In the coming years, electricity demand will grow at an accelerating pace, driven by the shift towards cleaner energy and transportation solutions, more frequent extreme weather conditions, and the growing use of disruptive technologies such as cryptocurrencies, streaming, and artificial intelligence. This means greater spending on networks, particularly to make the grid smarter and more flexible. In addition, with global monetary policy peaking, fixed-income exposure proxies in equities could see a bounce as the impact of decarbonization efforts on electricity demand benefits Utilities and other infrastructure plays.
The global increase in demand between 2020 and 2021 of over 1,500 terawatt-hours was, in absolute terms, the largest ever recorded, according to the January 2022 edition of the International Energy Administration semi-annual Electricity Market Report. In percentage terms, it was the largest since 2010, when the world was recovering from the global financial crisis. On a regional basis, electricity demand in India rose 8.4% in 2022, an estimated 2.6% in China (well below the pre-pandemic average of over 5% due to the nation’s zero-Covid policy), and 2.6% in the United States, driven not only by economic activity but also by higher residential use to combat the hotter summer and colder-than-normal winter.
Over the next three years, over 70% of the growth in global electricity demand is expected to come from the combined regions of Southeast Asia, China, and India. Advanced economies are experiencing growing demand as they push for electrification to decarbonize their economies. As a result, global electricity demand is expected to grow 3% per year from 2023 to 2025 versus the average annual pace of 2.4% from 2015 to 2019. According to analysis from the Rapid Energy Policy Evaluation and Analysis Toolkit, demand for electricity in the US in 2030 will be between 14% and 19% above 2021 levels. In California alone, electricity demand is expected to jump by at least 80% by 2045, according to Edison International (EIX).
Rising affluence in emerging economies and more frequent extreme temperatures are also boosting demand. As more households can afford climate control devices and many regions experience more extreme temperatures, power supplies are further stretched.
Need for Smarter Networks
Lack of grid flexibility as the use of renewable energy sources expands are costly. Prices on the wholesale electricity market in South Australia, which has a very high level of renewable generation, dropped below zero nearly 20% of the time in 2022. Similarly, the number of hours in which electricity prices dropped below zero doubled in the first half of 2023 versus in several European countries. This indicates an insufficiently flexible system that cannot adjust generation and storage as demand and generation ebb and flow.
Energy generation, which includes electricity, heat, and transport, is and has been the largest source of carbon dioxide emissions globally, at over 70%. It is also leading the shift to net zero emissions through the expanding use of renewable energy generation. Renewables and nuclear energy are expected to dominate the growth in electrical energy supply in the next three years, with the two combined meeting, on average, more than 90% of the additional demand.
Over 45% of the growth in renewable generation will come from China from 2023-2025, with the European Union at 15%. Electricity generation from renewable sources in the United States has risen from 18% of total generation in 2019 to 22% in 2021. Worldwide power generation from renewables is expected to grow from 29% in 2022 to 35% in 2025. This growth in renewables will require further investments to improve grid flexibility, as renewables are inherently more volatile than traditional energy sources.
For example, as more solar capacity has come online in California, the net load has continued to drop further and further in the middle of the day when solar generation is at its highest, followed by a sharp rise in the evening as solar production drops. Electricity demand is lowest overnight when most people are asleep, and businesses are closed. It begins to ramp up in the morning as people get up and businesses open, staying elevated throughout the day. However, net demand falls dramatically as solar production peaks at midday, creating a pattern called a duck curve. California has seen its midday netload fall from around 15 gigawatts in 2015 to less than zero in 2023 during the March to May season.
EV Sales Adding to Demand
Electric car sales in the US rose 55% in 2022, accounting for around 8% of all new cars sold, and the pace of adoption is accelerating. Americans bought more EVs in the second quarter of 2023 than in all of 2019. This is aided in part by the continual decline in the price premium for EVs as overall new vehicle prices rise. According to Kelley Blue Book, in Q1 2018, the average premium for an EV was estimated to be 83%, dropping to 39% in Q1 2021, then down to just 23% in Q1 2023.
On a global basis, sales of EVs increased by around 60% in 2022, with more than 10 million sold during the year versus total car sales of about 75 million. Sales are expected to account for 18% of total car sales in 2023, reaching 14.0 million units by the end of the year, a 35% year-over-year increase.
The number of public EVSE charging points, which are creating a new type of demand for the power grid, has grown from 12,726 in 2012 to 56,842 by 2018 to 126,513 by the end of 2022, with the number of charging ports increasing more in 2022 than in the preceding three years combined. By May 2023, the number of public EV charging outlets had risen to 138,111.
