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US power: a cloudy crystal ball

January 22, 2009 - Predicting future supply and demand for electricity is no mean feat.

The US Energy Information Administration (EIA) in its preliminary Annual Energy Outlook (AEO) 2009, published in December 2008, provides a benchmark projection for the business-as-usual case.

But if one thing is certain, business is not its usual self.

Demand will be hit by recession, while major policy changes appear certain, accelerating the adoption of new behaviors that could radically change the demand outlook for the US power industry.

Solar energy makes up less than 1% of US electricity supply, a far cry from the 10% the Paley Commission predicted by 1975.

Appointed in the early 1950s by President Harry Truman to review the nation's resources, the commission expected that the US would have 13-15 million solar water heaters installed within two decades.

Over half a century later not even one million are in place.

The commission also wrongly envisioned minor use of nuclear power, which today produces about one-fifth of the nation's electricity.

The Paley Commission was far from unique in its failed predictions.

Forecasting tomorrow's energy supply and demand -- particularly if tomorrow is decades away -- is not an easy task. (See chart: Growth in electricity use continues to slow, 1950-2030)

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The electricity sector is littered with abandoned power plant projects, begun on the promise of a boom that turned bust more quickly than expected.

No matter how hard forecasters squint, the electricity power landscape shifts under new government policy, technological innovation, economic cycles, and consumer trends.

And the power industry has its own unique characteristic -- no storage -- which means it has to build to meet peak demand and then some.

Crystal ball 2009

The US Energy Information Administration's Annual Energy Outlook is the benchmark for energy supply and demand projections in the United States.

An abbreviated early release of the 2009 report, issued December 17, was delivered to a power industry that faces tremendous uncertainty heading into the new year.

Developers see opportunity in high peak demand and low reserves margins.

But the troubled financial markets have blocked many from moving forward with new projects.

And the depth and length of the recession remains unknown.

"The financial market turmoil has had a huge impact on energy. Some of the projects that have been planned are not necessarily going to turn out," said Melody Swanson, manager of energy procurement services for Advantage IQ, a cost management company in Washington state.

At the same time, US president Barack Obama offers cause for optimism because he has promised new financial incentives for energy development as a means to build jobs.

He is focusing on projects that fit under the green energy or smart-grid category.

"If you were a planner for a major utility, I think you would be tearing out your hair. In some sense, we are in uncharted territory," said Lester Lave, professor of economics at Carnegie Mellon's Tepper School of Business.

The EIA's preliminary AEO 2009 puts long-term economic growth at a slightly higher rate than it did last year, with GDP averaging about 2.5% from 2007 to 2030, compared with 2.4% from 2006 to 2030.

At the same time, growth in electricity demand continues to slow because of higher prices, improved efficiency and other factors.

Electricity demand increases on average by only 1% a year, continuing the trend over the last 50 years of slowing rates of growth.

Total electricity consumption grows from 3,903 billion kWh in 2007 to 4,902 billion kWh in 2030.

Power prices rise long-term, although they dip to 9 cents/kWh in 2010-2015 from an average 9.1 cents/kWh in 2007.

By 2030, the forecast (See chart: Electricity prices rise) shows prices of 10.5 cents/kWh (in 2007 dollars).

The supply mix shifts gradually toward more renewables and other low-carbon fuels. In fact, non-hydropower renewable energy fulfills 33% of new demand.

The data also shows that natural gas-fired plants will continue to be favored.

Despite vows by policymakers to relieve the electricity sector from the price volatility of natural gas, the resource fuels the largest amount of new capacity over the time frame - 139 GW added by 2030.

Renewables make up 57 GW of new capacity, coal-fired generation 46 GW, and nuclear 13 GW.

Still, the overall pie that describes the US power sector arguably remains essentially unchanged.

Gas-fired generation continues to supply between 19% and 22% through 2030.

Coal's generation share declines from 49% to 45% by 2025, then rebounds to 47% in 2030.

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