As Consumers Cut Spending, Utilities Go Back to Drawing Board

by Kristen Wright, senior editor

U.S. electricity customers are cutting back as much as 25 percent, but it’s not because they bleed green. A recent study attributes consumer energy conservation directly to the recession.

“It clearly was the pocketbook,” said Greg Aliff, vice chairman and senior partner of energy and resources at Deloitte.

Deloitte and market research firm the Harrison Group conducted the “reSources 2011 Study” to gauge how business and consumer views on energy and energy efficiency are changing. The study is based on online interviews of 3,200 household decision-makers and 405 businesses with 250 employees or more.

“There is no doubt that the recession had an impact on the amount of energy consumers use,” Aliff said. “A full 90 percent of consumers say they are more resourceful than before the recession.”

Nearly as many–87 percent of respondents–said they are searching every spending category for more savings opportunities; that’s despite 55 percent of respondents’ saying they experienced no income reduction during the recession. They “just felt” they should be cutting back, according to the study.

As of August, the national unemployment rate held at 9.1 percent, according to the U.S. Bureau of Labor Statistics. That translates to some 14 million people out of work. If it’s difficult to imagine the magnitude, look at a U.S. map. The number of people looking for work in the United States is equivalent to the combined populations of Illinois and Hawaii, 2010 census data shows. Not much has changed in employment numbers since the study’s interviews were completed in April.

Consumers’ gut feelings to conserve will stick around awhile, Aliff said. Electricity customers don’t expect to revert into spendthrifts even upon economic rebound. Only 15 percent said they likely will become more relaxed about electricity usage as the economy improves.

“There is some level of permanent decline of energy use by consumers,” Aliff said.

Electric Power Research Institute data shows that residential power demand grew about 2.5 percent annually from 1980 to 2000. During the following 10 years, it grew 2 percent a year. EPRI expects residential demand to decline about 0.5 percent annually until 2020.

Customers Turn off Lights, Sweat a Little

Half of respondents said they find it somewhat difficult to reduce their electric bills, and 33 percent said it is extremely or very difficult. Only 1 percent said it is not difficult at all to reduce their electric bills.

What’s more, 68 percent of respondents said they took several extra steps to reduce their electric bills as a result of the recession and 16 percent said they don’t worry about doing things to keep their electric bills down.

Utilities could see huge financial implications as a result of these consumer behavior changes, said Marlene Motyka, U.S. alternative energy leader at Deloitte.

“If you are a producer or distributor of electricity, you are looking at real changes in your customer base, be it consumers or businesses,” Motyka said in a release on the study. “Most dramatically, you may see as much as a 25 percent energy cost reduction among your business customers and increased frugality at the household level.”

Of the businesses surveyed, 90 percent have set energy goals (see Figure 1). In addition, companies surveyed said they are targeting an average 25 percent reduction in electricity consumption or cost. And 61 percent of companies want to achieve those reductions within three years.

Sources including EPRI and the Energy Information Administration (EIA) also project a slowing of demand from industrial and commercial consumers. For 40 years, average overall demand grew by 2.5 percent. The EIA expects annual growth in total demand to average 0.7 percent through 2035.

To prepare, utilities should examine their customer strategies and cost-saving programs. In other words, they should optimize their smart grid investments, Motyka said.

Start With the Expectation Gap, Demographics

Aliff advises utilities to consider two things: the expectation gap and demographics.

“The data indicates there is clearly a significant level of expectation gap between the message utilities are trying to convey to consumers and what consumers understand,” Aliff said.

The study reveals that electricity customers are interested, but in general, they’re uninformed of the facts. Aliff gave a common example.

“Many consumers do not understand if they live in a state where there is choice,” he said.

Sixty-three percent of consumer respondents said they don’t know if they live in a deregulated market (see Figure 2). Twenty percent said no, they don’t live in a deregulated market, and 17 percent said yes. Of business respondents, only 8 percent said they don’t know if their market is deregulated, 60 percent said yes and 32 percent said no.

The study also confirms something deeper than misunderstanding. Most customers are ignorant about what happens beyond their light switches. Nevertheless, 38 percent of respondents said they understand the resources their electric companies use to generate electricity, while 35 percent said they don’t understand. Twenty-seven percent aren’t sure (see Figure 3).

Twenty-nine percent said their electric utilities use coal as a primary generation source, 22 percent said natural gas and 20 percent said oil. Eight percent said agricultural biomass, 6 percent said solar and 5 percent said wind.

