Electricity: The Next Looming Energy Crisis?

ST. LOUIS — While most people are worrying about skyrocketing petroleum and gas prices, they may want to keep an eye on electricity as well, said an economist with the Federal Reserve Bank of St. Louis.

The economist, Kevin L. Kliesen, said that electric capacity has lagged well behind demand and unless more electrical capacity is added, supply disruptions could occur. Kliesen's analysis appears in the October issue of The Regional Economist, a quarterly publication of business and economic topics published by the Reserve Bank. The publication is also available online at the St. Louis Fed's web site: http://www.stlouisfed.org.

As the rolling blackouts in Texas in 2005 and the blackout in the upper Midwest, Northeast and part of Canada in 2003 demonstrated, the electricity sector is not immune from crisis. "Between 1980 and 2005, electricity generation increased at an average rate of 2.3 percent," Kliesen said, "while electricity sales (consumption) have increased 2.4 percent annually."

He noted several factors other than population growth that have influenced electricity consumption. One is technological change. The dynamo is an early example. After World War II, the widespread adoption of central air conditioning spurred a big demand for electricity. More recently, the semiconductor increased demand by both households and firms, as computers have become commonplace. In addition, the housing boomparticularly the increasing size of new homes and their increasing requirements for cooling and heatinghas boosted demand for more electrical energy.

One problem highlighted by Kliesen is that that fixed investment in new electricity generation structures has declined at an annual rate of 2.9 percent since 1980. A serious consequence of that imbalance, he said, is the narrowing margin between production capability (capacity) and summer-time demand (peak load). "Summer is a critical time," said Kliesen, "because of the eight major North American power blackouts that occurred since 1984, six happened during the summer months."

As capacity has dwindled to extremely low levels, the Energy Information Administration has warned that the country needs to build a substantial number of new power plants over the next two decades to head off widespread power outages during peak usage. Although coal prices have risen sharply in recent yearsabout 33 percent just from 2001 to 2005the industry is expected to add a considerable amount of coal-fired generation capacity over the next 20 years and, partly in response to the Energy Policy Act of 2005, a significant amount of that new capacity is expected to come from nuclear and renewable energy sources.

Another pressing issue Kliesen cited is transmission capacity, noting that the growth rate for transmission lines is projected to be only 0.6 percent between 2005 and 2014, while the annual growth of electricity sales for the same period is estimated to be 1.75 percent.

In short, Kliesen concluded that "some economists are concerned that the industry is not adding enough capacity to deliver electricity over bulk transmission lines, potentially increasing the risk of supply disruptions."

With branches in Little Rock, Louisville and Memphis, the Federal Reserve Bank of St. Louis serves the Eighth Federal Reserve District, which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi. The St. Louis Fed is one of 12 regional Reserve banks that, along with the Board of Governors in Washington, D.C., comprise the Federal Reserve System. As the nation's central bank, the Federal Reserve System formulates U.S. monetary policy, regulates state-chartered member banks and bank holding companies, and provides payment services to financial institutions and the U.S. government.

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