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OCR for page 110
5
Future Economic influences on
Electricity Use
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This chapter considers some potential economic influences on
electricity use in the future. The shaded portions of the above
reproduction of Figure 1-1 identify the areas of discussion. The
principal questions that the chapter takes up are these: (1) what
major factors are likely to influence future electricity consumption
patterns relative to gross national product (GNP) and ~ 2) how
signif icant might their influence be on electricity demand? An
ancillary issue is the relationship between energy prices and
110
OCR for page 111
111
productivity growth rate, -treated in Chapter 3, since productivity
growth affects GNP, which in turn affects electricity use.
A number of the historical patterns of electricity use analyzed in
Chapter 2 may persist. First, there has been a remarkably stable
linear relationship between electricity consumption and GNP. In
particular, incremental electricity intensity has demonstrated long
periods of stability, with major increases following World Wars I and
II (see Figure 2.2~. Since World War II the percentage growth rate of
electricity consumption has declined and so has its magnitude relative
to percentage growth rates of gross economic output (Figure 2. 5) and
outputs of the ma jor individual sectors (Figure 2. 7) . Specif ically,
since the war the percentage growth rate of electricity consumption,
formerly several times greater than that of GNP, diminished, and in the
last few years its value has approached the latter. Since the Arab oil
embargo of 1973, the ratio of percentage growth rate of electricity
consumption to that of GNP has been near unity.
As discussed in Chapter 2, although this recent trend is consistent
in principle with the observed linear relationship between electricity
consumption and GNP, the question remains whether the degree and rate
of convergence of the growth rates are consistent with the long-term
trend that has characterized the postwar period. Chapter 2 also left
open the question whether the recent relationship between electricity
use and GNP represents a permanent change in slope of the long-standing
linear relationship between the variables, whether it is part of a
cycle that has persistently characterized the long-term relationship,
or whether it is a permanent one-time shift in the intercept of the
established linear relationship.
In this chapter we go further, examining the important forces that
have shaped the historical picture. Several generalizations can first
be made: (1) the level of economic activity will continue to be the
most important determinant of future electricity use and (2) great
uncertainty arises in estimating the quantitative outcome of the
interactions among the other important determinants of electricity
use. This uncertainty is in large part traceable to the difficulty in
forecasting future values of the determinants in question.
Nonetheless, we can take stock of some of the factors capable of
perturbing the simple linear relationship between electricity use and
GNP. We can consider how they might qualitatively influence the future
relationship between electricity use and certain economic measures.
First we review several recent forecasts of average annual g rowth
rates of electricity consumption and GNP to illustrate their
disparity. This background material is followed by discussions of the
chang ing composition of national output, the likely ef fects of
electricity and alternative fuel price movements, conservation
practices and potentials that might affect electricity consumption
patterns, and a few observations about how the factors may affect the
outlook for electricity use.
The material here, along with related material in other chapters,
helps to support two of the principal conclusions of the report:
OCR for page 112
112
o Valid conclusions about electricity demand drawn f ram national
data do not necessarily pertain to regional circumstances; there
are siqnificant regional differences in such factors as economic
.
output, prices, electricity supply mix, availability of
capacity, climate, and regulatory environment.
Electricity prices and alternative fuel prices affect
electricity consumption in two ways: first, they directly
affect the use of electricity and nonelectric fuels as factors
-
of production; second, they indirectly affect productivity
growth and thereby economic growth.
THE RANGE OF RECENT FORECASTS
The Edison Electric Institute (1984) reviewed and compared a number of
recent relative growth rate projections for electricity consumption and
GNP. The results are reproduced in Table 5-1.
The rows correspond to the various forecasts, with each forecast
period noted in parentheses. The rightmost column presents the ratio
of the growth rates of electricity consumption and GNP for the forecast
period. The other columns present the forecasts for intermediate
variables, provided that they were available from the original source.
The first data column gives the projected average annual real GNP
growth rate, the second the projected average annual change in the
price of imported oil, the third the projected average annual growth
rate of primary energy use, the fourth the projected growth rate of
energy consumed at the point of end use, the fifth the projected growth
rate of electrical energy use, and the sixth the corresponding growth
rate of peak demand for electricity.
The electricity-to-GNP ratios range widely, from -0.32 to 1.29, in
the studies reviewed. These values correspond to forecasts in which
the real GNP growth rates range from 2.5 to 3.5 percent per year, and
in which electricity consumption growth rates range from -0.8 to 4.5
percent per year. Even though these forecasts were prepared using
quite different methods and assumptions about economic growth and world
oil price prospects, such a wide range of electricity-to-GNP ratios is
surprising. Yet even this range is narrower than it has been at
earlier times. The authors state (Edison Electric Institute, 1984, p.
