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OCR for page 135
Appendix B
Measures of Economic Growth
and of Electricity Demand
One focus of this work is a better understanding of the relationships
between economic growth and electric ity demand .
Economic growth is conventionally measured in terms of gross
net tonal product (GNP), a measure of the output of the so-called
productive economy, as distinguished from the residential sector, the
output of which is not included in GNP. Yet a large part of
electricity use occurs in households. Should electricity use then be
cons idered here only for the productive economy to ensure the
comparability of f igures? This treatment is usually not adopted
because the income generated by the productive economy is used for
household expend itures .
In GNP each unit of electricity is valued at its price, for example,
at 7 cents per kilowatt hour. Yet electricity certainly gives rise to
costs external to its price, such as air pollution. It Night be argued
that these costs ought to be subtracted somehow f rom GNP. On the other
hand, some tasks, such as instant communication between cont inents,
could not be accomplished at any price without using electricity.
Thus, electricity's special characteristics give rise to various
positive and negative effects external to its price, not captured by
the GNP i nd icator .
Similarly, conventional measures of electric service do not capture
everything of importance for our purposes. Electric service is
measured in terms of installed capacity to deliver power or of energy
consumption. Electricity's full usefulness, however, lies in effective
end-use service to customers--warmer homes, cooler office buildings,
and many other applications--from electrically powered equipment. As
discussed elsewhere in the report, a few of the nation's larger
Futilities are making major expenditures to increase the effective
delivery of electric services to their customers without increasing
either installed capacity or energy consumption as usually measured.
The expenditures are for conservation and load management technologies,
rather than for new power plants. Because these expenditures are being
made by public utility companies expressly to expand the ef fective use
of electricity, the conventional measures of electric service that a
utility renders do not tell us all we need to know about the service's
13;
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136
value. In other words, conventional measures of electricity may
understate the actual amount of effective service provided.
We considered these measurement issues early and decided to rely on
conventional measures of both electricity and economic growth because
of the difficulty of doing otherwise and the need to conform with prior
work. We simply recognize that the conventional measurements can
sometimes be incomplete in signif icant ways.
We must also distinguish two uses of the word "demand" to avoid
confusion. In the economic sense demand is the quantity of a commodity
or service wanted at a specific price and time. Thus electricity
demand, as related to economic activity, is usually measured in units
of electrical energy, conveniently kilowatt hours. This concept is not
the one most natural to utilities. Utilities think of electricity
demand as the instantaneous load on the utility system, measured in
units of electrical power that must be supplied at that time, usually
kilowatts. Utilities think of electricity consumption over time as
energy, measured in kilowatt hours.
We make this distinction because the vast majority of analyses that
relate electricity consumption and economic growth focus on kilowatt
hours. These studies do not consider the availability and cost issues
of having sufficient capacity to meet demand in the sense that
utilities define it. To understand the relationship between
electricity consumption and economic growth we have to keep in mind
that each kilowatt hour consumed can have a different availability and
cost to the utility (and possibly a different price to the consumer)
reflecting the time and way it is produced. Availability and price
will also vary with other features of the utility providing the
electricity--its plant mix, fuel mix, reserve margin, and so on.
Ideally we would look at the relationships both between growth in
instantaneous electricity demand (kilowatts) and that in GNP and
between electricity consumption (kilowatts hours) and GNP. Although
the former has received relatively little attention f rom economists, it
remains a central issue for the companies providing the electricity and
for utility regulators.
The distinction between kilowatts and kilowatt hours is important
because electricity cannot be economically stored. Thus, providers of
electricity, such as electric utilities, must have enough generating
capacity available to meet the aggregate instantaneous demand on their
systems that may result from the combined demands of each of their
customers.
The efficiency with which a utility's generating capacity is used is
a function of its load curve, that is, the hourly distribution of
aggregate demand. If there is a substantial difference between average
power supplied over a long term and peak power capability, then the
utility's plant may not be used very efficiently. Thus, it is
important to consider both measures if one is interested in adequacy
and efficient allocation of resources.
The time pattern of growth in electricity demand (in kilowatts) is
not the same as that of the growth in electricity use (in kilowatt
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137
hours). The Edison Electric Institute's (EEI) 1983 Electric Power
Annual Report shows that from 1979 to 1983 the average growth per year
for summer peak demand in the United States was 2.9 percent per year
and for winter peak demand 2.7 percent per year, while the average
growth in electricity use per year during the same period wars only 1. 0
percent per year . These data show that, s ince 1979, peak demand has on
average grown faster than electricity use. However, including
estimated 1984 data would make a large difference, because they
tentatively show an increase in kilowatt hour use of 4.5 percent, with
only 0.7 percent increase in noncoincident summer peak demand (winter
data are not yet available) . Without the ` 1984 data one might be
inclined to infer that peak demand has begun to grow a good deal faster
than electricity use, suggesting a deterioration in utility load curves
and thus less efficient use of available generating capacity. Table
B-1 does show ~ fairly steady decline in annual load factor since
1963. However, the 1984 data show an increase in load factor that is
consistent with the greater increase in kilowatt hour use. It is too
early to tell whether the divergence of kilowatt and kilowatt hour
growth is a trend or not.
