Bacon's Rebellion

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How Fast Is Electricity Usage Growing — a Multibillion Dollar Question

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by

James A. Bacon
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electricityby James A. Bacon

Last week Dominion Virginia Power issued a press release highlighting the fact that persistent hot, humid weather in July, August and September had set a three-month electricity-usage record for its service territory and the electric cooperatives that are part of its system.

Over those three months customers used 28.2 million megawatt hours of electricity. That represented a 3.3% increase from the 27.3 million megawatt hours consumed in the third quarter in 2010.

“It was not a summer of extreme high temperatures, but it was very hot and humid for days on end and that drove demand,” said Robert M. Blue, president of Dominion Virginia Power. “Our integrated system of power stations and transmission lines were able to meet the increased demands reliably and effectively. We also worked with customers on conservation efforts, including declaring 10 ‘Smart Cooling’ days where customers enrolled in the voluntary program allow their air-conditioning units to cycle on and off to reduce energy demand at peak times.”

The  numbers buttressed Dominion’s claim that the Virginia Peninsula is in danger of experiencing blackouts next year when Yorktown Power Station units 1 and 2 must be shut down to meet EPA clean air guidelines. Dominion, which wants to build a high-voltage transmission line across the James River to make up for the lost capacity, cranked up the aging, coal-fueled generators 20 times in July and August when needed to meet peak demand. If weather conditions are similar next summer, federal reliability rules could force Dominion to execute controlled blackouts rather than risk an incident that would trigger an uncontrolled, cascading blackout.

Dominion’s preferred solution is controversial: Conservationists and other foes say the utility is exaggerating future growth of electricity demand on the Peninsula to justify its need for the transmission line. That debate mirrors a larger one — how valid is the utility’s forecast that electric usage will increase an average of 1.5% annually through the mid-2020s?

Last week the State Corporation Commission held a hearing in which participants debated the demand forecast contained in Dominion’s 2016 Integrated Resource Plan. Lawyers and consultants with environmentalist groups argued that Dominion inflated its projections in order to justify building new power plants within the plan’s 15-year time horizon, reports Jim Pierobon in Southeast Energy News,

“Dominion has layered error upon error that leads to only one result: unnecessary and costly investment in company-owned generation to meet an inflated and unlikely load growth,” charged Will Cleveland, an attorney with the Southern Environmental Law Center.

In other testimony, economist James Wilson challenged Dominion’s 1.5% growth figure, noting that demand has been relatively flat over the past decade. While the 2008-2010 recession was one reason, he said, slow load growth also stems from corporate investment in energy efficiency,

The slow growth of Dominion’s summer demand between 2010 and 2016 — about 0.5% annually — seemingly confirms the skeptics’ view. I discussed the slow growth with Dominion spokesman Dan Genest.

electricity_growth

Genest blames the slow load growth on slow economic growth following the recession, as seen in the chart above.”There are two principle reasons for the low growth,” he says. “First, the Commonwealth was still recovering from the recession. Second, Virginia was hit much harder than most states by the federal government’s sequestration program to reduce military spending.”

In 2014, Virginia’s economy finally gained steam. “The Gross Domestic Product growth for Virginia began a steady rise that currently is above 1.5 percent,” Genest says. “We expect that growth to continue and for our sales to follow suit.”

I asked if the trend toward increased usage could reflect the vagaries of variable summer temperatures. Meteorologists do measure “degree days” but Genest said humidity drove the record usage more than temperature. Dominion’s meteorologists have tried to develop a method for calculating the impact of humidity on electricity usage but have not been successful. The inability to precisely measure the impact of weather makes it difficult to gauge the the underlying usage patterns, thus introducing an element of uncertainty in any analysis.

In one sense Dominion’s forecast is conservative — it assumes that electric usage will grow more slowly than the economy. Dominion’s 1.5% average load growth compares to a 1.9% growth in the national economy assumed by the Office of Management and Budget for 2017 and 2.0% for the years following.

Whether that assumption is conservative enough is up for debate.

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12 responses to “How Fast Is Electricity Usage Growing — a Multibillion Dollar Question”

  1. Larrytheg Avatar
    Larrytheg

    This is an example of the incestuous relationship that Dominion has with the SCC. This projection should be done by an independent party – not Dominion.