· .
11 :
The range of projected growth rates has narrowed considerably over
the past few years. Only 'least cost' studies, such as those of the
Audubon Society and Roger Sant's 'Creating Abundance' indicate lower
growth rates for energy consumption than the consensus. Siegel and
Sillin, the mavericks among the analysts, project both higher
economic growth and electricity consumption.
OCR for page 113
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There are significant differences among the forecasts of Table 5-1
in the set of public policies each presumes to be in effect. For
example, "the Audubon Energy Plan is a detailed comprehensive program
based on energy conservation through more efficient use of fuel, and
increased reliance on renewable energy--solar power, wind and water
power, and the use of biomass. The plan spells out specif ic
legislative and administrative steps that would have to be taken by the
Federal government. " In a similar vein the Sant forecast is ~ 'a
Least-Cost' case, where all cost effective end use energy investments
are made" (Edison Electric Institute, 1984, p. iii). Other forecasts
in the table assume a policy and decision-making environment close to
that of today.
The foregoing compilation illustrates the substantial differences of
opinion about the future relationship between electricity use and GNP.
To understand how such differences can arise, we turn to the forces
that shape the relationship. We shall see that the estimates diverge
mainly because it is hard to quantify and predict rather than because
it is assumed that departures will occur from the economic forces that
have so far been present.
THE CHANGING COMPOSITION OF NATIONAL OUTPUT
Figure 2-6 illustrated that basically linear relationships have
prevailed between electricity use and representative measures of
economic activity in each of the three main sectors of the economy.
The histor ical patterns of change in the composition of national output
were also reported in Chapter 2 (Tables 2-3 through 2-5~. Is there
reason to believe that the composition of national output, as it
affects sectoral use, will change the relationship between electricity
use and GNP in the future? How important will the composition of
output be compared to other determinants of electricity use? To
facilitate discussion of these questions, we analyze the economy by the
three broad sectors discussed in Chapter 2. We find that diverse
forces arise from changing the composition of national output and that
their net effect is likely to alter electricity consumption in some
small and gradual degree.
The trend in composition of national output since 1950 is a relative
growth of the services portion, compared to the industrial portion, of
the economy. Correspondingly, electricity use in the commercial sector
has grown compared to that in the industrial sector, standing at about
28 percent of total use in 1983 (Table 2-2~. In addition, residential
use of electricity has grown compared to industrial use, the measures
standing respectively at about 34 and 38 percent of all use in 1983
(again, see Table 2-2~. These differences can be traced to the
differences in trends in growth in disposable personal income versus
gross product originating (GPO) in the industrial sector.
Electricity is used in industry primarily for motor drive,
electrolytic processing, and process heat. Commercially, the principal
uses of electricity are for space cond itioning and lighting . In the
OCR for page 115
115
residential sector, ma jor end uses are space conditioning,
refrigeration, water heating, lighting, and cooking. Thus, the forces
that drive future electricity use related to measures of economic
output are different for each sector. We first discuss some prospects
for the industrial sector with particular attention to manufacturing.
We then consider some prospects for the commercial and residential
sectors.
The Industrial Sector
Trends in Electricity Use
The industrial sector used about 38 percent of all electricity consumed
in 1983. In considering the future electricity consumption of this
sector it is convenient to treat it in two parts--for those industries
that are (1) more electricity-intensive and (2) less so, measured by
electric ity use per unit value of output.
The six most electricity-intensive manufacturing industries of our
economy are those of primary metals ; paper and paper products;
petroleum processing; chemicals; stone, clay, and glass; and textiles.
In 1980 these six industries accounted for 68 percent of the
electricity consumption in the industrial sector (Resource Dynamics
Corporation, 19841. The electricity intensity of these six industries
has remained relatively constant for the past three decades (see Figure
2-13~. However, the proportion of manufacturing output contributed by
these industries has also exhibited a fairly consistent decline (Figure
2-12~. The declining share of these industries in GPO has contributed
to the relative decline in the electricity intensity of the
manufacturing sector.
To project these relationships further requires forecasting the
growth prospects of electricity-intensive manufacturing industries
relative to those of non-electricity-intensive industries, something
the committee did not attempt. A recent study (Data Resources, Inc.,
1984), however, did consider some alternative forecasts. In one
projection of the compound annual growth rates for 1986 through 1995
for a 400-level Standard Industrial Classification disaggregation of
the economy, 3 of the 20 slowest growing activities were
textile-related and 4 were petroleum-related. In addition, 4 more of
the 20 slowest growing activities were construction-related, industries
heavily dependent on metals and stone, clay , and glass products ~ ibid.,
Table I. 4) . Thus, at least according to this forecast, 11 of 20 of the
so owest growing industrial activities belong to the electricity-
intensive manufacturing sectors.
