Electric Power

The modern electric utility industry began in the 1800s. In 1807, Humphry Davy constructed a practical battery and demonstrated both incandescent and arc light. In 1831, Michael Faraday built the first electric generator proving that rotary mechanical power could be converted into electric power. In 1879, Thomas Edison perfected a practical incandescent light bulb. The electric utility industry evolved from gas and electric carbon-arc commercial and street lighting systems. In 1882, in New York City, Thomas Edison’s Pearl Street electricity generating station established the industry by displaying the four key elements of a modern electric utility system: reliable central generation, efficient distribution, a successful end use, and a competitive price.

Electricity is measured in units called watts and watt-hours. Electricity must be used shortly after it is generated and cannot be stored to any significant degree. That means the power utilities must match the level of electricity generation to the level of demand in order to avoid wasteful over-production. The power industry has been deregulated to some degree in the past decade and now major utility companies sell power back and forth across major national grids in order to meet supply and demand needs. The quick changes in the supply-demand situation means that the price of electricity can be volatile.

Electricity futures trade at the New York Mercantile Exchange (NYMEX). The futures contract is a financially settled contract, which is priced based on electricity prices in the PJM western hub at 111 delivery points, mainly on the utility transmission systems of Pennsylvania Electric Co. and the Potomac Electric Co. The contract is priced in dollars and cents per megawatt hours.

Supply – US electricity production in 2002 was approximately 2.6 trillion kilowatt-hours, little changed from the 2001 level. The 2001-2002 levels were down from the 3.0-3.1 trillion kilowatt-hour range seen in the 1996-2000 period. The lower supply and demand for electricity in 2001 and 2002 was caused by the weaker US economy since there is a direct correlation between economic growth and electricity generation and usage.

US electricity generation in 2001 required the use of 2.686 trillion cubic feet of natural gas, 806 million short tons of coal, and 126 million barrels of fuel oil. In terms of kilowatt-hours, coal is the most widely used source of electricity production, accounting for about 56% of US electricity production. The other fuels in order of electricity production share are nuclear (23%), natural gas (9%), hydro (9%), and fuel oil (3%). Alternative sources of fuel for electricity generation that are gaining favor include biomass, wind, and fuel cells.

Demand – Residential use of electricity accounts for the largest single category of electricity demand with usage of 1.141 trillion kilowatt hours in 1999, followed by industrial (1.018 trillion kilowatt hours), commercial (971 billion kilowatt hours), public authorities other than street lighting (91 billion kilowatt hours), and street and highway lighting (16 billion kilowatt hours).