January 4, 2010

Indiana electricity rates may rise, growth in demand slow through 2013

Major factors driving up rates will be new federal air-quality standards, coupled with increasing construction and fuel costs, said Douglas Gotham, director of the State Utility Forecasting Group, a state-funded panel of researchers based at Purdue.

The report, entitled "Indiana Electricity Projections: The 2009 Forecast," contains projections of the state's energy needs between 2008 and 2027 and was prepared for the Indiana Utility Regulatory Commission (IURC). Analysts presented the report's findings to the state utility commission on Dec. 29.

The forecast was prepared by Gotham; Paul Preckel, a Purdue professor of agricultural economics; and analysts Forrest Holland, Marco Velastegui and David Nderitu.

Driving up rates are more stringent environmental guidelines that will hit Indiana harder than some states because of its heavy use of coal, Gotham said.

More than 90 percent of the electricity generated in the state is from coal-fired power plants. As of 2007, Indiana ranked fourth in the United States in the amount of nitrogen oxides and sulfur dioxide emitted annually.

Clean-air standards from the U.S. Environmental Protection Agency require Indiana utilities to increase the amount of equipment for reducing sulfur dioxide and nitrogen oxides emissions from coal-burning power plants.

"Utilities have added pollution-control equipment, which turned out to be much more expensive than previous estimates, largely because of an increase in construction costs," Gotham said.

Among the report's findings is the prediction that by 2013 electricity rates will increase by 12 percent overall, with residential rates rising 14 percent, commercial 13 percent and industrial 11 percent. Rates are projected to rise slightly over the rest of the 20-year period, increasing a total of 15 percent by 2027, Gotham said.

Meanwhile, the recession and other factors have profoundly affected demand.

"Electricity consumption dropped 2.4 percent over the last two years, which is very unusual," Gotham said. "Demand is predicted to rise only 1.55 percent each year over the next 20 years. This is much lower than the 2 to 3 percent annual growth in demand we've seen since the end of the 1980s recession."

The panel used a system of sophisticated mathematical models to predict future trends for residential, commercial and industrial power users in the state. Projections of electricity demand are based on the estimated impact of manufacturing output and employment, commercial employment, population, energy prices, and other factors.

"One factor reducing demand is a renewed interest in energy efficiency," Gotham said.

Incandescent light bulbs are expected to be phased out, and more efficient appliances also will restrain demand.

Consumption is projected to grow 36 percent by 2027, from this year's 110,000 gigawatt hours to nearly 150,000 gigawatt hours. A gigawatt is 1 billion watts. One gigawatt hour is the constant use of one gigawatt for an hour, or enough energy to serve the annual needs of about 90 average-sized Indiana homes.

The projections are done on a statewide basis. Some utilities would be expected to experience lower growth than others based on the economic and geographic factors that they face. Similarly, price increases will vary among utilities, Gotham said.

The report looked at three categories of electricity provided to users: baseload power, which is produced by plants that generate electricity throughout the day; peaking power, which is produced by plants providing electricity only during times of heaviest demand, such as the hottest periods on summer days; and cycling power, which is produced by plants providing power for uses that are between peaking and baseload demand.

In the previous forecast two years ago, analysts had projected a need for 3,220 megawatts of additional resources by 2012, of which 1,290 megawatts were baseload, 600 megawatts were peaking and 1,330 megawatts were cycling. In contrast, the new report projects a need for 540 megawatts of baseload resources by 2015, 480 of peaking and 300 of cycling.

"The reduction in new resource requirements is due to a combination of lower demand growth projections in the new report and new generating resources that Indiana utilities have acquired or have started construction on since the previous report was prepared," Gotham said.

The Purdue-based group prepares the reports about every two years to predict Indiana's future electricity requirements and the need for new generating capacity.

A copy of the report is available on the State Utility Forecasting Group's Web site at https://www.purdue.edu/dp/energy/SUFG/

The forecasting group does not make recommendations. The studies are done in accordance with a state law enacted in 1985 to provide the state regulatory commission with an impartial projection of electricity consumption and peak demand. That information is used to determine whether the need exists for additional power plants. This is the 12th full report compiled by the group.

The forecasting group is housed within Purdue's Energy Center, which is part of the university's Discovery Park.

Writer: Emil Venere, 765-494-4709, venere@purdue.edu

Sources: Douglas Gotham, 765-494-0851, gotham@purdue.edu

Danielle McGrath, IURC public information officer, 317-232-2297, dmcgrath@urc.IN.gov

Purdue News Service: (765) 494-2096; purduenews@purdue.edu

Note to Journalists: A copy of the report is available from David Nderitu at the State Utility Forecasting Group, 765-494-4243, nderitu@purdue.edu. It is also available online at https://www.purdue.edu/dp/energy/SUFG/

To the News Service home page