    And if folks want more than one entity’s word against another – Dominion – then have two separate and independent projections done.

    the point is that Dominion is a monopoly with a heavy self interest in such projections – and has obvious conflicts and it’s just improper for them to be both the provider and the predictor.

    this is like having Wall Street folks essentially paying someone to rate their products – and they got good ratings! And later – we find out the rating agencies were seriously compromised by their buyer-seller relationship.

    for similar reasons – you don’t want a company that is a monopoly predicting how much product and services the state “needs”.

    this is not rocket science and I’m just astounded that folks have to even try to dispute Dominion’s self-interest projections.

  2. TBill Avatar
    TBill

    We are one of those Dominion customers enrolled for the 10 declared Smart Cooling days where they cut off our A/C on the afternoons of the hottest days. That reflects my desire to minimize the need for new coal or nuke plants. At this point, coal now seems out of the picture, but when we first enrolled in the program, we did not know that.

    Virginia and Maryland and most of the Northeast states import much elec power (made mostly from coal), so if Dominion accidentally projected too much power need, the worst that could happen is Virginia could become self-sufficient or even export some power. Oh, the horror! (hey it is Halloween).

    This is not really an argument about power projections. The eco-groups want to stop Virginia from building power plants. They feel it would be better to under-build, and continue power imports, possibly paying extra for renewal power credits from out-of-state.

  3. tzoser Avatar
    tzoser

    Projecting future growth in electricity demand is both an art and a science and it is becoming more difficult. Historically, electricity usage increased at least as fast as population growth and increases in GDP. In the 1950s and 1960s electricity use increased at a higher rate than either of these two factors.

    Utilities work very hard to ensure that they always have enough capacity to meet their peak load plus the necessary reserve requirements. In the old days, we did not have a widely interconnected grid and the power plants were relatively low cost. The penalties for falling short meant brownouts or blackouts and the cost of having excess capacity was not too significant.

    Times have changed. With the 13-state PJM zone and the even larger Eastern Interconnection zone, there is always excess capacity available somewhere if the transmission is adequate to transport it.

    The utility habits have not changed much though. They still have a tendency to overestimate load growth, so they won’t get caught short of capacity. Lower rates of growth or the flat or declining electricity usage that we have encountered in 5 of the last 8 years in the U.S. have put pressure on utility revenues. The cost-of-service regulatory model (setting rates to cover utility costs plus a profit) has worked well as long as electricity demand increases each year. When it doesn’t, lower electricity sales do not yield enough revenues to cover the costs and profits intended by the rates set by the regulators. This can put utilities in a bind. They must somehow reduce costs or ask for a rate increase.

    Until the 1970s, every time a utility built a new power plant the cost to produce a kWh of electricity went down. For the last 45 years every time a new plant is built, the cost of electricity goes up. Today, every time a new power plant is approved by the SCC, it is accompanied by a rate adjustment clause (RAC). Rates go up even before the plant is built to cover construction work in progress.

    Some of the information provided by Dominion in the article is a little misleading. Projections of future demand are always done on a “weather normalized” basis. Basing load projections on actual peak demand can distort future projections because one year’s weather can be much hotter or cooler than normal. Actual demand numbers are corrected for weather conditions before they are extrapolated to estimate future demand. It is not appropriate to include the situation on the peninsula in this discussion because it is not a capacity or load growth issue, but one of transmission congestion during hot weather peaks.

    Using estimated growth in GDP as an indicator of the growth in electricity usage is not valid in the same way that it has been. Nationwide, electricity use has become decoupled from growth in GDP and population, as independent analysts will attest. This is due to less domestic manufacturing in the U.S. and a general increase in the energy efficiency of appliances, lighting, and commercial and industrial processes.

    The future load forecast is important because it is the foundation upon which a utility makes its plans to add generation and the way the SCC assesses whether such new facilities are actually needed.

    The points that the intervenors made in the IRP hearing were as follows:

    1. The assumptions Dominion used to create the load forecast were much higher than are now commonly used in the industry for the effect of GDP and population growth and other facctors on electricity usage.

    2. Dominion arbitrarily limited the purchased power from outside sources even if it was cheaper than power generated by Dominion, which favored the construction of new units.