It is hard to draw a strong conclusion from only one forecast,
premised on a large number of scenario parameters that are not reported
here (ibid., pp. 1-27~. However, if such trends prevail, they do
suggest a continuing slight decline in electricity consumption growth
OCR for page 116
116
relative to measures of aggregate industrial output growth, provided
new technolog ies do not change the historical trends.
The effects of other manufacturing industries, that is, of
non-electricity-intensive ones, on general trends in electricity
consumption are more difficult to assess.
Figure 2-13 showed that the intensity of electricity use of the
other manufacturing sectors decreased about 15 percent between 1970 and
1981. The reason for this trend, noted in Chapter 2, was that these
industries generally are already highly electrified, and thus
efficiency improvements have outweighed any incremental penetration of
electricity use.
Such gains in efficiency can in part be traced to the use of more
efficient electric motors. Table 5-2 illustrates patterns of
electricity consumption in the industrial sector in 1980 by industry
and end-use application. By far the largest such application was for
motor drives. Electric-motors, in fact, accounted for about 63 percent
Of industrial electricity use in that year.
In this regard, one recent report concluded the following (U.S.
Congress, Office of Technology Assessment, 1984, p. 37~:
Improvements in the efficiency of electric motors are likely to
be continuous for 10 to 15 years through improvements in the
motors themselves and through improved efficiency of use which
takes advantage of new semiconductor and control technology.
Thus, electricity use per unit of output could decrease by 5
percent (if there is little price stimulus) . Some of this
improved efficiency should come about as a result of past price
increases, as capital stock turns over .
The cliff iculty in coming to such a conclusion is that data are not
available on the proportion of electric motors in industry that have
already been replaced by newer, more efficient substitutes and those
that remain to be replaced. However, to the extent that the
non-electricity-intensive industries use motor drive, they may enjoy a
continuing modest increase of efficiency of electricity use.
Offsetting the trends mentioned above is the prospect that new
electricity-using technologies will tend to increase electricity use in
the industrial sector relative to economic output. Table 4-8 gave
examples of these technologies, with attention to their applications
for productivity growth. In the next section we consider the potential
influence of these technologies on future electricity use.
The Growth of Electrif fed Processes
Will new electrotechnologies signif icantly influence future electricity
use patterns in industry? The report cited above comprehensively
reviewed the prospects, stating that "great uncertainty surrounds the
contribution to industrial electricity demand from the most important
OCR for page 117
117
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new electrotechnologies" (ibid., p. 37). As Table 5-2 indicates, after
motor drive, electrolytic processes and process heating are the two
other most important classified industrial end uses for electricity.
About electrolytic processing the report states (ibid.) :
15 to 20 percent of all industrial electricity is used for
electrolysis of aluminum and chlorine (Boerker, 1979; Schmidt,
1984~. Aluminum electrolysis is more likely to decrease than
increase as a fraction of industrial use, because efficiency
improvements of 20 to 30 percent are technically possible from
several technologies and are probably necessary (given sharply
increasing prices for electricity in the Northwest, Texas, and
Louisiana where plants have been located) to keep aluminum
production in the United States competitive with aluminum
production overseas.
About process heating the report goes on to say (ibid.~:
Electric process heating in industry accounts for only about 10
percent of current uses of electricity but has great potential
to become much more important as new electric process heating
techniques are developed that make better use of electricity's
precision and ability to produce very high temperatures. In
some important high temperature industries such as cement, iron
and steel, and glassmaking, electricity makes up 20 to 35
percent of all energy use and could as much as double its share.
In summary, then, some important determinants of future industrial
electricity use are the relative growth rates of the electricity-
intensive and the non-electricity-intensive industries; the
introduction of new, more efficient electric motors to replace
existing, less efficient models; and the introduction of new industrial
electrotechnologies. The prices of electricity and alternative fuels
will also be important in influencing future electricity use in this
sector. Such price trends will be important as well in influencing
sectoral productivity growth trends, as discussed in Chapter 3, and in
realizing the benefits that can be obtained from the newer, more
efficient electricity-using technologies discussed in Chapter 4.
