Traditionally, the end of the year is a time to reflect and remember. So when the Federal Reserve raised interest rates in December as a vote of confidence in the economy, we should consider how this progressing economy will impact our industry. What is the relationship between the economy and electric sales? How will this relationship impact our future? What should we remember? We are forecasters and these are the questions we ask.
Looking backward, Brian Cary from Salt River Project came to Itron’s 2011 Energy Forecasting Group Meeting in Las Vegas and presented on the state of the economy. In 2011, we were slowly recovering from the 2008 recession with unemployment hovering around 9 percent and GDP growth floating about 1.5 percent. Brian presented a version the chart below which created a buzz of conversation.
In this chart, post-1960 recessions are plotted showing the duration and percent change in non-agriculture employment from pre-recession highs (Source: U.S. Bureau of Labor Stastistics). The Y-axis, plots the employment loss from the pre-recession high. The X-axis shows the number of months from the pre-recession high. The lines show the length and depth of each recession.
While Brian’s chart data ended in May 2011 (indicated on the graph), I completed the chart. In 2011, the chart challenged our notions of recovery patterns and the optimism of our economic forecasts. Today, the chart shows a 76-month recovery (6 years and 4 months) with a fairly predictable pattern.
Hindsight tells us that the economic forecast through the recession were overly aggressive resulting in a series of high electric sales forecast. But in 2011, the historic relationship between electric sales and employment was firmly entrenched in our econometric models. We did not have many alternatives.
The graph below shows the relationship between electric sales and employment plotted as indices with 2011 highlighted. Through 2009, movement in sales and employment are closely aligned. But recent history shows the relationship is slowly deteriorating -- employment continues to rise in the face of flattening electric sales.
What have we learned? The relationship between employment and electric sales is changing. But, we are forecasters and have been watching this relationship evolve. We are no longer trapped into using only macroeconomic drivers in our models. Today, we understand the weakening relationship between electric sales and the economy (employment and GDP), the advances in energy efficiency, and the penetration of distributed generation. As we look to tomorrow, we are adapting our techniques to capture these effects which offer us better insight into the future, and a better forecast.
Mark Quan is a Principal Forecast Consultant with Itron’s Forecasting Division. Since joining Itron in 1997, Quan has specialized in both short-term and long-term energy forecasting solutions as well as load research projects. Quan has developed and implemented several automated forecasting systems to predict next day system demand, load profiles, and retail consumption for companies throughout the United States and Canada. Short-term forecasting solutions include systems for the Midwest Independent System Operator (MISO) and the California Independent System Operator (CAISO). Long-term forecasting solutions include developing and supporting the long-term forecasts of sales and customers for clients such as Dairyland Power and Omaha Public Power District. These forecasts include end-use information and demand-side management impacts in an econometric framework. Finally, Quan has been involved in implementing Load Research systems such as at Snohomish PUD. Prior to joining Itron, Quan worked in the gas, electric, and corporate functions at Pacific Gas and Electric Company (PG&E), where he was involved in industry restructuring, electric planning, and natural gas planning. Quan received an M.S. in Operations Research from Stanford University and a B.S. in Applied Mathematics from the University of California at Los Angeles.
