Energy Planning Network: The Energy Pricing "Crystal Ball" (March 2000)
Fortunately, the Energy Information Administration (EIA) recently released its “Annual Energy Outlook 2000” (AEO2000) which provides trends and projections of energy consumption, supply, and pricing. Some of the findings are as follows:
In 1970, electricity accounted for only 12% of energy delivered to the end-use sectors, excluding transportation. Since then, the growth in electricity use for space conditioning, consumer appliances, and telecommunication equipment has resulted in greater divergence between total and delivered energy consumption. This trend is expected to stabilize in the AEO2000 forecast, as more efficient generating technologies offset increased demand for electricity.
For almost all end-use services, technologies now exist that can significantly curtail future energy demand if they are purchased by consumers. The most efficient technologies can provide significant long-run savings in energy bills, but their higher purchase costs tend to restrict their market penetration. For example, condensing technology for natural gas furnaces, which reclaims heat from exhaust gases, can raise efficiency by more than 20% over the current standard.
20% More Industrial Use?From 1970 to 1986, electricity’s share of industrial energy use increased from 23% to 35%. The natural gas share fell from 33% to 25%. After 1986, natural gas began to recover its share. The AEO2000 projections of plentiful supplies and relatively stable prices allow natural gas to maintain its current share of industrial energy consumption.
Primary energy use in the industrial sector increases by 0.9% a year in the forecast. Electricity (for machine-driven and some production processes) and natural gas (given its ease of handling) are the major energy sources for the industrial sector. Industrial delivered electricity use is projected to increase by 31.7%, as competition in the generation market keeps electricity prices low. By 2020, relatively low prices are also projected for natural gas, resulting in consumption that is 23.0% over its 1998 level. Industrial petroleum use grows by 25.4% over the same period.
Parallel growth rates are projected for electricity use and GDP. Historically, the demand for electricity has been related to economic growth. That positive relationship is expected to continue, but the ratio is uncertain.
New Plants on HorizonElectricity demand in the commercial and industrial sectors grows by 1.2% and 1.3% a year, respectively, between 1998 and 2020. Annual commercial floor space growth of 0.9% and industrial output growth of 1.8% contribute to the increase.
In addition to sectorial sales, cogenerators in 1998 produced 165 billion kWh for their own use in industrial and commercial processes. By 2020, cogenerators are expected to see only a slight decline in their share of total generation, increasing their own-use generation to 184 billion kWh as the demand for manufactured products increases.
Before building new capacity, utilities are expected to use other options to meet demand growth—maintenance of existing plants, power imports from Canada and Mexico, and purchases from cogenerators. Even so, assuming an average plant capacity of 300MW, a projected 1,000 new plants with a total of 300GW of capacity will be needed by 2020 to meet growing demand and to offset retirements.
Price Differences to NarrowBetween 1998 and 2020, the average price of electricity in real 1998 dollars is projected to decline by 0.6% a year as a result of competition among electricity suppliers. By sector, projected prices in 2020 are 10%, 17%, and 14% lower than 1998 prices for residential, commercial, and industrial customers, respectively. The AEO2000 assumes a transition to competitive pricing in five regions.
Specific restructuring plans differ from state to state and utility to utility, but most call for a transition period during which customer access will be phased in. The transition period reflects the time needed for the establishment of competitive market institutions and the recovery of stranded costs as permitted by regulators. AEO2000 assumes that competition will be phased in between 1999 and 2007, with fully competitive prices beginning in 2008. In all the competitively priced regions, the generation price is set by the marginal cost of generation. Transmission and distribution prices are assumed to remain regulated. Other issues addressed in AEO2000 include the restructuring of U.S. electricity markets, near-term prospects for world oil markets, and the impacts of energy use on carbon emissions.
For more information on the AEO2000 and the modeling methods used by EIA, visit www.eia.doe.gov.