    3. Dominion far undervalued the rapid improvements that energy efficiency has on depressing load growth. Dominion’s scheme averages that factor over 30 years, so the effect of recent jumps in energy efficiency that are likely to have significant effects on future load growth are significantly diluted in their model.

    4. Dominion applied extraordinary penalties to solar power so that the scenarios favored building new gas-fired units.

    TBill expresses an opinion shared by many ratepayers, basically “So what if Dominion builds too much capacity.” First, rates go up every time a new plant is built whether it is actually needed or not.

    Second, and most importantly, there is widespread concern that within the next 10 years the price of natural gas will go up and the costs of solar and storage will come down so that the new technologies will be considerably cheaper than the gas-fired plants. When this happens, the gas-fired plants won’t run as much as was predicted when they were approved. Who pays for a plant that is expected to last at least 40 years when it can no longer pay its way? The ratepayers do. This is known as “stranded costs”, a facility that was approved but can no longer afford to operate. This is happening all over the U.S. with old coal plants and nuclear plants. In California, in 2017, it will also happen to newer natural gas-fired plants.

    Many believe that using energy efficiency to offset any increase in load will allow us to use our existing plants to provide a reliable source of power while we see how these cost trends develop, without making risky investments in new gas plants.

    At the very worst, we can purchase power at low cost because much of this region is on a path to overbuild new natural gas-fired plants and they will be eager to find customers to buy their power at any price.

    The load forecast is the linchpin in this decision-making process and it should be an issue of concern for all ratepayers and policymakers.

  4. Larrytheg Avatar
    Larrytheg

    It’s actually a bigger mystery how the non-Dominion players are locating in Dominion’s territory – and hooking up to Dominion’s transmission facilities and generating power that will, at the least, compete on price and availability, with the power than Dominion is producing.

    We have a “pre-existing” “Merchant” power producer in the Fredericksburg Area – uses pulverized coal and I always thought they were in some kind of relationship with Dominion to provide power when and if Dominion needed/wanted it but now I’m wondering if they are more independent than that and can and do sell electricity to PJM as well.

    I remember when that plant was built. It was built by the Southern Company – and I wondered why and how it was the Southern Company and not Dominion that was building it.

    But if these non-Dominion entities can build and market electricity – in Dominion’s territory and using Dominion’s grid transmission facilities it certainly ought to influence what Dominion is planning even if in theory all that merchant power is going to PJM because from a practical perspective Dominion will likely use that power when it has a need and if that power ends up as cheap or cheaper than Dominion itself could provide from it’s own plants – why would they be building new plants to be paid for by ratepayers if those same ratepayers could get electricity just as cheap or cheaper from the merchant plants?

    perhaps Acbar or Tdozer or others more knowledgeable can weigh in but I do have a special request. Please make it simple. Don’t get into the weeds and make it into some kind of rube-goldberg explanation if possible. Don’t dumb it down – but do be be succinct!

    thanks!

  5. Acbar Avatar
    Acbar

    Dear LG — it’s complicated. And sometimes “simple” is too dumbed down to be anything but reactionary fodder. Succinct but not dumbed down means that every word counts. So here’s my attempt to cut to the chase:

    The plant you refer to, built as a merchant generator by Southern Co, I’m pretty sure sells all its energy, its output, exclusively to PJM. I don’t know who it sells its capacity to if not PJM directly (maybe ODEC?). Dominion is entirely out of that picture.

    Your key question is, “why would they be building new plants to be paid for by ratepayers if those same ratepayers could get electricity just as cheap or cheaper from the merchant plants?” Why, indeed? There is no reason for ratepayers to take that risk, especially the risk of gas-plant obsolescence as TZ discusses, other than the fact that DOminion tried to spin off generation and lean on the PJM market years ago, when it joined PJM, but the GA and the SCC “forbade” that — the SCC even insisted explicitly that Dominion own and control its generation to the max extent consistent with FERC rules — so now Dominion feels obliged to do what the SCC and GA wants (especially since it’s so lucrative)! This was dumb of the GA, but as a result Dominion has made a bunch of money building new generation riding financially on the backs of the ratepayers. The GA also killed retail access in VA, even though that was no threat to a DVP distribution co. buying from the market, or to a separate Dominion generation subsidiary selling to the market, only to a traditional integrated utility. The SCC now knows the wholesale markets have proved reliable and efficient, but how can it contradict the GA, now encouraged by Dominion to keep its ratepayer-funded construction business flourishing?