The Commercial Sector
As Chapter 2 showed, commercial electricity consumption has grown the
fastest of that in any of the three main sectors of the economy, at
least since 1960, reaching about 28 percent of all use by 1983. This
owes partly to the growth in output and employment in the commercial
part of our economy. Table 2-3 pointed out, for example, that between
1950 and 1983 the commercial sector increased from 62 to 69 percent of
U.S. GPO. Table 2-4 showed that employment in the commercial sector
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120
grew from 55 to 71 percent of the U.S. labor force between those same
years. About 55 percent of the commercial sector' s energy use is for
heating and air conditioning; about 35 percent is for lighting; the
remainder is for applications such as water heating, cooking,
ref r igeration, and operating miscellaneous appliances.
Projecting the trends in commercial electricity use is easier in
principle than in practice. In principle, commercial building stock
and the electricity use per building in that stock are the pertinent
measures to analyze and predict. Growth in commercial building stock
is related to growth in commercial economic activity. Determining
electricity use per building, however, is extremely difficult for two
reasons. First, only poor data are available on the electricity-using
characteristics of the existing commercial building stock. The
Nonresidential Building Energy Consumption Survey (NBECS) (U.S. Energy
Information Administration, 1983) is a good start at assembling this
data base, but projecting additions to this stock is problematic.
Second, it is hard to assess how various determinants of future
electricity use in this stock--such as the prices of electricity and
alternative fuels, heating and cooling equipment ef f iciencies, building
envelope designs, and var ious retrof it measures--will af feet the
electricity use in both existing and new commercial building stock.
The Of f ice of Technology Assessment reviewed the prospects for
future electricity consumption patterns, reaching the following
conclusions (U. S. Congress , 1984, p. 41~:
Electricity use per square foot in commercial buildings may
continue to increase for several reasons. Only 24 percent of
the existing commercial building square footage but almost half
(48 percent) of new building square footage is electrically
heated (U.S. Energy Information Administration, 1983~.... Air
conditioning in commercial buildings is probably saturated.
About 80 percent of all buildings have some air
conditioning.... Greater use of office machines and automation
might increase electricity use both to power the machines and to
cool them in of f ice buildings, stores, hospitals, and schools.
Machines, however, are less likely in churches, hotels, and
other categor ies of commercial buildings .
The potential for improving the efficiency of electricity use in
buildings is significant. Several studies (U.S. Congress, Office of
Technology Assessment, 1982; Solar Energy Research Institute, 1981;
Meter et al., 1983; Hunn et al., 1985) conclude that electricity and
fuel use in commercial buildings can be reduced by a signif icant
fraction. One of these recent reports (U.S. Congress, Office of
Technology Assessment, 1982), for example, found that electricity use
for lighting and air conditioning in commercial buildings could be
reduced by one-third to one-half and that the heating requirements also
could also be reduced substantially by recycling heat generated by
lighting, people, and off ice machines f rom the building core to the
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122
electricity continues to make signif icant inroads in space
heating and air conditioning. While about 17 percent of the
total occupied housing stock today uses electricity as its
primary heating source, 50 percent of new single-family housing
units (and a greater percentage of multifamily housing units)
incorporate electric heating systems, up f rom 28 percent in
1970. Of all occupied housing units, 57 percent now have air-
conditioning systems of some type, but only 27 percent are
equipped with central air-conditioning systems. However, some
two-thirds of new single-family homes are built with central
air-conditioning systems, which indicates that such electricity
penetration will continue.
There may be some increase in other electricity uses also (U. S.
Congress , Off ice of Technology Assessment, 1984 , pp. 39-40~:
The use of elects icity to heat water may expand beyond the 30
percent of households that now use it and could as much as
double if there is a big decrease in the relative cost of
electric and gas-heated hot water. The demand for other
electric appliances is considered largely saturated and unlikely
to expand substantially beyond the demand caused by increases in
new households.
A force in the other direction, however, is exerted by possible
improvements in appliance, lighting, and building efficiencies. Table
5-3 illustrates one estimate of the potential for improving appliance
and lighting eff iciencies. The cited report noted that "most observers
agree that some improvement in appliance eff iciency will occur " ~ ibid.,
p. 40), because "continued increases in elects icity prices will
increase the demand for . . . high eff iciency products [and] in some
regions market incentives will be augmented by local utility programs
(ibid.~.
Note also that none of the items listed in Table 5-3 concern the
building envelope, or shell. A variety of known measures could
signif icantly improve the thermal performance of building envelopes
(Solar Energy Research Institute , 1981 ; Hunn et al ., 1985) . These
measures encompass window coatings, insulation and weather stripping,
and a variety of window shadings.
Some local and state governments are sponsoring programs to increase
the incentives to adopt some of the conservation measures above. Some
utilities and regulatory agencies are also actively promoting these
programs.
Beyond these points, future electricity and fuel prices will play an
important role in consumer choices that achieve residential electricity
conservation. We turn, then, to discussing the likely effects of price
movements.
