Ed Crooks Electricity use to fall: more bad news for investment

The world’s electricity use will fall this year for the first time since 1945, according to the IEA. That is an extraordinary event, revealing just how sharp the downturn in the world economy is. Electricity use is closely linked to economic activity, and when economies shrink, so does power consumption.

The downturn was already taking effect last year, helping carbon dioxide emissions in the US and Europe to fall, in the US case by the largest amount for more than 20 years.

An analysis to be published next week by Capgemini, the consultancy, explains why those short-term successes point towards long-term failures.

Colette Lewiner, Capgemini’s Paris-based head of energy, points out that all the market signals are pointing in the wrong direction to stimulate investment. Demand is down, energy prices are down and the cost of carbon dioxide emissions in the EU’s trading scheme is down, too.

The current economic signals don’t give incentives to invest in renewable energies. The prices of fossil fuels make such investments even less profitable than before the crisis (for example for windmills compared to gas power stations). In addition, at their current low price, CO2 emissions represent only a small burden for gas or coal fired plants and therefore do not help to close the economic gap with the renewable energies.

In Europe in the second half of 2008 (compared to the second half of 2007) investments in renewable energies fell by 14% to US$21.2bn, and in the United States, there was a 50% reduction to $10.7bn.

Offsetting those factors are the various “green stimulus” packages proposed by the US, the EU and other economies. The merits of these are often questionable, however, and so far the packages appear to have had little effect on clean energy investment.

Ms Lewiner argues that in rich countries, the changes to energy use are likely to be long-lasting:

In the developed countries the crisis will probably transform the way companies and individuals consume energy, through the adoption of new standards (for example on cars’ energy consumption and CO2 emissions and on building insulation) and perhaps through certain changes in consumers’ habits.

However, she adds:

On a global level, it is more than likely that a large part of the previous problems related to demographic growth and rising standards of living will re-emerge.

This is why it is absolutely vital that the reduction in energy consumption in the developed countries aims at compensating for the increase in the developing countries.

And when energy demand recovers, “The wake-up call could be very painful!”

Related links:

IEA’s dire warning on green stimulus and renewables (FT Energy Source, 22/05/09)
World electricity use forecast to fall (FT, 21/05/09)