Electricity Demand Drops Notably with Complex Ramifications

Sharp drop in U.S. prices could undermine investment in renewables, complicate carbon trading calculations

2 min read

The Wall Street Journal’s excellent Rebecca Smith reports today that electricity demand dropped 4.4 percent in the largest U.S. power market, consisting of 13 states east of the Mississippi. Average spot prices for electricity fell all out of proportion in the same operating region, by 40 percent. According to Smith, the pattern prevails throughout the  country. In the area around Houston, for example, spot prices were $61.72 per megawatt-hour in June, compared with $129.48/MWh  during the like month a year earlier. Generally, the declines in demand and prices are the most precipitous and most sustained seen in the United States since the 1950s.

Smith raises the question of whether the low prices could be discouraging potential investors in electricity generation and infrastructure, so that "if demand comes roaring back" there won't be enough new plant and equipment to support higher demand.

But that's not the only concern by any means. Those thinking of putting their money into renewables like wind and solar often find, even with very generous investment incentives, state portfolio mandates and energy credits, that a project is just at the margin of profitability. (A new PV plant in Pennsylvania that we profiled earlier this year is a case in point.) In open electricity markets, such projects have to compete successfully against tried and true sources of electricity like coal and natural gas. If it looks to investors as if electricity prices might actually stay low for years to come, or might fluctuate unpredictably with wobbly economic recoveries, then renewables will suffer even with the best of incentives.

(Note in this connection, however, the unequivocal superiority of the "feed-in" tariffs that countries like Germany and Spain have adopted to encourage investment in wind and solar. In those countries, investors are guaranteed prices for electricity generated by renewables over time, regardless of what happens to general electricity rates.)

Another complication: if as expected Congress enacts and Obama signs legislation that creates a carbon trading system, that system may work differently in a lower-price electricity regime than its inventors anticipated. On the one hand, if prices stay low, then purchase of carbon emission credits may have a smaller than expected impact on perceived prices. (Say you're used to paying 8 cents per kilowatt-hour for electricity, but the price has just gone down to 5 cents; soon, with your utility having to buy emission credits, your price may go back (say) to 7.5 cents, but it will seem lower than usual, not higher. In retrospect, then, legislators could have adopted a more demanding carbon reduction system without running into resentment.

At the same time, though, the relative cost to utilities of purchasing credits will seem larger in a lower electricity price regime, because the cost of credit relative to revenue per kWh will be greater. From this point of view, a given trading system may have greater effect at low price levels than at high.

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