DALLAS – Public utilities have the rate-setting flexibility to handle an expected drop in demand for electricity in coming decades, according to Fitch Ratings.
Electricity prices hit near-record lows in 2016 and demand is expected to fall 11% through 2040, industry analysts have found.
"The long-term decline in electricity demand will likely be driven by conservation efforts, more efficient lighting technologies, increasing efficiency standards and growth in distributed generation, particularly rooftop solar," Fitch Ratings analyst Dennis Pidherny wrote in a Dec. 27 outlook. "Improvements in battery storage technology, expanded federal investment incentives and favorable net metering arrangements in some states, could push electric sales down even further."
Still, Fitch maintains a stable outlook for the public power sector.
"While lower electric sales could pressure public power issuers' unit costs, and force changes to budgeting and resource planning, factors including the sector's autonomous rate-setting authority and improved rate design should limit this risk," Pidherny said.
"We also believe potential long-run consumption declines will be managed through reductions in planned investment, particularly new generating capacity," he said. "Capital investment, as a percentage of depreciation, steadily declined throughout the public power sector since 2010."
Pidherny said that consumption trends and ample access to excess energy production contributed to the decline.
"We expect capex spending to remain low during the near term as issuers delay plans for new production units and leverage opportunities to exploit market overcapacity," he said.
The falling price of abundant natural gas played a part in reducing costs as the power industry continued its shift from coal to gas-fired power plants.
The U.S. Energy Information Administration EIA expects the share of U.S. total utility-scale electricity generation from natural gas will average 34% this year, and the share from coal will decline to 30%.
In 2015, both fuels supplied about 33% of total U.S. electricity generation, the EIA said. In 2017, natural gas and coal are forecast to generate 33% and 31% of electricity, respectively.
The average spot price at the Western Hub of PJM, grid operator for most of the east coast, fell 19% this year to $28.78 a megawatt-hour, the least in grid data going back to 2005. The western hub includes Washington and is the most actively traded U.S. power location. New York City, Boston and Dallas area power prices are similarly trading at record lows this year.
In 2016, the PJM Interconnection Board authorized more than $636 million in electric transmission projects to strengthen the grid and reduce electricity costs. The approvals include a market efficiency project expected to save customers $622 million over 15 years. The $320 million market efficiency project is expected to alleviate transmission congestion across the Pennsylvania and Maryland border.
"This is PJM's largest-ever market efficiency project, and we expect it will resolve a significant amount of the remaining transmission congestion in the eastern portion of PJM," said Andrew L. Ott, PJM president and CEO.
Nationally, non-hydropower renewables are forecast to generate 8% of electricity generation in 2016 and 9% in 2017. Generation shares of nuclear and hydropower are forecast to be relatively unchanged from 2016 to 2017.
President-elect Donald Trump's promise to restore coal as a leading energy source in the U.S. is not expected to have any immediate impact on industry trends. Trump's cabinet appointees, including former Texas Gov. Rick Perry and Secretary of State designee Rex Tillerson, chief executive of Exxon Mobil, come primarily from the oil and gas industry.
Trump declared man-made global warming a "hoax" by the Chinese during his campaign, but said after the election that he would keep an open mind on the subject.
The EIA's Short-Term Energy Outlook forecasts the average residential customer will consume 4% more electricity from December 2016 through March 2017, than the same period last winter. The projected increase reflects the record warmth of the winter of 2015-2016 and not a reversal in the trend of declining residential consumption.
The EIA has forecast that overall residential electricity will grow by just 9%, or roughly 0.3% per annum, from 2015-2040 on growth in the number of households alone. Average household electric demand is forecast to decline by 11%. Residential users represent the largest customer segment for public power and cooperative issuers.
According to Bloomberg News, solar power is now cheaper than coal in some parts of the world, and is likely to be the lowest-cost option almost everywhere within a decade.
In 2016, countries from Chile to the United Arab Emirates broke records with deals to generate electricity from sun for less than 3 cents a kilowatt-hour, half the average global cost of coal power.
Since 2009, solar prices are down 62%, with manufacturing capacity growing to record levels. By 2025, solar may be cheaper than using coal on average globally, according to Bloomberg New Energy Finance.
By far, the largest U.S. market for solar power is California, which accounts for 44% of the national market.
California's "Clean Energy and Pollution Reduction Act of 2015 established 2030 targets to increase retail sales of renewable electricity to 50% and a requirement to double the energy efficiency savings in electricity and natural gas end uses by 2030.
The other major source of renewable energy, wind power, has also continued to grow. In 2015, wind was the largest source of U.S. electric-generating capacity additions at 41% market share, up from 24% the year before, according to a by the U.S. Department of Energy and Lawrence Berkeley National Laboratory.
Wind power represented 31% of all U.S. capacity additions over the last decade, the report noted.
Berkeley Labs found that average wind turbine prices have declined by 20% to 40% since 2008.
