Why electricity demand is falling, and what it means

It is a multi-generational truth that electricity consumption only increases. This is best seen in the US where, since 1949, electricity demand has marched upward in a nearly uninterrupted pattern with the country never experiencing two consecutive years of negative growth.

Even here in Australia with data going back to 1961, we have never experienced two consecutive years of negative growth either.

Electricity demand falls in USA in four of last five years

However, in the US, how is it that in four of the past five years to 2012, electricity demand has indeed fallen? In fact, the same unprecedented softening in electricity consumption is happening in many places around the world (Figure 2).

Source: Bloomberg, national statistical departments. Long term is: Australia – 51 years; US – 63 years; Japan – 20 years; Germany, France, Italy and UK – 22 years.

Why has electricity demand fallen?

While the global financial crisis and subsequently weak economic environment are partially to blame for the decline, we believe there are three other contributing factors:

1. Rise of distributed generation

2. Increasing energy efficiency

3. Behavioural changes

Distributed generation is a term to describe the shift away from producing energy near a fuel source (which is typically far away from consumers) to producing near the consumer. The best example of this is solar panels on rooftops, where electricity is produced and consumed onsite.

No power bill from rooftop solar panels – getting consumers off the power grid

This can be extended to other forms of micro generation and energy storage, which collectively reduce energy lost from long distance transmission and harden the system against unplanned outages. Much of the micro-generation (rooftop solar panels, microturbines, fuel cells and Combined Heat and Power (CHP) units) is occurring behind the meter, meaning consumers are reducing their use of grid power. As explained by Edison International, it has seen the consumption share of industrial users in Southern California go from one-third of total electricity consumption to only 10 per cent as many installed super-efficient CHP units onsite.

Rooftop solar installations are now doing the same thing with residential and commercial electricity demand, as they swap local grid power with self generation and, in some cases, even put excess power back into the grid. Solar power and CHP units are both established technologies and within financial reach of much of the population, indicating this trend will continue.

LED light bulbs use up to 90 per cent less electricity

The most efficient watt is the one you don’t use because it uses no resources to produce it at all. This simple idea is embodied in energy efficient products and services, which is gaining significantly more attention. LED light bulbs use up to 90 per cent less electricity as a comparable incandescent light bulb. Insulation in your home immediately cuts energy bills. Recycling an aluminium can uses 95 per cent less energy than making it from virgin materials. Collectively, these efficiency measures are impacting consumption as the high cost of energy brings the issue sharply into focus for consumers and businesses. The price of energy is not going lower and, as a precious resource, it just makes sense for its use to continue to be carefully rationed.

Perhaps because conservation and the environment have become mainstream issues, utilities are telling us they are seeing behavioural differences between their younger and older customers. While an older customer would simply turn on the aircon when it is hot, younger customers are increasingly just opening a window. While their evidence seems to be more anecdotal than scientific, the Australian Bureau of Statistics noted in a recent study of social trends that four out of five people (80 per cent) who reduced their electricity usage reported this was due to efforts to conserve energy.

In contrast, saving money and lifestyle changes was given as a reason only about one in five times (20 per cent). Attitudes take a long time to form and to change but once entrenched are difficult to dislodge. We suspect a new generational trend is becoming entrenched that recognises our individual actions have ramifications for the collective.

Winners and losers in energy market

How energy is produced, transported and consumed is in constant flux due to a multitude of factors. These factors will result in winners and losers.

Just as falling electricity consumption is bad for the owner of a generator, the winners will be those companies that reduce a customer’s dependence on the grid.