OCR for page 123
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PRICES OF ELECTRICITY AND OTHER FUELS
General Pr ice Considerations
Numerous effects have been traced to the relative shifts in energy
prices of the 1970s and early 1980s. In particular, we have witnessed
greater eff iciencies in electricity use and the substitution of
electricity for oil and gas, since these fuels have increased in price
much faster than electricity. Several studies cited in Chapter 2
concluded that electricity and alternative fuel prices enter into
electricity demand, but that their quantitative effects are not yet
well established. Another effect of increasing fuel prices, as Chapter
3 reported, has been reduced productivity growth in the general economy.
The central question about price in the context of this report is
different: what will future fuel and electricity prices mean for the
future electricity use-GNP relationship? Stated differently, if
electricity prices increase or decrease relative to other fuel prices
or other prices in the economy, what will the effects be on electricity
use?
For relatively constant fuel and electricity prices, there is likely
to be little shift in the relationship. Continued disruption in the
fuels markets and future fuel price increases like those experienced
since 1973 would have a depressing effect on productivity growth and
foster further efficiency of electricity use, sustaining (or forcing a
return to) the energy awareness of the 1970s.
Electricity prices are, of course, a composite of costs of the fuels
to generate the electricity and of a large number of capital and labor
costs for generating, transmitting, and distributing the electricity.
The ultimate consumer pr ice, both in the past and in the future, is a
reflection of such costs as administered through state regulation.
Regional Price Considerations
Electricity prices vary around the country, in part because electricity
is produced in the United States by individual utilities with dif ferent
resource bases, fuel mixes, and other variations. Prices vary also
because they are set by individual state utility commission reviews,
for investor-owned utilities, and by individual local communities, for
municipal utilities.
Future electric service requirements will also at feet future
electricity pr ices. As discussed in Appendix B , electric service has
two characteristics, instantaneous demand and cumulative use. Though
fuel use is determined primarily by cumulative use, instantaneous
demand determines whether utilities must build additional facilities to
supply power their customers need. The cost of cumulative use is an
operating cost, largely determined by fuel prices. The cost of meeting
growth in instantaneous demand, on the other hand, requires
capitalization of new generating equipment. In recent years the costs
of new equipment have generally been greater than those of existing
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125
facilities. Thus, areas of the country that face increasing
instantaneous demand may face greater price increases than those where
electricity use does not require new capacity. As a result,
electricity use, which is related to economic output--as affected by
electricity prices and productivity gains, will in turn vary regionally.
Regional variation in electricity prices also occurs because of rate
design. For example, where utilities have time-of-use rates
(reflecting the cost differential in meeting variable customer demand
as different parts of the utility's generating capacity are used),
users whose demand falls mostly on peak, when demand is greatest, will
face the largest utility bills. Their ability to shift demand off peak
will reduce both their electricity costs and the need for the utility
to build new facilities.
Other trends in rate-making practices will also affect future
electricity prices. One of these trends is to make electricity prices
more "forward looking, " through using marginal-cost pricing and
"forward" test years rather than historical test years. Another trend
is to differentiate rates according to the reliability of service,
allowing the consumer to choose from a variety of reliability levels
and the i r cor responding rates.
Effects of Price on Electricity Use
It is hard to assess how these various influences will combine to
af feet future electricity use. The result depends on exactly what
price changes come about and how. For example, a change in electricity
prices caused by changing fuel prices has a different effect than the
same change caused by a change in the real cost of installing new
generating plants. The different effects will be related to the price
elasticities of electricity demand with respect to electricity and
alternative fuels, and to the influence of the price changes on
productivity growth rate.
Consider f irst a case where an electricity price increase is brought
about by a change in fuel prices only. Assume the elasticity of
electricity demand with respect to alternative fuel prices is about
one-third of the own-price elasticity of electricity and opposite in
sign. Fuel prices represent about one-third to one-half the cost of
producing electricity. Thus, doubling fuel prices would result in
electricity prices rising by one-third to one-half. On the one hand
the effect of the higher fuel prices would be to make electricity more
attractive relative to alternative fuels, tending to increase
electricity use; on the other hand the effect of the higher electricity
prices would be to discourage electricity use. The price effects, at
least for these elasticities, approximately offset one another.
Contrast this case with a hypothetical increase in the price of
electricity brought about only by a change in the cost of generating
plants, with no offsetting change in alternative fuel prices.