Disruptive Technologies Are Energy Intensive
According to the Shift Project, watching 30 minutes of Netflix is equivalent to driving about 4 miles in a gasoline-powered car. Cambridge University found that cryptocurrency consumes more electricity than the Netherlands does in a year. Cloud computing is responsible for somewhere between 2.5% and 3.7% of emissions, beating out those from commercial aviation’s at 2.4%. The development and use of AI models is expected to boost data center energy use to 21% of the world’s supply by 2030. For context, in 2014, data centers consumed an estimated 1.8% of total US electricity consumption.
Electricity Infrastructure in the United States Needs an Upgrade
Most of the U.S. electric grid was built in the 1960s and 1970s. Over 70% of the grid is more than 25 years old and was built to transmit electricity generated by fossil fuels and nuclear power plants. According to the American Society of Civil Engineers (ASCA) 2021 Report Card for America’s Infrastructure (published every four years), the nation’s energy grid gets a C-, up from a D+ in the 2017 report.
The delivery of electricity in the United States is conducted through a complex and seriously aging patchwork of power generation facilities, around 600,000 miles of backbone transmission lines (of which nearly 250,000 are high-voltage lines of over 230 kilovolts), and 5.5 million miles of local distribution lines that are under a combination of federal, states, local, and tribal regulatory control. Some components of today’s grid are over 100 years old, well past their 50-year life expectancy, with around 70% of transmission & distribution (T&D) lines well into the second half of their lifespans.
The distribution system accounts for 92% of all service interruptions, and these outages are estimated to cost each U.S. household between $28 and $169 annually. For data centers, the cost of outages grew to $740,000 in 2016 (latest available) from $505,000 in 2010. Think of it this way: what other industry asks its consumers to cut back their use of its product on a seasonal basis, such as here, here, and here?
One of the biggest challenges for today’s grid arises from the changing nature of power supply and demand. The grid was not designed to manage the variable nature of renewable power generation or to handle the drop in net demand as solar power production peaks at midday. The following companies specialize in smart grid technologies and/or management of renewables:
Washington state-based Itron (ITRI) provides energy and water resource management solutions and has worked with utilities such as Southern California Edison, Pacific Gas & Electric, DTE Energy, Florida Power & Light, and Gaz Réseau Distribution France. During its Q2 2023 earnings conference call in August, the company raised its revenue guidance for full-year 2023 by 12% at the midpoint versus prior guidance and its non-GAAP EPS by 140% versus prior guidance at the midpoint. Shares are up over 17% YTD.
Schneider Electric (SBGSY) offers solutions for smart grid software and services, infrastructure cybersecurity, renewable power management, and microgrid management, amongst many others. The company’s largest geographic markets are the US, China, and India. The company reported a record high for its second quarter revenues of over €9 billion with record high operating cash flow of €2.7 billion. Its Energy Management segment grew 16% organically in Q2 2023 with an adjusted EBITA margin of 20.7%. The company upgraded its 2023 adjusted EBITA growth to between 18% and 23% organic from prior estimates of 16% and 21%. Revenue estimates were upgraded from 10% to 13% organic growth to 11% to 13%. Shares are up around 17% YTD.
Siemens Energy AG (SMNEY) offers solutions for smart grid technologies, renewable energy management, and energy management services. While charges in its wind business impacted the company’s third-quarter results, revenues rose 8.0% on a comparable YoY basis, and orders rose 54.2% YoY. Shares are down 33% YTD.
NV5 Global (NVEE) offers engineering and consulting services for energy generation, transmission, distribution, and construction. In August, the company reported second-quarter results which saw revenues rise 10% YoY, but net income fell from $17.3 million in Q2 2022 to $15.4 million in Q2 2023 due to increases in amortization from acquisitions and interest expenses and lower income from real estate and LNG businesses. Shares are down 28% YTD.
Quanta Services Inc (PWR) provides specialty contracting solutions for electric and gas utilities in the US, Canada, and Australia. In 2022, 74% of revenues were from utilities and renewable energy developers, with 51% of revenues in 2023 expected to come from electric power infrastructure solutions and 27% from renewable energy infrastructure solutions. In August, the company reported second-quarter results that saw revenue reach a record high of $5 billion with a record-high backlog of $27.2 billion. The company raised guidance for full-year 2023 for revenue, adjusted EBITDA, and adjusted EPS. Shares are up nearly 30% YTD.
The bottom line is that while the markets may be getting more challenging these days, in the longer run, the growing demand for electricity creates tailwinds for those companies that help make power grids more resilient and flexible as power sources and usage dynamics evolve. In addition, as we pass the peak in the global monetary policy tightening cycle, fixed-income exposure proxies in equities could enjoy a bounce as decarbonization efforts benefit infrastructure plays.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.