Power Demand Growth

Electricity generation in the contiguous 48 states totaled 4,014 million MWh in 2016, exceeding its pre-recession peak of 4,013 million MWh in 2007 after nearly a decade of stagnation. Flat U.S. power demand cannot be explained by the absence of population or economic growth; over the same period, the U.S. population grew by ~8% and U.S. GDP increased by ~12.5% in real terms. In this note, we examine the U.S. experience in an international context, and find that over the same period power demand has stagnated in every developed region of the world. Across the globe, the historical link between growth in generation and GDP has weakened markedly. In regions accounting for over 90% of global power output, generation has materially lagged GDP growth over the last five years. In the OECD countries of Europe, generation has lagged GDP growth by 1.1% p.a., in North America by 1.9% p.a., in Japan by 2.4% p.a. and in Australia and New Zealand by 2.9% p.a. (see Exhibit 4). Generation now lags GDP growth in the largest developing economies as well, including China and India. Globally, power demand growth over the last five years has lagged GDP growth by an average of 0.8% p.a. While the International Energy Agency and others expect that the relationship between generation growth and GDP growth will soon revert to its historical mean, we are skeptical that U.S. power generation will accelerate in the years ahead. Consistent with our expectation, U.S. utilities’ announced capex plans suggests that the industry is entering a period when capital expenditures will shift significantly, with stagnant electricity demand reducing the need for investment in generation and transmission while customer growth, grid hardening, the rollout of smart grid technologies and the advent of electric vehicles drive increased capex on the distribution grid (see Exhibit 17). Two frequently mentioned drivers of a potential recovery in power demand are electric vehicles and cryptocurrencies (e.g. Bitcoin). Yet the 200,000 plug-in electric vehicles sold in the U.S. in last year added only two basis points to power demand. If EV sales continue to accelerate, however, this could change in the long term; by 2025-2030, EV sales could reach 2 million per year. If these sales include heavy duty as well light duty vehicles, every 1 million new vehicles could add 0.13% to U.S. power demand. By contrast, given that power consumption for cryptocurrencies is only ~0.10%-0.15% of total U.S. demand, our analysis suggests that, at current Bitcoin prices, mining demand is unlikely to grow rapidly enough to have a meaningful impact on aggregate U.S. electricity consumption. The limited potential for meaningful demand growth over the next decade supports our view that, within the electric utility industry, the most favorable long-term growth prospects may exist among transmission and distribution rather than vertically integrated utilities, and particularly those positioned to maximize capital expenditures and rate base growth in the distribution segment (see Exhibit 20). Of the publicly traded utilities whose regulated subsidiaries have the highest percentage of rate base growth in the transmission and distribution segments, we rank five among our most preferred utility stocks: Edison International (EIX), Exelon (EXC), PG&E (PCG), FirstEnergy (FE) and American Electric Power (AEP). (See Exhibit 21).