If we carry the effects of the fuel and electricity price changes
through to productivity growth rate, as discussed in Chapter 3, then
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the situation becomes more complex. In the f irst case above, both the
fuel and electricity price increases will tend to decrease the rate of
productivity growth in many industries. This decreased productivity
growth rate will show up directly in decreased GNP growth rate and
therefore in decreased electricity consumption, at least according to
the linear relationship between electricity use and GNP discussed in
Chapter 2. In the second case, the increase in electricity prices will
also tend to decrease the rate of productivity growth, but without the
additional depressing effect on productivity growth rate traceable to
increased alternative fuel prices. Thus, the reduction of productivity
g rowth rate in the general economy will be somewhat larger if the
electricity price change is a result of changing fuel prices than if
the electricity price change is independent of fuel prices.
It is harder to determine ache effects on electricity use of changes
in electricity prices from allocating costs according to time of use.
In some cases, the resulting cost allocation will depress growth in
electricity end uses that occur predominately during peak periods, but
at the same time it may stimulate consumption during off-peak periods.
This shift of load has implications for the amount and type of
generating equipment that might be used most economically to meet
future instantaneous demand, thus influencing the future costs of
electricity supply and, in turn, productivity growth. The data are not
sufficient, however, to determine whether the net effect will be an
increase or decrease in electricity use.
Other rate-making innovations would not seem to affect productivity
growth directly much, though they may augment the effectiveness of, or
substitute for, var ious conservation and load management programs,
which are discussed in the next section.
PRACTICE: S AND POTENTIALS FOR EFFICIENCY IMPROVEMENTS:
CONSERVATION AND MAD ~NAG=ENT
As pointed out earlier, the potential for improving the ef f iciency of
electricity use is large, particularly for buildings and appliances.
This section f irst discusses the nature and size of such potential;
then it addresses the likelihood that a signif icant part of that
potent ial will be realized; and, f inally, it relates the ef f ic iency and
load management possibilities to productivity, as discussed in Chapters
3 and 4.
First, it is useful to make a distinction between conservation and
load management. As the previous section pointed out, service
requirements for electricity can be measured two ways. The demand for
power at a particular point in time is called load, conveniently
measured in kilowatts. The use of power over an interval of time
results in a cumulative consumption of electrical energy, conveniently
measured in kilowatt hours. In this section, actions designed to
increase the eff iciency of electrical energy use are called
conservation; actions designed to improve ache efficiency of supplying
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an instantaneous level of power, primarily during periods of peak
demand, are called load management.
Utility Experience
Partial evidence about the potential for electric efficiency
improvements can be obtained from the experience of a few major
utilities. These utilities have evaluated direct involvement in
conservation and load management with respect to direct investments in
new supply facilities, and they have made their future investment plans
accordingly. Pacific Gas and Electric Company (PG&E), the nation's
largest privately owned utility, is planning a series of expenditures
that will yield the equivalent of 3, 201 megawatts (12. 5 percent of
total projected load) by the year 2004, and 10,784 gigawatt hours (8. 0
percent of total sales) by the same year (Pacif ic Gas and Electric
Company, 1984) . These projected savings, to be achieved by direct PG&E
expenditures, are over and above the conservation that is pro jected to
occur during the same period as a result of "consumer response to rate
increases and impacts of government mandated conservation standards. n
In other words, PG&E expects to be able to ~build" the equivalent of
three typically sized nuclear power plants, by the year 2004, in the
form of efficiency improvements within its service territory.
Southern California Edison Company has been particularly innovative
in load management. For example, a pilot program offers customers a
f inancial incentive to pick their own level of uninterruptible demand
and then give the utility the right to cut off demand in excess of that
level during emergency periods. The amount of the incentive will vary
depending on each customer's estimated peak demand and the level of
uninterruptible demand selected by each customer.
Prospects for Realizing the Potential
of Conservation and Load Management
There are three prominent reasons why conservation and load management
are considered to have attractive, but unrealized, potential. First,
inefficiencies exist in electricity use because of electricity pricing
practices mentioned in the previous section. Second, many consumers
simply do not have enough information on which to base rational
consumption decisions. Third, there are conflicting interests between
efficient building design and building cost that sometimes discourage
economical investment in energy eff iciency measures.
The classic example of such divergent interests occurs when the
landlord's tenants pay their own utility bills: insulating the
building might be highly cost-effective, but the landlord must weigh
the cost of insulation against the expectation of recovering that cost
through higher rents. Another example concerns new commercial of f ice
buildings: an initial investment in oversized thermal storage may be
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highly cost-ef f ective f rom the point of view of the building operator,
but those designing and constructing the building will not necessarily
feel that economic stimulus. In commercial buildings in particular,
this factor may loom large, since builders and owner-operators are
rarely the same; nor are owner-operators and tenants usually the same.
