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5 Future Economic influences on Electricity Use r :{~ 1. 1 ............... ............. ~ ~ ..... .. .. ........... .... ... . ,.,.,,~^jabm~......... Electrification t_~ Productivity Growth .....~...................... , ........... .............. . .2.',., ...... ,.... .... .. . .. . ..... . ~. ~..... .1 I I ncome ,4_ Electricity l Using Devices SU PP LY DEMAND 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

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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:

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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.

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114 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

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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

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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

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119 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.

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124 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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126 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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127 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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128 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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129 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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130 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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131 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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132 REFERENCES 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 and Electrif ication ~ IKE) Program Plan. A report to the Energy Management and Utilization Division of the Electric Power Research Institute (Draft). McLean, Va. August. Schmidt, P. S. 1984. Electricity and Industrial Productivity-- A Technical and Economic Perspective. Electric Power Research Institute Report EM-3460. Elmsford, N.Y.: P"rgamon Press. Solar Energy Research Institute. 1981. A New Prosperity: Building a Sustainable Energy Future. Andover , Mass.: Br ick House Publishing . U.S. Congress, Office of Technology Assessment. 1982. Energy Efficiency of Buildings in Cities. OTA-E-168. Washington, D.C. March. U. S . Cong ress, Of f ice of Technology Assessment . 1984 . Nuclear Power in an Age of Uncertainty. OTA-E-216. Washington, D. C ~ February. U. S. Energy Information Administration. 1983. Nonresidential Build ing Energy Consumpt ion Survey: 19 79 Consumption and Expend itures, Par t 1: Natural Gas and Electricity. March.