    What Southern Company and many others did conceptually was spin off their generation into a subsidiary, making ALL its generation “merchant” (old and new), and keep its retail sales and distribution businesses in separate subsidiaries buying ALL their requirements from the marketplace. In the Northeast, mid-Atlantic and Midwest, this model worked. In the South, in general, unbundling the old utilities has evolved more slowly due to regulatory and legislative hostility to depending on markets for reliability. That hostility is still present in Virginia — in contrast, most of the other State Commissions in the PJM region (which cover a 13 State area) won’t allow their utilities to build new base load generation at ratepayer risk.

    Now, don’t take this too hard. Dominion is a well run, low cost builder of new generation and its ratepayers MAY be well served by the decisions Dominion has laid out in its IRP and elsewhere. But, should Dominion’s ratepayers take the financial risk that Dominion’s forecasts may prove too high? No. And meanwhile, should Dominion hedge its forecasts with long-term market purchases that will expire in the time frame of all those generation and grid uncertainties? Yes. The SCC has already signaled (in its Remington decision) that it wants Dominion to pay more attention to market purchases as an alternative to build-it-yourself. This year’s SCC order on DVP’s IRP will, I suspect, be pivotal.

    TZ, what do you think? We’ve been talking about this for years now, but talk is cheap. Is the SCC ever going to allow (or compel) Dominion to bury the integrated-utility past and move on?

  6. Acbar Avatar
    Acbar

    Jim, the Dominion IRP’s load forecasts were attacked bitterly by many parties, but those are not the people charged by law with keeping the lights on. There is one very interesting piece of corroborating data: the folks at PJM prepare their own forecasts independently, and their January 2016 forecast calls for Dominion’s peak loads to grow over the next 10 years an average of 1.2% in summer and 1.6% in winter, the highest rates of growth in PJM. The midyear updates of that PJM forecast are slightly lower for Dominion. A new set of PJM forecasts should be released in early January, 2017. See: https://www.pjm.com/~/media/documents/reports/2016-load-report.ashx

  7. TBill Avatar
    TBill

    Fundamentally the way I look at it, Virginia seems find itself in a unique position to take advantage of the shift to natural gas. Somewhat analogous to Texas/Mid-West which has enormous wind energy potential, and Canada/PWN has enormous hydro potential. We have to play with the cards we were dealt, and hopefully we play a smart game.

  8. Larrytheg Avatar
    Larrytheg

    still – at the end of the day what good does it do for Dominion to “project” demand and for itself to plan new plants – if unknown numbers of independent merchant plants are going to swoop in and bet they can make a profit building their own plants – also not known how many they are planning – and meeting the demand that Dominion was projecting – as if only Dominion was going to be building plants to meet those projections?

    I don’t see how Dominion can plan a certain number of plants to meet “needs” if other companies are also planning on building plants …

    Can a monopoly get permission to build a plant , have ratepayers pay for the plant then sell their excess power to PJM for cheaper than the merchant plants can – by virtue of the fact that their capital costs are essentially subsidized by ratepayers?

    or is Dominion prohibited from selling it’s excess power for cheaper than what it cost to build the plants?

  9. Acbar Avatar
    Acbar

    TBill, Virginia would be foolish NOT to take FULL advantage of proximity to the Marcellus Shale and its gas, for industry and commerce generally. And any generation built in the near term should be gas-fired, if not solar.

    The issues I think Larry and TZ are raising, correctly, are the big changes ahead: should we invest in more utility-rate-based generation of any kind, given: (1) the active market we are located in (PJM) and the potential for rate base to be “stranded” before it’s are fully amortized, (2) that plenty of merchant (independent) generator builders are chompin’ at the bit to build gas units, which have a 30-40 year useful life but they can pay’em off in 10 years or so, and (3) that the wholesale marketplace for electricity may look very different in 15-20 years when the easy fracking is done and Marcellus Shale starts to deplete and the price of gas begins to climb, and (4) that the price of solar gen equipment is expected to continue to drop steadily, likely to the point that most large businesses and institutions would be foolish not to build distributed solar gen into their site plans (and lots of homeowners will emulate them), to the point where we may have all the solar gen we can absorb and be worried about how to add wind power into the mix, and (5) that the science of large-scale battery storage is really, actually expected to break through (finally!) a few remaining technical and price barriers very, very soon, along with (6) the likely expansion of electric vehicle production and the consequent use of widespread electric vehicle charging as a load balancing and even a storage medium.