Such conflicts will be reduced only to the extent that information
about potential ef f iciencies becomes commonly available to of f ice
building purchasers and that those purchasers insist on such
eff iciencies as criteria for purchase.
The point is important in the present context because the
conservation and load management prog rams being promulgated at all
levels of government and by many electric utilities are designed to
induce more eff icient energy use to overcome exactly such impediments.
S ince it is generally accepted that industrial users already have
incentives to use electricity efficiently in that industrial rates are
closer to marginal costs than are residential and co'Tunercial rates,
most of these prog rams are aimed at use in the last two sectors.
However, most utilities will implement conservation and load management
programs only if such programs are cost-effective for the entire set of
utility rate payers and not simply a subset. This approach is somewhat
different from the one that utility commissions embraced just a few
years ago, namely, the approach that the entire class of conservation
programs was worthwhile. The difficulty in measuring cost-effective
conservation, particularly in the residential sector, is quite large.
Further study would be appropriate.
All the cost-effective measures that can increase the efficiency of
electricity use also offer prospective increases in various measures of
productivity, as we illustrate with a f ew examples below.
Economic Effects
Consider the effects the more efficient appliances listed in Table 5-3
would have if they were adopted in the residential sector . Fi rst,
using these appliances would reduce the use of electricity, at least
for corresponding end uses. Also, the consumers who chose these more
eff icient appliances would have paid more to acquire them, but they
would also pay less on a monthly basis for electricity to enjoy the
services the appliances provide. Any net savings over the lif e of the
appliance would consist of income available for other consumption.
However, none of these effects will show up in the sectoral
productivity measures discussed in Chapter 3. Rather, the
macroeconomic effect will be evidenced in a change in the composition
of consumption and a change in the composition of sectoral output.
Thus, although the new technolog ies of fer more ef f ic lent service to the
consumer than the old technologies with consequent increase in
disposable income, they offer no direct benef its to macroeconomic
productivity. The same principles would apply to improving building
thermal characteristics in the residential sector.
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Similar improvements in the commercial sector, however, would
evidence themselves in measures of sectoral productivity growth. The
commercial sector is an intermediate sector of production, employing
capital , labor, materials, electricity, and nonelectrical energy to
produce its output. To the extent that cost-effective building
envelope, lighting, and appliance efficiency improvements can be made,
the result will be evidenced in the sectoral productivity measures
d iscussed in Chapter 3 .
In like manner, the adoption by industry of one of the new
electrotechnologies discussed in Chapter 4, as long as its use is more
cost-ef festive than the technology it replaces, will show up as a
productivity improvement, using the analysis of Chapter 3.
By the same reasoning, many improvements promulgated by the several
levels of government and by utilities for increased efficiency of
residential electricity use do not manifest the direct sectoral and
macroeconomic benefits that similar improvements might afford in the
industrial and commercial sectors.
In another way, however, all means of consuming electricity more
efficiently, particularly those that reduce peak demands, are
indirectly beneficial. This result comes about through effects on the
costs of supply. The cost of supplying electricity during periods of
peak demand exceeds that during baseload periods. In the long run, if
peak loads can be reduced relative to total electricity sales, this
means that less generating capacity can be used to produce the same
number of kilowatt hours, reducing the average cost of generation. Any
measure that offers a real reduction in the costs of supply was shown
in Chapter 3 to induce productivity improvements.
In still another sense, any efficiency improvement, whether in
supply or in consumption of electricity, offers economic benefit.
Electric utilities provide a set of services to residential,
commercial, and industrial customers, so that any decrease in the cost
of a service, regardless of the source of the decrease, makes the
supply of that service more efficient. It is improving productivity in
this sense that leads many proponents of conservat ion and load
management to advocate so strongly their conservation programs.
Several studies have shown that there are many potential means for
reducing electricity consumption that cost less than current supply;
consequently, the thrust of the conservationist's argument is that to
forgo these potentials is to lose economic ef f iciency and productivity.
One means of accomplishing the goal of reduced consumption is to
encourage utilities to fund efficiency measures. As discussed above,
many electric utilities in the United States have embarked on
substantial programs toward electric efficiency to expand their
effective service. Much of the potent ial for savings could be
realized, given the willingness of residential, commercial, and
industrial users to participate. Moreover, if investment in efficiency
measures became conventional utility behavior nationwide, it could have
a ma jor educational ef feet on other potential investors.
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Whether utilities in general will take on such economic activity is,
of course, uncertain. The outcome will depend in part on both federal
and state government policies, including those of state regulatory
commissions, which often have the power to supervise future investments
by individual regulated utilities. The outcome will also depend, in
part, on institutional inertia, and on the extent of efforts to
overcome it, within the utility industry itself. These efforts will
depend in part on government leadership at both federal and state
levels.
