The Changing Role of Forecasting in Electric Utilities

By Faruqui, Ahmad; Melendy, Cynthia A. et al. | The Journal of Business Forecasting Methods & Systems, Winter 1994 | Go to article overview

The Changing Role of Forecasting in Electric Utilities


Faruqui, Ahmad, Melendy, Cynthia A., Bloom, Jeremy, The Journal of Business Forecasting Methods & Systems


Electric utilities are faced with the need to rethink their corporate mission and their objectives in light of the changing environment of their industry. They have to decide where they want to go. Since the oil embargoes in the 1970's, government interest in deregulation, the advent of competitive markets as a result of the Public Utility Regulatory Policies Act (PURPA) and other regulations, volatility in resource costs and requirements, and environmental regulations have led to dramatic changes in the electric utility planning process. As the planning process changes, so does the role of forecasters.

CHANGES IN THE PLANNING ENVIRONMENT

One of the most dramatic changes in utility planning in the last two decades is the increased volatility in the market conditions which the planners face. After a long period of steadily increasing electricity sales and steadily decreasing power costs, the 1973 OPEC oil embargo has shown that electric usage is sensitive to specially large price increases. This event was the first of many that changed utility planning and the role of a forecaster. Volatility in three interrelated factors contribute to volatility in electric consumption:

1 . Volatility in fuel prices, including fuels used to produce electricity and fuels used as substitutes for electricity.

2. Volatility in competition, including both direct competition from other utilities with the advent of wholesale power wheeling and from other customer power options such as cogeneration, and indirect competition resulting from customers closing their business or relocating to other regions and/or other countries.

3. Volatility in customer preferences, as exhibited by their choice of type of electric-using building or equipment, and how they use them.

The deregulation of the natural gas industry, the continuing uncertainty of oil supply in international markets, and environmental restrictions imply that fuel price projection is a complex undertaking. In addition, electric loads may change in response to fuel price changes for a number of reasons. Electric utility customers may switch to gas heating and other appliances if gas is relatively cheaper. Industrial and other customers may quit or move because of high fuel prices. Forecasters are called on to predict fuel prices and their effects on the market, in addition to forecasting electric loads, to ensure that the resource acquisition plan addresses the potential impacts of fuel price volatility.

Many forces have created competition in the electric utility business, which was previously a regulated monopoly. The PURPA legislation created competition by allowing power purchases from non-utility businesses. Some regulatory commissions require utilities to implement competitive bidding for new supply-side resources, demand-side resources, or both. Since the electric forecast defines the need for new resources, it is a starting point for assessing avoided costs (costs utility would incur if no bid responses are selected) and defining bid evaluation criteria.

Forecasters no longer assume that electricity usage changes in proportion to changes in the U.S. gross domestic product (GDP) or local economic indicators; instead, both government agencies and electric utilities are working to reduce electric usage on a per-unit basis. National legislation mandates appliance efficiency standards which will increase the efficiency of new equipment. Efficiency standards address heating and cooling equipment, water heaters, motors, lighting, refrigerators, freezers, and many other equipment and appliances. State and local legislation mandates that houses should be constructed to reduce energy consumption. The California Title 24 building standards, the City of Davis (California) building code, and the model conservation standards in the Pacific Northwest are the three prime examples of this type of legislation.

Utility programs provide information and financial incentives to encourage customers to use equipment or buildings that are even more efficient than the set standard.

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