Respondents’ answers don’t jibe with Environmental Protection Agency stats: Coal provides 49.61 percent of the nation’s electricity; natural gas supplies 18.77 percent; oil provides 3.03 percent; biomass provides 1.3 percent; wind supplies 0.44 percent; and solar provides 0.01 percent.

The study shows that younger electricity consumers, despite their fondness for technology, know less about electricity than older consumers (see Figure 4). When asked if they understand the generation sources their electric companies use, 50 percent of Gen Y respondents said no, and 26 percent said they aren’t sure. Fifty-two percent of mature respondents said they understand their generation sources, as did 42 percent of baby boomers and 32 percent of Gen X respondents. Then the study asked respondents in which sources they’d like their electric companies to invest. Sixty-five percent said wind. Solar was a close second with 64 percent, 22 percent said nuclear and 7 percent said coal.

Aliff said that in addition to the expectation gap, demographics matter and are potentially significant. For example, people of certain ages, incomes and education levels exhibit certain preferences. And different demographics exhibit different technology preferences, he said.

“Gen Y is tending to use more technology and even pay for technology,” Aliff said.

The study confirms that interest in smart home energy technology skews younger (see Figure 5). Twenty-eight percent of Gen Y respondents said they’d definitely or probably purchase a smart energy application. Gen X came in at 19 percent, baby boomers at 16 percent and matures at 13 percent.

When asked about the likelihood to pay a small amount to have a meter and control or timer system for at least some of their major household devices that use electricity to better manage their use and cost, 33 percent of Gen Y respondents said they definitely or probably would pay for it. Again, the numbers fall as the ages increase. Gen X came in at 27 percent, baby boomers at 22 percent and matures at 16 percent.

Customer demographics differ from utility to utility, as well. Aliff said utilities should pursue deeper knowledge of their customers.

“There’s a great opportunity for individual utilities to do something similar to what we’ve done in this study and really understand the demographics that exist,” he said

Upon identifying and understanding their customer demographics, utilities can market to those groups with specific tools and messages. That’s the hard part.

“You can’t belittle the challenge,” Aliff said. “We all know how quote “˜fickle’ the American consumer can be. We also know how quickly their views can change. And we also know we live in an extraordinarily difficult economic time.”

Utilities must understand the value proposition of their consumers, he said.

“What is it that motivates them around energy? Is it clearly the cost or an element of green or an element of choice?” Aliff said. “Are they willing to pay more for something green–alternative energy–if that can be demonstrated that that creates jobs in the local economy and provides a cleaner form of energy?”

The next step, Aliff said, is to match those answers with what the utility can do realistically within the parameters of the company.

“Capital finance comes into play,” he said. “You’re there to make money for your shareholders. Once you figure out what you can do programmatically, then I think you can tailor your message more precisely to those groups.”

In the meantime, it’s back to the drawing board. To learn more about the study, email

Dominion CEO: We’re the Exception

Most people don’t realize it, but the backbone of the Internet runs through Dominion Virginia Power’s territory, said Thomas F. Farrell II, chairman, president and CEO of the electric utility’s parent company, Dominion Resources Inc.

Dominion Virginia Power’s white-collar-driven, suburban service territory serves half the nation’s Internet flow. It also has a very large commercial mix and a huge data center load in northern Virginia, in particular, Farrell said. That coupled with the territory’s close proximity to Washington, D.C., and large military installations contribute to the territory’s insulation from the recession, he said.

“In the early part of the recession, we had a very small actual decline in overall demand,” Farrell said. “We had a relatively significant decline in industrial demand.”

As other U.S. electric utilities experience reduced demand, Dominion Virginia Power is an exception.

“The average utility has about 20 percent industrial load. We have about 10,” Farrell said.

Electricity sales have not suffered, he said.

“We have seen sales grow in 2011, over 2010,” Farrell said.

Dominion Virginia Power reported second-quarter unaudited operating earnings of $115 million ($0.20 per share) compared with reported earnings of $113 million ($0.19 per share) for the same period in 2010.

Dominion Resources Inc. is one of the nation’s largest producers and transporters of energy, with a portfolio of approximately 27,600 MW of generation, 100,000 miles of natural gas transmission, gathering and storage pipeline and 6,100 miles of electric transmission lines. Dominion operates the nation’s largest natural gas storage system with 947 billion cubic feet of storage capacity and services 5.8 million utility and retail energy customer accounts in 14 states.

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