The Rising and Critical Role of Electricity

Energy is the Foundation of Modern U.S. Life

Each electric utility’s transmission and distribution system is fundamentally an energy delivery network. A first principle is that total energy usage (broadly defined) and GDP growth have always been and always will be highly correlated. Simply stated, economic growth in the U.S. (and in every developed economy) translates to increased energy usage. The figure to the right highlights the long run trends (1949-2007) of both real U.S. GDP growth and total energy usage. These are factors have been correlated >.9 in a multitude of energy industry research studies over very long periods of time.

Fortunately, the modern economies have improved their energy intensity. The figure below illustrates that the energy intensity of the U.S. economy (expressed as energy input per $ of real GDP) has been falling (improving) over the long run (>50 years).  Specifically, energy intensity (not to be confused with energy efficiency) has been cut (improved) by almost 50 percent in the last half century.

A variety of macro- and micro-economic factors explain these measures and the trends. For example, relatively modest improvement in energy intensity was made during the period from 1949 until the early 1970’s consistent with relatively stable energy input prices. The energy price shocks in the 1970’s were catalysts for energy efficiency initiatives; and later, continued technical innovation in healthcare, computers, telephony, the internet, and financial innovation (with technical innovation) vastly improved the energy intensity of our economy – in short, the economy in the U.S. has shifted from an industrial economy to one characterized by service and knowledge workers.

The overarching point is clear – expanding the GDP of any advanced economy is critically linked to energy use. Or, stated differently, GDP expansion will always be a positive, energy consuming initiative.

Electricity plays an increasingly important role in the Energy Mix

Electricity’s role in the energy mix of any modern economy is even more critical and growing. The figure to the right notes that electricity use has grown from less than 5 percent to 40 percent of the U.S. energy mix over the last 60 years (1949-2007). Moreover, it is also important to highlight that this increasing role of electricity in this mix shows absolutely no sign of diminishing or abating. The reasons for and force behind this growing adoption of electricity use are legend. Electricity is an extraordinarily adaptive form of energy. It is the enabling source of power for many of our economy’s most valuable innovations in computing, the internet, telephony, healthcare, etc. Many new end-uses, the so-called “Best Buy” effect of widespread adoption of consumer electronics, home networks, electric vehicles, etc. will only drive electricity use higher.

Real Electricity Cost has remained relatively unchanged

The cost of electric energy has also added to its desirability and thus its expanded use. Nationally, although the nominal electricity costs have risen over time, the real electricity costs have been relatively unchanged for decades. The figure to the right highlights the national long-run electricity price trends over a 50 year period. Experienced industry participants will recognize the broad factors:

• Real prices fell during the 1960’s (and periods prior) as the last economies of scale were realized in fossil-based power generation. The capacity of the industry’s largest coal-fired power plants expanded ten-fold during the period 1930-1970.
• Electricity prices then increased both nominally and in real terms in the 1970’s and in early 1980 as fuel input prices rose and nuclear construction and interest costs soared.
• Real prices have systematically fallen since the early 1980’s (until very recently) from “transition to competition”, rate caps, and other regulatory restructuring initiatives.

• Recent fuel and environmental cost increases are now reversing this trend.
• However, even today, the U.S. overall real electricity prices are 20 percent lower than their peak and at a level consistent with industry’s lowest real level in the 1960’s.

Inescapable Conclusions

The implications of these industry forces are clear and large:

• Energy use and GDP growth are almost perfectly linked. Economic growth can only occur in conjunction with increasing energy use.
• Although a seemingly “mature” technology, electric energy is still a rapidly growing form of energy, as a result of its stable to declining real price and its extraordinarily flexible use in lighting, space conditioning, motive power, and information/telecommunications technologies
• The electric transmission and distribution network will continue to be a critical infrastructure, the relative importance of which will increase every day.