these numerous sources of downward pressure, electric demand growth faces multiple additional downside risks including a potentially worsening Eurozone crisis, higher energy efficiency gains, and distributed generation growth. Conversely, a looming industrial recovery in the US represents an upside risk driver to Wood Mackenzie’s forecast. Such risks add much uncertainty for decision makers in the power sector.

In conclusion, Wood Mackenzie’s analysis underscores that this considerably muted demand growth is expected to have a huge impact on power market fundamentals. Compliance with potential future emission reduction regulations like carbon cap and trade policies could have very different repercussions in light of this new reality.

 

Click here for more information on Wood Mackenzie’s analysis.