Did Energy Efficiency Break Utilities' Business Model?

We have reached a tipping point in America’s power sector. An industry that has sustained itself on Americans’ growing power demands has suddenly seen demand drop. This is making it difficult for U.S. power utilities, under their current model, to turn a profit.

What’s more, this is not a new trend. Using a time-series filter, an analysis of forty years of monthly end-use electricity data exposes a twenty-five year trend during which energy efficiency has steadily chipped away at the total electricity use in the U.S. This would signal a pending contraction of the power generation sector, but seasonal, cyclical fluctuations are making it impossible for power providers to scale back. Increasingly warm summers in the U.S., combined with a demographic shift towards warmer states, have caused demand for electricity to actually increase during peak seasons.

The two diverging long-term patterns—falling electricity use and the increasing peak load—create a perfect storm for the finances of utility companies. While warmer summers require utilities to maintain generation capacity, warmer winters and energy efficiency starkly reduce demand the rest of the year, cutting into utility companies’ cash flow and bottom line.

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​Shakeb Afsah and Kendyl Salcito are with the CO2 Scorecard Group. Nicola Limodio is a doctoral candidate at the Department of Economics at the London School of Economics; he is a former Junior Professional Associate at the World Bank.