Electricity demand, like economic growth, shows significant regional
variation. Table B-2 is a summary of data from EEI's 1983 Electric
Power Annual Report. The map in Figure B-1 shows the geographical
boundaries of the electric reliability council regions, which are
subsets of the National Electric Reliability Council (NERC) , used in
EEI's planning and analysis. The summer peak demand compound growth
rate for 1979 through 1983 varied f ram 0. 7 percent per year in the MAIN
region (Illinois, most of Wisconsin, and part of Missouri) to 5.9
percent per year in the ERCOT region (most of Texas) . The next
greatest area of g rowth was the southeastern United States. Winter
peak demand also g rew most rapidly in Texas and in the Southeast. Note
that summer and winter peak load growth d if fer in most regions . (The
line in this table designated "Entire United States" should be viewed
with great caution. EEI notes that "U.S. totals are meaningless and
should not be used for policy purposes.")
Growth of electricity use also varied greatly by region, ranging
from an increase of 3.6 percent per year in Texas to a decline of I.0
percent per year in the ECAR region. There is not a strong
relationship between growth of peak demand and that of energy use
except that in each region peak demand growth exceeded the increase in
energy use over this period. However, recall that in 1984 energy use
grew much faster than peak demand. Unfortunately regional data are not
available for 1984. The aggregate 1984 f igure suggests that we should
be cautious about inferring a relationship between peak demand growth
and energy use demand growth between 1979 and 1983, since including
1984 data would signif icantly change any relationship inferred.
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OCR for page 139
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TABLE B-2 Compound Growth Rate in Peak Loads and Energy Requirements,
by Region, 1979 to 1983 (Percent per YearJ
Summer Peak Winter Peak Annual Growth in
Reg ions Load Growth Load Growth Energy Requ i remeet s
NPCC 2.1 0.9 1.1
MAAC 2.3 2.0 1.2
ECAR 1.7 1.7 -1. 0
SERC 4.0 2. 6 1. 7
MAIN 0.7 0.6 -0.8
SPP 5.1 6.1 3.2
ERCOT 5.9 8.5 3.6
MAPP 3.5 ~2.2 1.5
WSCC 2.0 2.5 0.6
Entire U.S. 2.9 2.7 1.0
aSee Figure B-1 for explanation of region acronyms.
SOURCE: Edison Electric Institute, 1983 Electric Power Annual Report,
pp . 7-10 (data f rom National Electric ity Reliabi lity Counc ill .
OCR for page 140
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As Table B-3 shows, the NERC regional councils predict that growth
in kilowatt hour use will equal or exceed peak demand growth in most
regions over the next decade. They also project that on average annual
load factors will remain constant over the next decade, at about the
1984 level. (The predicted value is 61.7 percent for 1-984 to 1993 from
1983 Electric Power Annual Report, p. 24; the predicted value is 61.8
percent for 1984 from the EEI Statistical Yearbook. ~ Thus, the decline
in load factor between 1979 and 1983 is expected by the counc its to be
arrested but not signif icantly improved over the next decade. Although
this is clearly the intent of the councils, recent history suggests
that it may not be easy to improve the growth of kilowatt hours over
kilowatts. However, the interest expressed by various utilities in
load management techniques suggests that there will be conside rable
emphasis placed on this goal over the next decade.
What does all this suggest about the relationship between GNP and
electricity demand? It shows that the different concepts of demand
have different growth predictions and that major variations in growth
by reg ion have been the norm and should be expected
in the future. It
also argues tor disaggregating GNP growth by region to characterize
past trends in the relationship between electricity use and GNP growth
and to predict future trends better. Electricity can be transported,
but there are limits to the distances over which it is efficient to do
so. Centers of economic development may shift over time, but
substantial lead times and capital expenditures are required. EEI
predicts summer capacity -reserve margins in 1993 that a^re - higher in the
areas where less demand growth is likely to occur and that range f rom
15. 5 percent in the ERCOT region to 26. 3 percent in the WSCC region.
It predicts winter margins in 1993 f rom 24.4 percent in the SERC region
to 37 percent in the SPP region. Interregional power sales can help
equ ilibrate much of the mismatch of supply and demand and wi 11 he lp
maximize eff icient general use of resources.
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142
TABLE B-3 Proj ections of Growth in Annual Load and Energy Requi remeets,
by Region, 1984 to 1993 (Percent per Year)
Summer Peak Winter Peak Annual Growth in
Regions Load Growth Load Growth Energy Requirements
NPCC 1.7 1.8 1.9
MAAC 1.3 2.1 1. 8
ECAR 2.4 2.5 2.4
SERC 2.9 2.4 3.0
MAIN 1.8 2.3 2.3
SPP 2.7 3.1 3.0
ERCOT 4.0 4.1 4.0
MAPP 2.4 2.7 2.9
WSCC 2.6 2.2 2.5
Entire U.S. 2.5 2.5 2.7
resee Figure B-1 for explanation of region acronyms.
SOURCE: Edison Electric Institute, 1983 Electric Power Annual Report,
pp. 20-24 (data f rom National Electricity Reliabi lity Counc ill .
Representative terms from entire chapter:
electricity demand