Some suggest that the prospects for realizing such potentials are
uncertain or that they are exaggerated. Often, those holding these
views suggest a different strategy for meeting future electricity
needs, namely, by ensuring a plentiful and economical supply of
electricity through constructing additional conventional power plants.
The rational response to this apparent conflict lies in comparing
the available alternatives to determine the most economically sound and
reliable mix. Because the potentials and costs, both for conservation
and load management and for conventional power plant investments, may
vary substantially from region to region and utility to utility, it is
appropriate to conduct such analyses at the utility level, case by case.
THE OUTLOOK
To return to the questions raised at the beginning of this chapter, the
principal forces that have shaped the relationship between electricity
use and GNP in the past will probably continue to operate in the
future. A linear relationship between the two quantities has persisted
for many years, despite relatively large shifts in the composition of
national output and large shifts in electricity and alternative fuel
prices in the past decade. However, the forces of change operating on
this relationship may be expected to take a long time to become
evident, and perhaps not enough time for that has passed since the
energy price shocks. The information presented in this chapter is not
enough to make a judgment about the continuation of the former
relationship.
There are a number of forces capable of altering the linear
relationship in the future. A few examples are electrification brought
about by technical change ; conservation in response to price changes
and heightened user awareness; regulatory actions, such as pricing
policies; and other public policies affecting the availability and use
of energy.
Electrification opportunities are illustrated by the new industrial
electrotechnologies mentioned in Chapter 4, as well as a number of more
efficient residential and commercial appliance and equipment
alternatives reviewed in this chapter. However, in all three economic
sectors electrification has long been proceeding and is thus already
embodied in the trends portrayed in Chapter 2. In considering the
future, no dramatic nor trend-changing options for electrification were
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identif led, though many options that will continue incremental
increases in electricity use were noted.
A variety of known conservation and load management opportunities
have the potential for making electricity use more efficient. Some
state regulatory authorities and utilities have been particularly
effective at promoting the realization of such potential, for example,
California regulators and utilities. However, in other states and in
California as well, there is significant further potential for reducing
electricity use, even though there are also significant institutional
barriers to realizing this potential. Some conservation programs have
been in effect for years, and as a consequence their effects are also
already embodied in the data of Chapter 2. Future opportunities can be
characterized as a continuation of the historical trends.
In the future, the state of the economy will probably continue to be
the most important determinant of electricity use, as it has been in
the past. Recall, in this connection, the strong conclusion of Chapter
3 that both the level and g rowth rate of the economy are smaller than
if the energy price increases of the 1970s had not occurred.
Nevertheless, we expect that other determinants of electricity use will
continue to modulate the precise relationship.
In addition, we have established that many of the forces that will
influence future electricity use will also affect growth in our economy
through their influence on productivity. Actions that change real
electricity prices, for example, affect productivity growth as well as
the immediate and future use of electricity. Conservation actions that
result in increased economic efficiency of electricity use offer
productivity gains--if not directly, then indirectly. Selected
electrotechnologies, whenever their use reduces the cost of output,
also offer productivity benefits.
The interrelations pointed out here have not always been well
understood, and much additional work should be done to quantify them.
Moreover, the dual interaction between electricity and the economy,
namely, the correlation of consumption with GNP and the effect of
electricity-using technical change and electricity prices on the
productivity growth rate, should be considered in developing federal
and state energy and economic policies.
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Boerker, S. W. 1979. Characterization of Industrial Process Energy
Services. Institute for Energy Analysis. May.
Data Resources, Inc. 1984. Structural Change in the United States:
Perspectives on the Future. Prepared for the Edison Electric
Inst itute . Octobe r .
Edison Electric Institute. 1984. Comparison of Long-Range Energy
Forecasts. Prepared by the Energy Modeling and Economic Research
Department . Washington, D. C ~ December .
Hunn, B., A. Rosenfeld, M. Baughman, H. Akbari, and S. Silver. 1985.
Technical Potential for Electrical Energy Conservation in the Texas
Building Sector. Center for Energy Studies Report (in preparation).
Austin: The University of Texas at Austin.
Meter, A., J. Wright, and A. Rosenfeld. 1983. Supplying Energy Through
Greater Efficiency. Berkeley: University of California Press.
Pacif ic Gas and Electric Company. 1984. Long Term Planning Results
1984-2004. San Francisco. May.
Resource Dynamics Corporation. 1984. Industrial Electro-Technologies
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Representative terms from entire chapter:
productivity growth