    These are not the cards we have been dealt but the cards we can reasonably predict we will be dealt. What they say to me is, play the natural gas card as hard as we can for ~15 years, but don’t get locked into costly gas units that you have to pay for beyond that; assume the 30 years that come after 2030 will look, and be, very different for the electric utility business. I think that’s part of playing a smart game.

  10. Acbar Avatar
    Acbar

    Further to LG: you ask, “Can a monopoly get permission to build a plant , have ratepayers pay for the plant then sell their excess power to PJM for cheaper than the merchant plants can – by virtue of the fact that their capital costs are essentially subsidized by ratepayers?” No; if ratepayers are paying the capital cost of the plant, the plant is operated on their behalf — for better or worse. The ratepayers won’t pay the capital cost, then turn Dominion loose to sell the output as though it were a merchant plant with zero capital cost! There is no “excess power” — all the energy, 100%, is sold to PJM (PJM is the system operator) whether it’s a rate-based or a merchant unit; 100% of the requirements of Dominion’s customers is purchased from PJM. Of course Dominion can sell power only if the unit is chosen and dispatched by PJM to run; what Dominion’s customers buy is whatever power is being dispatched at the time (from among all the units in PJM); PJM chooses what to dispatch based on the price Dominion and everyone else owning a generator bids in the energy market. It’s up to Dominion to decide what to bid, but Dominion, as the gen owner, will only hurt itself if it bids to run the unit for a price below operating cost.

    And you ask, “or is Dominion prohibited from selling it’s excess power for cheaper than what it cost to build the plants?” See “excess power” above. There is no such thing as “excess” power in a regional energy market like PJM’s; Dominion doesn’t sell only the power in excess of its customers’ needs, it sells all of what it generates, but only when asked to operate, and it buys all of it, but only as much as they consume from time to time. As far as the price at which Dominion sells is concerned, it can bid to run at any price it wishes to put on the bid — knowing, of course, that its unit won’t get selected to run at all if the bid is too high, and that it will run at a loss if the bid is too low.

    In short: every MWh generated on the PJM grid goes into the energy market, and every MWh consumed comes out of that market. The only exception is distributed generation, like solar, generated by a customer “behind-the-meter.” And even in that case, if the distributed-generation owner would prefer to sell to PJM (and buy all his requirements from Dominion) he may choose to do so.

  11. Acbar Avatar
    Acbar

    And again: LG, you say, “at the end of the day what good does it do for Dominion to “project” demand and for itself to plan new plants – if unknown numbers of independent merchant plants are going to swoop in and bet they can make a profit building their own plants”? BINGO! They should project their own future demand, but they shouldn’t necessarily build their own plants to meet that demand. That’s what the PJM capacity and energy markets are there for. They should build generation only if (wearing their generator owner hat) they think they can out-compete the independent generators with their own merchant plant. They should buy from independents if (wearing their LSE, load-serving-entity, hat) they think buying from the market is lower risk than the chances of being stuck with stranded costs. There is no need whatsoever for Dominion’s customers to take the risk of building a new rate-based generator.

  12. LarrytheG Avatar
    LarrytheG

    re: ” There is no such thing as “excess” power in a regional energy market like PJM’s; Dominion doesn’t sell only the power in excess of its customers’ needs, it sells all of what it generates, but only when asked to operate, and it buys all of it, but only as much as they consume from time to time.”

    So Dominion gets ratepayers to pay for the plants – and then sells the power to PJM? that sorta sounds wrong… no?

    The merchant plants have to finance their plants from investors… and pay them back plus give them an ROI.

    how does the SCC regulate Dominion on the selling of power generated from plants paid for by ratepayers and not investors?

    I’m sure I’ve got this screwed up and someone will straighten me out, right?

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